Tag: Finance

Setting Small Investment Goals…

Just a FYI for potential readers: My next several posts will probably be financial related. Hopefully this doesn’t “bore” you too much! 😉

Like many people, I have long term goals for myself from a career, financial, and personal perspective. These goals are 5,10, and sometimes 10+ years in the future. One of my long term goals is being able to a taxable (non-retirement) investment portfolio that generates at least $2,500/month in income. This equates to a portfolio that annually generates $30,000 each year. Having a portfolio that generates $30,000 per year sounds like a steep mountain to climb unless you break it into smaller more achievable goals. 

I wanted to share a few thoughts and strategies about breaking things into smaller goals that have worked for me as I go about this journey to generate at least $2,500 in investment income per month…

It is really hard when you first start buying stock realizing that the stock you just purchase may only pay you a paltry $3.80 per quarter or ~$13.00 per year. That can be down right demoralizing to even think about! So instead of thinking about the longer term amount, when I bough that first position, I looked at things from the perspective of if I had enough dividends to buy a new share of stock in the company I was buying. This did two things for me:

  • It made the goal more realistic and achievable
  • It made me focus on the short term while inching along towards the longer term objective

I was talking with a co-worker a few weeks ago about where I’m at towards my long term goal and told this person that year 0 to year 3 are probably the hardest years to go through when it comes to this investment goal. I say this because it’s difficult to see any progress being made especially when the investments I’m making may only be buying partial shares of stock in the very beginning. It’s also challenging because for most stock investments the benefits to ownership are not realized immediately and you have to be in it for the long haul through both the ups and downs that the market could go through.

I would estimate that I’m somewhere between the middle of year 0 and the end of year 1 in terms of establishing a dividend investment portfolio, having a good number of high quality investments, and starting to see the benefits of dividend re-investments and dividend raises. Right now, I have 5 positions which I consider to be a full positions and am working on building a 6th full position. I define a full position as an investment where reinvested dividends will buy at least 1 full share of stock per quarter.

The 6 positions that I have now generates an estimated $1,400 per year in investment income. (Note: My $1,400 number is actually conservative because I own a couple ETFs where distributions can be uneven and aren’t as predictable as companies who pay dividends.) While the $1,400 number is still really low compared to the $30,000 per year that I want, I am going to use to set a small goal. My small goal for the rest of the year is to get my forward estimated annual dividend income to $2,000 per year.

In my mind, $2,000 is a more attainable goal to aim for this year. Even if I don’t achieve that goal by the end of year, the number is more attainable and realistic than looking at it against the overall number. This also helps me with planning. Right now, I am working on establishing my 6th full position and after that I will build a 7th full position. My plan is once I have my 7th full position is to circle back and buy an additional 10% in my existing 6 positions. Then I will establish positions 8, 9, and 10 and then recycle to other existing positions to add 10% again.

Over the coming days, weeks, months, and years, I will continue writing about this journey to $30,000 in investment income. I hope you will like hearing about my journey!

If there’s anything I would like to end with, it’d be this: Establishing smaller goals to achieve bigger ones is something that can be applied to anything whether its weight loss, paying off debt, buying a home, or investing. Celebrating the small wins also makes it much easier to continue marching down the path of obtaining that bigger goal.

 

 

 

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Thoughts on Brexit…

Ah, the crazy Brits…they’re always up to something that’s bound to cause a stir. Whether it’s voting for Scottish independence (2014) or voting on the United Kingdom (UK) leaving the European Union (EU) (this year). One thing I do admire about the system of government in the UK is how they put they major policy questions directly to the citizens for a vote (even if the referendum was non-binding)

With that in mind, I wanted to share some thoughts on Brexit…

Like the majority of the rest of the world, I was quite surprised when the majority of the votes came in favor of leaving the EU. I do think that the British people are making an ill-informed decision or a decision that they are bound to regret in the years to come. There’s many things that the British government will have to do such as re-issuing passports, review current laws that were passed for EU regulatory purposes, negotiate a new trade agreement with EU, determine the status of EU citizens in Britain and British citizens living in the EU, and the list goes on and on! One other thing for consideration is that by leaving the EU, it may also force the break up of the UK. Every single county in Scotland voted to remain in the EU. Also, Northern Ireland is exploring its options to keep trade and borders open with Ireland. It’s no wonder Prime Minister Cameron is letting the next PM activate article 50 of the Lisbon Treaty that allows the 2 year clock on leaving the EU to begin ;).

I also think that the U.S. markets are overreacting. The markets in the U.S. have dropped almost 1,000 points from last Thursday’s close due to the “global uncertainty” associated with Britain leaving the EU. In fairness, Britain is the world’s 5th largest economy, however, a lot can and will happen if Britain decided to declare under article 50 that they are leaving the EU. What this overreaction presents for me is opportunities to buy stock at discounted prices! I only wish I had more cash to take advantage of the price drop. It’s like I was explaining to one of my co-workers today, our company is not materially worth less the today because the British people voted to leave the EU. I’m also a believer that this price drop in the market will eventually recover.

From a selfish standpoint, now is a great time to travel to Britain as the exchange rate has gotten much more favorable for the U.S. dollar. Additionally, if you’re buying a house in the next 30 days or so, you may be able to lock in a lower interest rate as there as been a significant surge in buying 10 year U.S. Treasury bonds. This has caused the yield on the bonds to decrease and because mortgages are closely tied to the 10 year Treasury yield, interests are lower.

It will be interesting to see how the vote to leave the EU plays out. There has been talk in Britain of voters not understanding what they were voting for, a petition calling for another vote on leaving the EU, and leaders of the “Leave” campaign walking back on their pledges on what happens and how certain programs would be funded if the “Leave” vote won.

Leaving the EU will be a complex affair with lots to consider for Great Britain and its (former) EU partners. There is much to discuss if and when Britain declares that it’s leaving. So far the biggest losers of the vote to the leave the EU have been the British citizens with the pound losing its value, markets in turmoil, and the potential for Scotland to leave the UK.

I’ll leave you with one thing to ponder…

Given that the vote on last Thursday was non-binding for the British Parliament and the complexities behind actually leaving the EU, will the British actually leave or will this end up being bluster that will end up causing a lot of anxiety and costing people a lot of money? As for me, while everyone is panicking about the uncertainty and trying to figure out what to sell, I’ll be happily buying cheap stock!

If you’re interested in reading more about “Brexit”, I encourage you to consult the following links:

News Link – A 15,000 dollar tax credit for buying a house after all??

I saw this link on one of the message boards I frequent. Apparently the Senate wants to increase the home buyer tax credit to 15,000 and remove the income and first time buyer restrictions.  Originally, when the stimulus bill was being considered in Congress, the first time home buyer tax credit was $15,000 in the Senate version and nothing in the House version. Through negotiations, the tax credit was watered down to $8,000 with certain restrictions.

Now apparently to encourage even more home buying the Senate would like to increase this tax credit back to the original $15,000! You got to love the government for trying. Personally, no tax credit is going to completely solve the problem with people losing their jobs, unable to meet their monthly obligations, and unable to easily get approved for financing.

This is definitely one to watch though.

Senators Want Homebuyer Tax Credit to Rise to $15,000 (Update2) – Bloomberg.com.

Developing a secondary strategy for Credit Card Rewards Points

In previous posts about credit rewards strategies, I’ve talked about how to develop a rewards strategy, discussed why I use the Starwoods American Express and Schwab Visa as my primary cards, and talked a little bit about how I’ve earned extra SPG points buyingcoins from the U.S. Mint. Now it’s time to talk about secondary strategies for earning rewards points.

So you understand your goals and spend profile and you’ve picked a card that matches these two things, but you are thinking, “There are so many rewards programs”, you begin to wonder if you can take advantage of a few more programs. The answer is a resounding Yes! Let’s talk about secondary strategies for a minute. The way I view secondary rewards programs where it can either help contribute to an overall goal such as travel or you obtain one time bonus for things like gift cards or cash back. In other words, the credit cards that are part of your secondary strategy should include those cards with sign up bonuses. Let’s discuss a couple of examples.

I recently signed up for the American Express Rewards Plus Gold card and the Business Gold Delta Skymiles card. Both of these cards had sign up bonuses if I spend a certain amount of $ within the first 3 months of getting the card. My intentions are to fulfill the spend requirements for the sign up bonuses by ordering coins from the U.S. Mint. This way I do not have to divert any of my real spending away from my Starwords American Express card to earn those valuable SPG points.

The specific bonuses offered by the two American express cards were 30,000 skymiles and 15,000 membership rewards points. Now, in prior posts, I have alluded to the fact I am in the process of dumping all my NWA/Delta frequent flyer miles due to the massive devaluing of the program. These 30,000 miles will help me get close to having a 120,000 remaining miles to use on award travel. If I am lucky and search diligently enough, I will be able to find a perk saver business class award ticket to Asia.

In regards to the gold card and the reason for getting that, I currently have about 135,000 membership rewards points. Amex membership rewards points are similar to SPG points in that they can be converted to miles in frequent flyer programs. Additionally, if I so choose, I could convert the points to SPG points at a 3 Amex points to 1 SPG point redemption ratio. So with these 15,000 membership rewards points, I have the possibility of another 5,000 SPG points. I’m still in the process of determining if a conversion is the right way to go on this. I’ve also read that converting to Air Canda miles is another step in the right direction because of their generous award ticket policies of 2 stop-overs with one going across the Atlantic Ocean and the other going in the direction of the Pacific Ocean. My decision on which program to convert to will depend on how many SPG points I have at the end when I am trying to book my round-the-world trip and how I decide to book the travel (a bunch of one way award flights or one massive ticket).

If you can not tell, my primary goal for rewards points is travel. These two cards help me towards that goal even though after I fulfill the spend requirements for the bonus points, I will not use them again. In fact, I will probably cancel the Delta Gold Card. Additionally, I will my business Amex gold card. The reason I hold on to an Amex gold card is because I want to keep the membership rewards points and not have to spend them. So on a yearly basis, I find another Amex gold card with a sign up bonus and free annual fee the first year and I can continue to keep my membership rewards points.

Your primary goal may be cash back or you may come across an offer for an amazon giftcard or just a random $250 cashback that may have nothing to do with your primary goal at all! Maybe you have planned a big purchase at Amazon.com and could use that amazon giftcard or cashback. My suggestion is do not shy away from those opportunities. I recently applied for a chase sapphire preferred card. The bonus points being offered was 25,000 after the first purchase. I don’t even have any ties to any chase reward program, but I figured I could make use of those 25,000 points some how! This is what I mean by take advantage the opportunities. Of course if Chase approves me, I will get the bonus points, figure out the best use for them and close the card 3-11 months later. You can do a similar thing with Citi thank you points – apply for those cards that offer thank you point bonuses, cancel them in 3-6 months, apply for a different card with a thank you point bonus, and continue this process. I have even read of people applying for the same card a year or so later and getting the sign up bonus again!

Now, I will add a couple of caveats here. I caution you against applying for a large number of cards if you’re looking to get approved for a loan in the near future. Also, make sure you understand the terms for getting bonus points and if there are any annual fees involved. Typically, it is best to look for cards that are at least fee free the first year. Additionally, you do a need a decent credit score of 720+ to fully execute this strategy. These are just a couple of additional points to keep in mind.

There are many rewards points programs and credit card offers out there. Developing a secondary strategy that is geared towards your primary goal can help you realize your goal even quicker. Additionally, if you find one of those really good offers like $250 cash back or a $250 giftcard, jump on it! Sometimes it doesn’t matter if the offer helps you towards your primary goal or not if it is really good!

Feel free to leave your suggestions in the comments for your primary and secondary rewards earning strategies.

What to do with GM

Well it’s been quite a week of activity for GM. Many events have led to the what has finally happened this week. On Monday they filed for bankruptcy. In past few months, GM has received over 19 billion dollars in government loans to continue operating while it came up with a re-organization plan. Their first restructuring plan was rejected by the government. As part of rejecting this plan, the government told Rick Wagnor, the long time CEO of GM, that he must resign.

This week GM also sold its Saturn brand to the Penske Automotive Group and sold the Hummer brand to a Chinese manufacturing company. GM has also gotten its unsecured bond holders to agree to an equity share in the new company in exchange for debt forgiveness. Rounding out the shedding of GM brands is Opel which was sold to the Canadian auto parts company, Magna.

GM also took steps to reduce its legacy costs. In its deal reached with the United Auto Workers union, GM was able to get the union to agree to taking on 10 billion dollars in equity in the union healthcare benefit fund. In exchange for this, the UAW’s healthcare fund will receive a 17.5% equity stake in the new company.

Finally, GM was able to secure bankruptcy up to 30 billion dollars in financing from the government. It’s not like this wasn’t a given, considering the U.S. government will control 60% of the new GM making it the majority owner.

For those who say the GM bankruptcy filing was a product of the economic crisis that started in real estate, I say think again. In 2005, BusinessWeek ran an article analyzing GM’s business plan. Here’s what BusinessWeek predicted:


How bad could it get? BusinessWeek’s analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and
reduced legacy costs. It’s undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going
to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy
court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the
union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.”

It’s now about 5 years later and GM is finally shedding brands, closing factories, and reducing costs. There has been a lot of other analysis done on why GM has failed. This is one article I highly recommend reading which takes a look at the decisions that GM made decades ago to pay for employee healthcare and pensions and how accounting changes in 1992 affected the company.

Make no mistake about this, GM’s failure is a result of poor management decisions.

Now that the U.S. tax payers are the new majority shareholders of GM, we have a chance to have a say in the way GM operates. I propose to the Obama Administration that not only should the current Board of Directors be replaced for violating their fiduciary responsibility to manage the company, but the top 3 layers of management at GM be shown the door. Too often have these same people been granted the authority to manage the company and change the direction of the company only to make poor decisions. It is time to get new blood in the highest levels of GM management and run the company appropriately. Apologists may say that this time will be different in that GM will be smaller, have less legacy costs, and that the decisions will be easier for management to make. I disagree. Top management has had their chance for decades to make GM work. We’re here today because of poor management decisions, nothing more, nothing less.

Feel free to leave your solution and suggestions for GM in the comments especially since the U.S. tax payer is financing GM’s bankruptcy and the new majority shareholder!

Betting against the American economy (My bet against the Dow)

Throughout the months of March and April, as the markets were moving up and down, Steve, my roommate, and I exchanged 125-150 emails on the subject of the market. Some of the time I would email an article that I knew Steve would disagree with, just to get a discussion going. Much of the time, I was pointing out that the markets were still too high and how more bad news was forthcoming. I complained as the markets moved positively on bad news such as increasing unemployment or companies not losing as much money as predicted. He complained the markets pulled back from earlier gains on things like housing news and the analysis of bank quarterly earnings. Eventually, this led to the following email exchange:

my roommate:“will the DOW hit 9000 this year? ill bet you $20 bucks”

me:“Just because it hits 9000 doesn’t mean it will stay at 9000. I’d be dumb to take this bet because all you have to do is hit 9000. it could go down the next day, but you could still claim victory.”

my roommate:“ok whats your bet then”

me:“My bet is that DOW will unable to sustain 9000 for an entire month during 2009. 20$.”

my roommate:“deal. dow stays above 9k for a month

remember that you are betting against the biggest badest economy in the world: the american economy. while capitalism and all these ‘stupid banks’ show how capitalism goes astray – it also adapts quickly – there is a monetary incentive to do so.”

me:“and you’re betting that the illusions created in this current market will hold up.”

As of today, the market stands at about 8360. The market has swung up as high as around 8500 recently, but nowhere near 9000. Now I realize 2009 isn’t over yet and that it is too early to claim victory, but, I don’t see the Dow making 9000 this year. I think there is going to be more bad debt writes off by the banks and more prime borrowers having problems due to job loss and declining home values. The banks in their quarterly earnings reports were increasing their provisions for bad debt. So even the banks are expecting more bad news. From time to time I will update the status of this bet.

Feel free to leave your comments or predictions for the Dow / markets in 2009.

Why I use the Starwoods Amex and Schwab Visa Cards as my primary credits cards

SPG Amexschwab visa

I have been asked the question many times, “What is the best card to use?”. Every time this question is asked of me by one of my friends I end up giving the standard answer…”It depends.” This usually leads to a longer discussion about goals and what they want out of their rewards. In my post regarding developing a rewards strategy, I tried to lay out the steps a person should consider when choosing their credit card(s). Tonite, I want to share with you what cards I use and more importantly WHY I use them.

Goals and Old Strategy…
Before I talk about the specific cards in my wallet, I think its important to understand my goals. My goal for my credit card rewards is to get a round the world airline award ticket in business class. This is a very specific goal that points me in the direction of cards that offer programs that turn points into air miles in a variety of frequent flyer programs. This is also helped me develop a specific strategy of targeting airline, hotel, and American Express point programs. Originally, I wanted to earn as many frequent flyer miles as possible. This meant that I would fly the same airline, sign up for the credit cards with bonus miles, and earn American Express and hotel points as a secondary strategy as a way of getting more air miles. The problem was that I focused on a specific airline instead of focusing on a program that was flexible and gave me options in choosing the best airline miles. It was only after I realized that the airline programs were being devalued that I knew I would have to change things up. What I wish I would have realized was the flexibility of the SPG starpoint.

What I carry currently and how it helps me….
In my wallet, I carry two credit cards that I consider to be among the best for maximizing my rewards – the Starwoods Preferred Guest (SPG) American Express Card and the Schwab Invest First Visa Card .

The SPG amex card allows you to earn 1 point per dollar spent. There is a 10,000 point sign up bonus. You can redeem SPG points for gift cards, buy flights with points, hotel stays, or you can transfer points to miles in most major (over 30) frequent flyer programs. It is these last two things that I listed that I want to discuss further. If you’re interested redeeming for a hotel room, you can do a straight award starting at 3,000 points depending on the category hotel you choose. A much better option is to look at the cash and points redemption option. At certain Starwood properties, you can get a room for a small amount of points and a reasonable price. I’ve seen awards start at $60 a night plus a couple thousand points. Looking at the big picture, this let’s your points go further and doesn’t cost you much especially when you are talking about burning 50 – 60 thousand points at a category 4,5, or 6 hotel for a few nights or paying $60-100 a night plus 3,000 points. The cash and points deal is really good. Another fringe benefit is redeeming is if you redeem for 4 nights, you can get the 5th night free. If you wanted to use this card just for hotel points, it would be a great card to use, but I want to point you in the direction of transferring points to airline miles.

With Starwoods, if you transfer 20,000 points to participating airline programs , SPG will add another 5,000 bonus miles to the transaction. This effectively turns the SPG Amex card into a 1.25 point per dollar card if you redeem in 20,000 point increments. Some will argue that cash back cards are better. I would argue that the value of travel points is when you start talking about redeeming for premium class seats on airlines. I highly recommend that you don’t use miles or points to redeem for domestic coach seats unless you urgently need seats and can’t afford to buy the tickets.

An Example Calculation
Business Class seat on NWA/DL to Taipei, Taiwan – $7167.02
Dollars to spend using average cash back rate of 2% to purchase this ticket – $358,351
Air miles required to get a saver class award ticket – 120,000 for a round trip
Starpoints required to redeem for NWA seat – 100,000
Cost for obtaining those 100,000 SPG points – A maxmium of $100,000
Return on 100,000 starpoints for a $7,167.02 premium seat – over 7%

The above example is a worst case scenario. If you have status you are earning points are a far greater rate through bonuses when you stay with at SPG hotels. Your return % could be much greater than 7%!

One other way to quickly obtain points is to purchase them. . I usually don’t recommend this, but this will help me leap frog towards my goal quicker. I can get 20,700 points for $700 or I can run $20,000 through on the Amex card and get 20,000 points. (20,000 is the max points that may be purchased in a year) It might take awhile to run 20k in expenses and it would depend on your immediate need for points. The US Mint Strategy I talked about earlier will help you quickly run expenses through.

Pitfalls of this card….
There are some pitfalls that I have chosen to live with regarding the SPG card. First, it is an American Express. AMEX is not as widely accepted as Visa or Mastercard. Second, through credit card transactions only, I get 1 point per dollar. Other cards give certain bonuses for gas and grocery purchases whereas the SPG is a straight 1 point per dollar.

How I mitigated the pitfalls
Since I realize AMEX isn’t accepted everywhere and because I have Schwab Checking, Brokerage, and Savings accounts. I decided to get the Schwab Invest First Visa card. This is a straight 2% cash back credited to the brokerage account every month. Now one of the cool things about this card is that there is no foreign transaction fees charged. So when you go overseas, you’re not stuck paying the ridiculous fee for using a credit card.

In my next credit cards post, I will talk about my secondary strategy to complement my reward programs earnings.

The blessing and curse of student loans

I read this article on USA Today about the pressures of paying off students loans. I can certainly relate to this pressure as I have spent the majority of my extra income from the last 4 years paying off  over $50,000 in student loans years earlier than I am required. I may have made a choice to pay down those loans early, but I’d rather get rid of debt as quickly as possible.

I found a few things interesting about in this article.  First, how hard student loans are to discharge through bankruptcy. The article seemed to indicate it was easier to discharge gambling debt through bankruptcy than student loans. This doesn’t seem right to me.

The second thing I found interesting was regarding the cost of private loans. Private lenders claimed that once the law disallowed the discharge of private student loans that these loans would become cheaper. According to the article, the interest rates on private student loans have not become cheaper. I don’t know enough about the current private student loan environment, but from my own experience, as the interest rates have dropped, so to have the rates on my remaining private loans. This is probably because the interest rate on my loans are variable and tied to the market rate.

I certainly think that the government needs to take some action to give students relief from their loans especially in the current tough economic times. The banks that gave these loans out have certainly been granted billions of dollars in relief. I see no reason why students can not be granted some relief as well. The article makes an excellent point that many students can not afford to search for a job in a career related to their major because they are taking lower paying jobs to keep up with student loan payments.

The final point I’d like to make is that student loans can be both a blessing and a curse. They can help students pursue their dreams but sometimes at a fairly steep price. Looking back, I wish I had paid out of pocket for more of my college costs. Starting out with a negative net worth and mountain of debt is no fun as recent graduates are quickly coming to realize.

College graduates struggle to repay student loans – USATODAY.com.