Put that extra money to work!

Checking accounts are a great financial instrument to have. They allow you to store and access your money safely without worry. The only drawback to the checking account is the very low rate of interest. Traditionally, checking accounts offer a very poor annual interest rate--Often about 0.5%. For most folks this is not an issue, they spend their cash in their accounts paycheck to paycheck and do not have extra money at the end of the month. Of course, knowing my audience, that is not true (hopefully)!

If you find your checking account to have more money than you need for bills and expenses every month and growing, there is a simple solution you may have overlooked to put that money to better use. The first solution would be to increase the contributions to your 401(k), Roth, and/or other investments. If you need more liquidity-i.e. access, you can always dump that extra cash in a high-yield savings account.

Returns on high-yield savings account can be as high as 6%--12 times the average you are receiving in your checking account. A little quick math for you to drive home the point on the higher interest rate: With $10k sitting in your checking account vs. a saving account at the rates stated earlier, you are looking at an annual difference of $550. Hardly worth passing up on! Go to http://www.money-rates.com/savings.htm for a summary of current rates being offered with banks.

Keep an eye on the interest rate to guarantee you are making the most interest on your money. These rates can be introductory rates (~3-6 months) or adjustable rates at either internet banks or regional brick and mortar banks. Some even offer free on-line checking, ATM cards, and free bank to bank transfers. ING Direct will allow you to set up monthly contributions—key to running a tight budget and still being able to save money. I urge you to do your research on what is appropriate to your needs.

I use HSBC—not the tops on the interest rate currently (they had the best a year ago), but reliable and easily accessed through the internet. I have also worked with ING Direct and had a positive experience as well.

I use these high-interest savings accounts to store my emergency funds (that 3-6 months of savings needed in case I lose my job). I will also store money I may be saving for an upcoming expensive purchase. Not only do I receive the advantage of high interest, the transfer of the money can take up to three business days—a great barrier to impulse spending. By moving that money out of my checking account, I’m not tempted to break my budget as well.

One thing to note—always bank with a FDIC (Federal Deposit Insurance Corporation) Insured bank! Most banks will have the FDIC logo on their homepage .
You can always look up a banking institution on the FDIC web site as well to learn more about the bank in question (www.fdic.gov).

The FDIC is a Federal institution that guarantees balances up to $100,000. That’s right, if the bank folds, you get your money back. Needless to say, if you have over $100k in an account, you should probably diversify into other holding or at least open another account somewhere else. Rarely does a bank fold, but one did fold recently, http://www.netbank.com/ . Nothing to worry about if you are within the FDIC limits, but something to be aware of regardless.

High interest savings accounts are a valuable financial tool to increase interest on cash you cannot invest or need for short –term purchases or emergencies. As long as the bank is FDIC insured, and you are comfortable with the services provided, the high interest savings account is a useful tool to put your money to work for you.

-Rocketshoe

The Sad and Depressed Dollar

Every day it seems the dollar hits a new record low against foreign currencies (Just last week we paired with the Canadian Dollar, the Looney!-hasn't happened in over 30 years). Obviously this cannot continue forever, and is not good for the US consumer, but as an investor it is something we can take advantage of.

Let’s talk about why the dollar is worth what it is. There are many theories of currency valuation; two that I find interesting are purchasing power parityand asset market model.

Purchasing power parity is the idea that a currency is worth what it is based on what it will buy. For example, by using the Chinese currency, in China, you can pretty easily buy a meal for eight remembi or about a dollar. In California, the same meal might cost you eight dollars and that difference means that if you go to China to get a meal you only have to pay a dollar. I definitely think this is part of the difference between currencies, but I don’t think it accounts for the entire difference, and most importantly, I don’t think it explains very well why the valuation ratios change. The asset market model is pretty good for that.

The basic idea is convert your dollar into a US treasury short term bond, currently yielding about 4.75 percent. Then convert your neighbor’s pound into a British short term treasury note yielding about 5.25 percent. Which one would you rather have? I’d rather have the pound, and would sell my dollars to buy pounds. If everyone thought the same way the it wouldn’t be so good for dollars – which is the situation we are in right now. Given that piece of the puzzle let’s back off and consider the very long term view. There is no fundamental reason why purchasing power parity means that the US should have a currency advantage with other countries. This advantage only exists because of our position in the world and that people, thus far, have more trust in the transparency and robustness of American capitalism than other countries, such as Communist China. So why don’t we raise our interest rates and make our currency more valuable?

The simple answer is, we are approaching an election year and the powers that be want to avoid a recession before the election. In most of the country housing prices are declining rapidly (http://money.cnn.com/news/newsfeeds/articles/prnewswire/NYTU06528082007-1.htm), mostly because they ran up so quickly.

The Federal Reserve had a choice of whether to allow this decline to become more evident, or to mask it by simply making the dollar less valuable. The decline still happens, but part of it occurs because of your purchasing power parity with the rest of the world declines. This will show up in inflation, but not as much as you’d think. Our trade deficit, at $838 billion last year (2006), is still small compared to $13.13 trillion GDP in 2006. This will mostly show up as your ability to purchase things outside the US, whether as a touristor, or an investor, will decline. The obvious thing to buy is foreign equities.

If you look at foreign stock markets, particularly emerging markets, they have done really well in the last few years. (http://money.cnn.com/quote/mutualfund/mutualfund.html?symb=PRMSX) . This would make one suspect that maybe the transparency and robustness of Chinese Capitalism (I mean Communism) is getting close to that of the US. But we know that’s not true.

So here is my suggestion:

The US isn’t the only country with a subprime mortgage mess – but it is the first to deal with it – and the fact it is more visible in the US is because of the transparency of our financial system.

Therefore, the current devaluation of the dollar won’t continue forever, but will until other countries deal with their mortgage issues. As evidence of this I’ll pull acouple data points.

First, search the internet for housing bubble in any other country.

I’ll pick Canada(1.9 million links -http://www.google.com/search?hl=en&client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial&hs=9c1&q=housing+bubble+canada&btnG=Search)

or Spain (1.6 million links -http://www.google.com/search?hl=en&client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial&hs=XJM&q=housing+bubble+spanish&btnG=Search)–

both numbers almost as high as the US housing bubble

(2.2 million links -http://www.google.com/search?hl=en&client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial&hs=Lxg&q=housing+bubble+US&btnG=Search), but for much smaller countries!

In the longer run, the shit is going to hit the fan all over the world – just take the recent bank run in the UK as an example:

(http://investing.reuters.co.uk/news/articleinvesting.aspx?type=bankingFinancial&storyID=2007-09-24T070126Z_01_L23582276_RTRIDST_0_SP_PAGE_012-L23582276-OISBN.XML).

This will probably cause each of these other countries to lower their short term interest rates for similar political reasons. As the world deals with its housing and credit issues, the ability of world banks to deal with inflationary pressures will be reduced and the cost of basic materials will go up.

So, if you buy into my thoughts, I’ll suggest a couple things:

1. In the near term buy equities in any foreign market. Riskier markets are better because of beta, a concept we will discuss later.

2. In the near term, but for the long term, buy basic materials or equities that own basic materials. (Southern Copper with their 6% dividend is my favorite right now).

3. In the medium term, as every country you might invest in will have a bank run or two – stop investing in them as questions arise as to the strength of their financial systems.

4. At that point (maybe 6 months to a year away), increase your position in US equities, as the fact US financial markets have already gone through the turmoil associated with declining asset prices will make US assets relatively more valuable.

This strategy I offer as an opportunity to play off my thesis presented above. The US market is declining and it will take asymmetric strategies to profit in the turbulence we will face ahead. Why is Housing bombing? That's another article to stay tuned for. As always, I want to hear your take and suggestions to my strategy.

-Wageslave

How to get out of credit card debt

Many of us graduated college owing a bunch of money to someone. Or our first job didn’t pay us that much and we racked up some debt. Or we just didn’t pay attention to our finances because we didn’t think it would matter – and who expected to live past their mid twenties?!?

Whatever the reason, there is a way out. Actually there are many of them. I’m going to outline one today I have a lot of personal experience with. My family never understood student loans – we were a credit card family. And so through college, instead of doing the smart thing of accumulating a modest sum of student loans I could pay off over a decade or two I accumulated credit card debt. After I graduated, I didn’t really think about it much and, for the most part, the interest rates were low. Then I got hit with something called universal default. Chase changed the due date of one of my cards and I paid it late. This caused my interest rate on all of my Chase cards – where the vast majority of my debt was, to skyrocket for three or four percent to 29.99 percent (usary). That was rough.

In hindsight, the correct thing to do was to call Chase up and ask them to retain the original interest rate by closing the card for new purchases. Unfortunately, I didn’t even know that was an option. In fact, when you are in any situation where a credit card company changes the terms and conditions, you can reject these changes and the worst they can do is stop accepting new purchases from you.

So I discovered another way out through four steps:

1. Fix my credit. After Chase changed my interest rate, they cut my credit lines to just a few hundred over the current balances. This caused my utilization to skyrocket. There are two factors that appear to have great influence on your credit score (Your credit score is a grade given to you by credit agencies based on your credit history to determine how much of a credit risk you are--basically, what are your chances of paying back the money you are borrowing. The higher the credit score, the more money and at a lower interest rate will be offered to you). These are keeping your individual card utilization under 90% and keeping your overall utilization under 50%. Since my credit score was low, it was difficult for me to get a new major bank credit. Fortunately, the department stores, particularly furniture stores, don’t really care. So I applied for a few accounts at Home Depot and Thomasville furniture that reduced my overall utilization below 50%. At the same time, I paid down all of my cards with a high utilization down to below 90%.

a. Another way to go, that I did not take advantage of, was using authorized users. By having a trusted friend put you down as an authorized user on their credit card, their available credit shows up on your credit report (Note: if you miss payments, the authorized user's credit score will suffer as well). This is a quick way to increase your available credit, although the rumor is it will go away when the FICO model changes early next year.

b. If you have business income, you can also take advantage of the fact business credit cards do not report on personal credit reports. Therefore if you have a few good business lines of credit, you can use them to hide your personal debt and therefore make you more attractive for new credit.

c. One final thing you can do for a small boost is “bumpage.” The major credit bureaus only store a certain amount of information in your credit file. By repeatedly accessing your credit history daily, you can actually “bump” off old information, particularly old credit inquires. This does not result in a huge increase in your credit score – each inquiry only subtracts a few points – but nonetheless it may be useful in getting additional credit.

2. My credit score skyrocketed from the mid 600’s to the mid 700’s. The next step was to apply for new credit. I started getting a lot of pre-screened offers in the mail. These are usually the best to apply for because these offers only come because the companies involved have already looked at your credit. So I applied for and was granted several new cards, often with 0% interest rates for 12-18 months.

3. The next thing to do is to reallocate. It turns out if you have an old card from Bank of America with a $10,000 credit limit and a new card with a $1,000 credit limit, you can combine them and take advantage of the one with the better interest rate. So suddenly, you instead of a 0% credit card with a $1,000 limit, you have one with a $11,000 limit. Bank of America and Chase is an easy phone call to do this. American Express lets you do it online. Citibank apparently sometimes gives you some guff but usually if you call a couple times they will let you do this.

4. The next step requires really good credit – which you now have. Your credit ratios look good on paper if you maintained the 50/90 rule in step 1. So now, assume you have the discipline to do it, is to rinse and repeat steps 3 & 4. You will continue to get new offers if your credit is good and by applying for the preapproved offers and reallocating, you suddenly can get very large lines of credit. In addition, many credit cards will give you between $150 and $250 (sometimes even more) just for applying. By combining credit lines, you suddenly will have cards with lines of credit between $25,000-$50,000. If you do a 0%/18 month offer one one or more of these cards you can earn thousands of dollars in interest income by just putting the money in a high yield savings account. (Although in other articles we will discuss better ways to do this without having to pay the taxes associated with interest income.)

So in the end, by following the steps above, you not only repair your damaged credit from high debt levels, but you actually pay off your debt with introductory “promotional” offers from the credit card companies – the same companies that raised your interest rates are paying off your debt! Remember, the above approach takes patience and discipline. You can’t go party once you have your first $50,000 0% credit card!

-Wageslave

Budgeting Basics

Ok kids, we all want money and we all want to be rich. Already I can hear the whining..."But Rocketshoe, I don't make enough money, I live paycheck to paycheck. I also have too much debt! How can I possibly save any money?!? Ooh there's a sale at mall..." Well, Rocketshoe is here to help.

For some, this may be rote, others may learn something, most will squirm uncomfortably in their seats while reading what needs to be done.

Everyone should have a monthly budget. A budget allows you to plan for the future, understand your financial boundaries, and pay down debt (Some will be surprised how much they really do make or how little--which will lead to hunting for a way to subsidize your income). Although writing a budget and sticking to it at first can be painful, it is very liberating and can give you a sense of security since you have a handle on it (much like working out at the gym, but without all the sweating--but that may depend on how much debt you have).

First and foremost--Pay yourself First. Contribute to your 401(k) (stay tuned for 401(k) and compound interest discussions). Its a free tax break. At least contribute as much to gain all matching from your employer. If you never see it in your checking account, you won't get to spend it. Talk to your HR rep at work to set this up.

Second, start with your take home pay on the top line and write down your monthly bills--rent, utilities, car payment, student loan, etc. If you come up with a negative number, you need to cut expenses. A generally accepted break down is as follows:

Housing: 30%

Utilities: 10%

Food: 15%

Transportation: 10%

Clothing: 5%

Debt Repayment: 10%

Entertainment:5%

Insurance: 5%

Savings: 10%

Of course this is only a suggestion and it is elastic. If you are not hitting 30% of rent, add the leftovers to another topic. If you are over in any category, take from another. Also reexamine your situation--do you really need all those extra ringtones and text messaging on your cell phone? Could you stand to bring your lunch to work? Should you be partying it up during the week as well as the weekend? Could you ride your bike more often? Creativity and being honest with yourself are key to balancing your budget.

Out of all the topics above, Debt Repayment and Savings are probably the most important in terms of your financial future. Everyone should strive to have an emergency fund of at least three months of expenses in the event you lose your job or are unable to work. This can take time to build, even if just $100 a paycheck, but when bad things do happen, you will be able to survive without going further into debt. Also, if you can afford more, start saving for that next vacation or big purchase. When you are paying in cash instead of credit, you'll feel much better about it and you won't be building up debt.

Debt repayment is good, very good. Nothing feels better than not owing anyone money. If you have more debt than you can pay off every month, you need to rank order the debt in terms of interest rates (This does not include debt where you do not have the option to pay different amounts, i.e. student loans, car payments, mortgage, unless you are paying more than the monthly payment.). Pay off the debt with the highest interest rates first. For example, if you have a credit card with an interest rate of 15% with a balance and you are making extra payments on your car payment which is at 8%, you are losing money. Why? It does you know good to pay down cheaper debt--you are losing money over the long run. (Note: If you can qualify, and make the payments on time, there is nothing better than a 0% loan, 'Same-as-Cash' option--which will be discussed as well in the future). Pay the higher debt down first!! Yes, and continue to contribute to that emergency fund, but pay down the debt!

Another option to reduce your credit card debt immediately is to consolidate your debt onto one card with a lower interest rate. It might cost about $50 to transfer, but having one bill at one low rate will help a lot. Also, some credit cards offer 0% interest for the first 6-18 months. This gives you valuable time to pay down debt while not incurring more interest. Although I do not recommend it, some folks have been transferring debt for years without paying a lick of interest by jumping from card to card and deal to deal. Check out this little nifty crawler from Kiplinger:

http://www.kiplinger.com/basics/archives/2003/03/credit2.html . It displays whats out there in terms of credit card deals. Also, please, please read the fine print on credit cards with respect to annual fees...you should never have to pay an annual fee for any credit card--you can be charged up to $90/month for frequent flyer miles!!!

Back to reducing spending--check out one of Wageslave's favorite places to hang out -- Fat Wallet.com (http://www.fatwallet.com/) . This forum has dozens of deals and techniques to lower your cell phone bill, find deals, and internet coupon codes. Not a bad place to save a buck or two.

Sticking to a budget can be very difficult if you are used to spending everything. Another approach that some folks use that I know works is to have two checking accounts. Your paycheck sends two amounts to two different accounts. One account you pay your bills out of (ideally, you would not have an ATM card to this account) and the other with your fun money in that has an ATM card. This way you are pretty much doing what you did before, but you spend less. Can be a little more time consuming to set-up, but it does work.

Another way to reduce spending is to not go out every night on the weekend. Spend an evening inside and develop a new hobby --like maybe a financial blog--or work on a business, or work a bit harder on your homework. Not only will you save money, but you may even be ahead of life when Monday rolls back around.

Finally, don't feel so bad about your financial situation. We all make bad choices and as Americans, we are not educated in our public schools on how to manage our finances. We work and live in an economy that is dependent on our spending, and everyday we are attacked on all sides by advertising that wants us to spend more and keep up with the Jones. Take hold of your financial future and get out of debt and/or save more money. You might be surprised how much you are spending at Starbucks. One last thing, the average American has about $8,000 sitting on credit cards. Damn.

Stay tuned for an article on what you can do with that extra money.

-Rocketshoe

Wageslave Speaks

We are the new rich. Or will be soon. We still want to change the world, but also want to not have to work. The key thing is we are at a point in our life where we have the choice of becoming wage slaves and working for companies all of our life or figure the system out and have companies work for us the rest of our lives.

Philip Dick once wrote a short story which became a movie entitled the same: Paycheck-where in a future world, ruled by corporations and governments, where individual rights scarcely exist. Many people today live in that world. They are bound to their jobs and don’t have the freedom to figure out what they want or even begin to think about how to get there.

This blog is about combining individual stories to create a base of knowledge in order to figure out how to not be one of those people. I felt myself falling into that world. I worked for a small company. We were a bunch of bright kids and we felt like we could take over the world. The only thing we had to do was help our boss accomplish his goal first. And so many of us worked a lot; often between 60 and 80 hours a week. Our boss promised us a lush future compensation in stock options. The funny thing was for every year we were there, the date those options were to be worth something was always one more year away. (When I started we were one year away, the next year we were two years away and so on.).

Something was wrong.

I was a wage slave. I needed to work, because they didn’t pay me enough to save enough to take much time off. I wasn’t working on my own dreams but someone else’s. In fact, the job was so consuming that I didn’t even get a chance to think about my own dreams. But I decided to make a change. I quit, did a little job hopping, started a little side-business or two and suddenly in the course of a year make almost twice what I used to make and work about half as much.

A lot of people say: I don’t care about the money. Honestly, I agree. It wasn’t so much the money but the freedom. While I started to make more money I kept my lifestyle largely the same, paid off my car, and suddenly my overall expenses are significantly lower than when I started. So I don’t need the money. But the freedom is wonderful. The freedom comes from two places. One, I save a bit of money now. So if I don’t want to work – I can stop. Two, I have time to think! I’m not sure what I’ll do with my life when I grow up but at least I can think about it and then have the opportunity to pursue it as well.

Wageslave is a cofounder of RocketStocksBlog.com

-Wageslave

Welcome to ROCKETSTOCKSBLOG.COM

Welcome to the Inaugural and opening of Rocketstockblogs.com!!!

The content of this blog will vary. While we are not a personal finance blog, we will try to apply the lessons from the world into our own finances and aim to share them as well. Some of the things we will routinely discuss:

• Getting out of debt – Many of us at some point in our twenties (some of us in our thirties and forties too!) owed someone else a lot of money. There are ways out – even if you are on the edge.
• Taxes – Saving money on taxes makes a huge difference, particularly for people living in California. This blog will go over some innovative ways save money tax free, own your own money, and help you grow your money while minimizing your tax exposure while still within the laws of the IRS!
• Planning for Retirement- There are many tax-friendly retirement options available to everyone. By choosing the right account, you can put away up to $42,000/year of pretax money if you meet the requirements
• Portfolio Management- Diversification, dividends, short-term gains, and long-term gains, etc.
• Trading– We will provide stock picks of stocks we think are not properly analyzed or covered by Wall Street in order to try to find opportunities in the short term. We will also go over options and how to use options and use the increased volatility in the market lately to make money.
• Investing – Because the authors of this blog have varied backgrounds and are positioned globally we hope to put our insights together to come up with some good ideas for macroeconomic trends that we can take advantage of.
• Big Market Picture- Conceptualizing what factors are moving the Market, and understanding the macroeconomic picture is half the battle to being a good investor.

One of the reasons we put this blog together is we’ve been giving people advise at cocktail parties on subjects like when to buy (or not to buy) a house and where the dollar is going but would like a better forum to lay out our case and because these things are often easier to explain when you are not slurrring (and remember!).

We also want to compile all the information and research of our friends and coworkers. Many investment strategies have gone unrecorded for the enrichment of others.

We also invite you to add your comments, rants, opinions, and suggestions. Ideas and research become good ideas and research when they hold up under scrutiny!

We can be reached at Rocketshoe@gmail.com