Credit Card Experiments, Continued

Quick Credit Score Update

Both credit score predictors were wrong.  One predicted a small drop (about 3 points) the other a small gain (again, about 3 points).  Instead my score dropped from 735 to 724 — 11 points.  However, two months later, it bounced back to 733, roughly what I expected.

I anticipate, that with continued paying of my full balance due every month, except on my one zero-interest, balance-transfer card, that my scores will gradually increase.  I will provide occasional updates as developments occur.

 

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The Credit Score Game Continues

In the last post I wrote about how my wife’s credit score (783) was significantly higher than mine (747).  That just won’t do — I embarked on a credit-score-improvement quest that includes research and experimentation.

The experiment is already paying off in unexpected ways.  I got a $100 bonus and began using a 1.5% cash-back Quicksilver card as my day-to-day card.  This a small upgrade from my 1% cash-back card.  I also convinced my wife to get a Citi Double Cash Back card for most of our recurring monthly expenses that ends up saving us 2%.

I learned more taking with my brother about his credit card management techniques.  It turns out that he and his wife are pretty expert at credit-card savings.  He has various 5% cash-back category cards he uses to buy groceries and gas.  They also have 2% cash-back cards for non-category purchases.  He also uses a neat trick to stretch the 5% grocery purchases further… buying pre-paid gift cards at grocery stores for, say,  Home Depot or Target — effectively getting 5% off of purchases there too!  Financial savvy definitely runs in the family.

Let’s not forget mileage cards too.  My United MileagePlus Explorer Card is the only card I have with an annual fee ($95).  I fly often enough on United that it is worth it to me.  And recently between my wife and I we recently bought 5 tickets with United miles for myself and some family members  (Tip:  if you want to help someone buy a ticket with your miles, don’t pay to transfer your miles to them… instead simply buy the ticket for them with your miles!)

The Credit-Card/Credit-Score Experiment

As expected, getting two new cards temporarily lowered my credit score — from 747 to 728. However, it recovered a bit… to 735. So what did I do… get one last new card… The Chase Freedom Card with a $200 (20,000 point) bonus.

I decided to get a %5 cash-back “rotating-category card.”  It was the $200 bonus that caused me to chose this this particular one. The criteria for collecting the bonus is pretty simple: charge $500 of purchases in the first 3 months.  I view this as purchasing $500 worth of stuff that I would have bought anyhow — Christmas gifts and such — for only $300.

This third new card will probably cause another temporary downward blip on my credit score. What’s important about this last card is that it brings my total credit card limit (amongst all active credit cards) to $61,700.  This means that the debt (see previous post) of approximately $12,000 will get below the critical level of 20% of utilization of available total credit… which should help my credit score in the mid to long term.  In the meantime I am “floating” $12,000 in debt for free at 0% interest for 15 months.

What Next: A Credit-Score Challenge?

My personal challenge is “no more new cards until 2016.”  I’ve had my fun getting 3 new cards that I believe will 1) help my improve my credit score in the long-run, and 2) help me save money (via cash-back programs) on purchases.

Onc challenge will be in keeping some activity on all of my open cards, and earning maximum cash-back while resisting the temptation to overspend just because there is a small reward.  I hope to have a zero balance before the teaser 0% APR rises to some ridiculous level (of, say, 19%).  I will keep you updated here.

Why Exit Corporate America and a Six-Figure Salary?

My employer and I are parting ways after nine and a half years together.  It is an amicable separation, and I wish the [unnamed] technology corporation, and especially my soon-to-be coworkers the very best.  I am happy that the severance package is reasonably generous.

I feel a bit bad for my coworkers because they still face the same aggressive schedules but with about 30 fewer engineers.  However, the company is actively working to reduce headcount, and those left behind almost always bear greater burdens on their lives.  Sixty-hour weeks are not uncommon in the tech industry, and over the years I’ve endured the occasional 100-hour week. When that happens, breakfast, lunch, and dinner is brought in because there is no time to eat otherwise.

There was a time when I didn’t mind fifty- and sixty-hour weeks.  But that was when everything was new, exciting, and fun.  That was when I worked at the “old HP”, where almost anything was possible.  In the beginning I learned something new almost daily, and I love learning.

Here is why this “job separation” feels like a good thing:

1. Severance pay is a nice perk.
2. I believe my best talents are wasted in my current role.
3. There is virtually nothing for me to learn in my current role.
4. The is little chance of me moving to a significantly different role (within the corporation).
5. I will never get rich working for a large corporation, unless I build it myself.
6. Going to work feels like stepping into the Matrix.
7. True creativity is treated like the flu… people avoid it as much as possible.
8. I am willing to bet on myself and my talents!

I am passionate about creativity and I have largely refused to drink the corporate Kool-Aid.  Pretending to be a Kool-Aid drinker is extremely taxing, and feels disingenuous.

Creativity is more habit than raw talent.  Creativity can be exercised and developed, or it can be quashed and stifled.  Creativity is dangerous to boring people and their boring jobs.  In contrast, creativity is energizing to interesting and open-minded people.

I prefer to use my energy to improve the world in my own unique way, and with my own unique, somewhat flamboyant style.  I can relate from repeated managerial feedback that my style is not appreciated by former employer.  My style is friendly, lively, and centered around humor with a touch of sarcasm.  Liveliness, humor, and particularly sarcasm are not appreciated in my former corporate realm.  What passes for humor is so sanitized that any pre-existing wit is sublimed into the corporate HEPA filter of political correctness, anxiety, self-censorship and banality.  That culture is one reason this [unamed] corporation’s advertisements are so uninspired.

I am managing my own company now.  It is a start-up, and it is my passion.  It is being built around disruptive technology — technology that will make waves in the world of investing. Technology that few will understand, but which produces results that almost anyone can appreciate.  The culture of this new company will be based on a simple idea — be bold.

 

 

 

Extending my Time Horizon

I have been on my new work out regimen for about 3.5 months.  In this time I have increased my sustained energy (cardio) output by 40%, and can now bench press more than my own weight.  With a mix of strength and interval training I have begun morphing my body and my metabolism from a out-of-shape to somewhat in shape.  I expect to continue making continuing gains for about 2-3 months, at which point I expect my fitness to begin slowly plateauing.

Frankly, I hope to continue exercising — in one form or another — for the rest of my life.  According to my research, the level of exercise I am performing can, in the mean, extend my lifetime by about 3 years.  This, of course, means my financial planning needs to be adjusted accordingly.

Mostly these minor adjustment mean a slight increase in savings and a small increase in risk-asset allocation.

There is seldom a benefit without a cost.  My share of the cost for the family gym membership is about $60/month. I have also paid a short-term $1100 for 21 weeks of one-hour, one-on-one personal training.  After the initial period, I plan on going to a once-per-month personal training program.  This works out to about $1400 per year for the gym membership and monthly personal training.

However the benefits of physical fitness, both personal and financial are tremendous.  The most striking example is type 2 diabetes, which a largely preventable and potentially devastating disease affection millions of Americans.  According to this website, type 2 diabetes affects over 25% of people 65 years old and older.  Preventing this one disease alone, in my opinion, is worth the financial and time costs of maintaining and improving physical fitness.

Improved fitness helps prevent other diseases such as stroke and heart attacks.  Whereas fitness (and proper diet) are virtually guaranteed to prevent type 2 diabetes, improved physical fitness reduces the odds of, say, the devastating affects of stroke. But just like reducing the risk of a financial loss is valuable, so is reducing the risk of various diseases.

The Purpose of Investing

The purpose of individual investing boils down to two important objectives: 1) Being more confident in your financial future, 2) Attaining a bright financial future.  In terms of well-being the first objective makes one feel more secure and happier today, while the second causes one to be more secure and hopefully happier in the future.

In essence the purpose of investing derives from the goals of security, freedom, and happiness.  It is these goals that have got me hooked on “exercise religion”.  In the case of financial matters, I continue to save today, for a brighter tomorrow.  As regards fitness, I am similarly making investments of time and money to bolster my future health.

What I’m saying is that exercise is a form of savings — saving future cost of medical expenses, missed work, and unhappiness.  I’ve put a lot of work into building my financial future, and I will do what I have to live to see it.

Houses

I find myself in the interesting position of owning 3 residential properties:  1) Our new “dream” house, 2) Our “old” starter home, 3) our rental property.

My wife and I decided to do things differently.  Most homeowners looking to upgrade either make an offer contingent on the sale of the first home, or sell first and buy later.  I decided that was not the optimal strategy for us.  I decided it was best to buy in the upgraded segment before the higher-end markets heated up, and to sell our starter home in a seller’s market.  Part one was buying and moving in to the new house.

The strategy worked very well.  Our “old” home resides in a market where contracts are signed in days, not weeks, and multiple competing offers were becoming common.  Our plan also allowed us to stage the old house without occupying it.   We laid down fresh mulch and 12 tons of rock.  This gave the house tremendous curb appeal.  We also put days of effort into making  sure the house was “white glove” clean from floor to ceiling — even the basement.  We left some furniture and most of the artwork behind (temporarily) for staging.  The place looked spectacular inside and out.

We listed it on a Thursday night, and by Friday night we had had 13 showings and multiple offers.  Saturday morning we discussed the pros and cons of each offer, and made a decision.  We accepted the offer that was $9000 over our asking price.

Before we started the whole process we negotiated a deal with our real-estate agent.  She’d receive the standard 3% on our new home purchase, but only 2% on the old home sale.  This meant paying 5% on the sale, rather than 6%.  This saved us over $2500 in commissions.

So far we are pleased with our new home.  It appraised for more than our negotiated price.  And even though it is about 50% larger than our previous home, our first month’s utility bills are significantly cheaper than our old home built in the 1970s.  Our new home is “high-efficiency”, with a HERS Index of 60.  We anticipate saving $800 to $1000 per year on utilities.  Moreover, we obtained a 3 percent, 15-year mortgage with a negative 1.65 points, which even after 0.5 points of origination, resulted in less than $1000 of closing costs.

All the while, the rental property continues to provide monthly “dividends”.

2013 Tax Bill: Who *Really* Gets Hit

Drum roll please:

3. Anyone (the 53%) who pays federal income taxes.
2. Single No kids (SNOKs).
1. DINKs:  Dual-Income No Kids.

The 2013 tax compromise hits everyone who files because of the change in Social Security tax.  From the very first dollar rates go from 4.2% to 6.2% for Social Security.  Compared to 2012, virtually everyone pays more taxes in 2013.

Having no kids really hits taxpayers.  Don’t miss my message… children are expensive to raise, and having children will not save you money!  But having children will reduce your tax bill due to myriad credits from the child tax credit, to extra exemptions, to 529 college savings plans.

Having no children hits single taxpayers some, but DINKs get hit harder for total incomes above the 15% tax bracket (approx $71,000).  Married couples making $248,000 per year — not quite Obama-rich — will pay $4548 more in Social Security taxes alone than they did in 2013 if the partners make similar incomes.  If, however, another couple with a single wage earners (SINK: single income no kids), SocSec tax would be half, $2274 due to the $113,700 Social Security cap, which is assessed per person, not per couple.

The marriage penalty, which never fully went away, is back with a vengeance in 2013.  The higher the income, the greater the marriage penalty.  The more equal the incomes, the greater the penalty.  It is almost like the tax code is telling married women to stay home and get pregnant.  It is hard to believe it is 2013, because it feels like the tax code is still written with a 1950’s mentality.

 

Financial Life 2.0

Three quarters of the way through another busy year.  I married my girlfriend of six years, and we are thriving despite the dismal economy.    I have a rewarding electrical engineering job, working on some of the most advanced technology on the planet.  My wife has her own successful business, and based on current projections, she has a good chance of  passing me in earned income this year.

My wife and I are compatible in many, many ways — but finance has historically not been one.  At heart, I am a saver, and she is a spender.   That is one reason we have a prenuptial agreement.

When we met my wife was in debt.  In contrast I was looking for new ways to invest my money.  Those ways included paying off my home  mortgage in full, starting several small businesses, and purchasing my first income (rental) property.  With lots of coaching and encouragement (and no out-of-pocket money), I helped her become debt free.  It was very important to me that she do it on her own, because early on I did believe she was the one for me.  On the flip side, I knew that there would be too much tension between us if she could not get here finances together.  Luckily, she listened and adapted.

I have my flaws, but discipline with money is not one of them.  Over time, I have become less frugal.  That has always been part of my plan.  Save and grow wealth early; spend and enjoy later.  We are living well, and putting away money for the future.  I have little doubt that before I turn 40, we will be a millionaire household.  Depending on how one counts, we are already.  Having at least one million dollars in (reasonably) liquid assets is a goal.

My dreams are bigger than this.  I have created a financial portfolio software business I believe has the potential to be worth tens or hundreds of millions of dollars.  It is because of this software,and the ideas built into it, that I have largely stopped blogging here.  The software simply has a better business model.  The prospects of Balhiser.com, as a financial blog, making even $100,000 a year are very small.   It just took me a while to swallow that truth.  I haven’t given up on this website, I’ve just put it on the back burner.

Anyhow, back to wedded bliss.  There is one truth that mars our bliss: the marriage penalty.  Simply put — when we got married our taxes went up.  Just for kicks we ran the numbers both ways: single and married.  The difference was over a $1000 marriage penalty.  And the way things are going, the tax penalty is only going to get worse.

All in all, though, I am happy to be married to my lovely wife.

Wishing my readers all the best.  When in doubt, diversify — at least in matters of finance.  (Probably best not to diversify in matters of fiancée(s))

 

 

 

 

Making Money

When I last updated my “play money” (Crazy Ivan) account info it was worth $25,953.  As of market close yesterday it is worth $28,174.  Equity and ETF positions have changed slightly. Then now include DTN, INTC, IVV, JNK, PBP, SPLV and XLE.   I like all of these positions, however XLE has been a short-term disappointment.  I hold XLE as only a hedge against rising gas prices.

All in all not bad performance for an account valued at $15,784 in October 2005.  (There have been no deposits or withdrawals  during the whole time.)  This is about 11.2% annualized performance.

Top 6 Investment Innovations in Recent Decades

These are my top picks for innovations that most benefit personal investors.

#6:  Decimal pricing.    Do you remember when stocks were priced in fractions?  Like 23 and 3/8?  This was not cool.  Not only was it clunky, but it meant that bid/ask spreads were usually stuck at 1/8 of a dollar per share, or 12.5 cents per share.  Luckily, today most investments are priced in decimals.  Some exceptions include bonds and the interest rates on most mortgages.  How archaic!

#5: Free online investment info.   Information used to largely come in paper form, and cost money.  Or you could pay tons of money for Quotron… really not practical.

#4: Discount online brokers.   My Dad used to pay $50-$100 per stock trade — over the phone with a broker.  Today some of my ETF trades are free, many of my trades average about $1, and my most expensive trades cost $8.

#3: Exchange-Traded Funds (ETFs).  ETFs fix most of the problems with mutual funds such as high(er) expenses and lack of intra-day trading.  ETFs also open up a wide variety of investment options including access to commodities, leveraged funds, and precious metals.

#2: Index investing.  Index investing brings two huge advantages.  First, incredibly low costs.  Second, maximum diversification.  Index investing has, and continues to revolutionize the investing playing field.

#1: 401(k)s (and IRAs).   Named after a once-obscure IRS code, 401(k)s, or 401Ks, offer investors decades of tax-deferred growth opportunity.  IRAs offer a similar advantage.  Finally Roth IRAs offer similar tax-deferral opportunities where the tax benefit is back-loaded.

Stock Beta Computation, 6 Closing Thoughts

When I wrote about computing stock betas in 2010, I had no idea it would be this blog’s third most popular topic. I wrote a handful of blog posts about stock beta, but my heart wasn’t in them.  Today, driving home from the airport, I was inspired to blog about beta for perhaps the last time.  Previously I held back and focused on the mechanics of beta computation, and the discrepancies I was seeing between various website’s beta values.  This time I provide an example beta-computation spreadsheet and don’t hold back on the math or the theory.  Before I launch into this final word on beta, here a few highlights.

1. Beta is easy to find online.  Not all sites agreed on value, but the delta seems less than it was 2 years ago.   Why compute beta when you can simple look it up?
2. Beta is less useful if it has a low R-squared.  Luckily, sites like Yahoo! Finance provide R-squared values.
3. Even with a high R-squared, beta is not a very useful risk measure.  Standard deviation is better in many ways.
4. In theory high-beta stocks (>3) should go up dramatically when the market goes up.  In practice this is often not the case.
5. In theory low-beta stocks (<0.5) should be “safer” than the market.  Again not so true.
6. In theory low-beta stocks (<0.5) should “under-perform.”  Not necessarily.

If you are still interested in beta, simply click to read the full-beta blog.