How to think about rich and poor

How do you explain to kids -- Are People Without Nice Things Lazy?

I like this simple answer a reader wrote.

Well, here's what my parents told me: Life isn't fair, and some people have advantages that others lack. People who have more nice things are often simply luckier than people who have less. So you should be grateful for what you have and not feel superior to those with fewer advantages.

Retirement in an aging population

Retirement planning is an important topic in personal finance. The purpose of retirement planning is to ensure a person have sufficient living incomes after leaving the work force. Recent reports in the Economist showed that the world's population is getting older. This is going to complicate retirement planning for the individuals and the governments.

Key facts reported in the articles are as the follows. First, people will live longer in coming decades. The average life expectancy for people in the developed world is 78. This number is expected to rise. Second, in both developed and developing countries, we're seeing a trend of birth rate decrease (i.e., less babies are born into new families). Third, an aging population (more old folks and less young kids) will cause problems for the existing pension systems (e.g., the Social Security system in the US). There will be less young workers to pay taxes to support an increasing number of retirees.

So as an individual what can we do to ensure that we will have sufficient incomes to retire? I think there are only two reasonable answers: (1) prepare to stay in the work force longer, and (2) maintain a sound retirement investment portfolio for living into an older age (say 85-90).

• Ageing in the rich world
• A shortage of babies
• Living longer
• Selling to older people
• Targeting pensions
• Work till you drop
• China’s ageing predicament
• Coping with global greying

BoA customers get free museum passes

If you're a Bank of America customer, you are eligible for free weekend passes to over 100 museums in the US. This is a part of the Museums on Us program.

For the rest of 2009, you can get free passes during the following weekends:

• July 4-5
• August 1-2
• September 5-6
• October 3-4
• November 7-8
• December 5-6

If you are in the Bay Area, check out the San Jose Museum of Art, the Tech Museum of Innovation and the de Young Museum.

Inside look of a personal credit crisis

The health of the United States economy is not good. In fact, it has been really sick. The root cause of this sickness was cheap home loans to people who actually can't afford to pay. It's to hard to imagine how we have come to this situation. Many people blame the problem on irresponsible lenders and immoral investors. But, the truth is that the borrowers are also guilty as charged. Because they wanted to own beautiful and expensive houses with least amount of payments, they were willing to take on the worst possible kind of home loans and did so without asking any questions.  Personal greed for more materialistic rewards causes both educated and uneducated people to do stupid things.

The New York Times has an interesting article that describes a very personal story about how a upper-middle class family got itself into credit crisis. The main character of the story is Edmund L. Andrews and who is also the author of the article. Mr. Andrews is an educated personal, an economics report for the New York Times. From 2004 to 2009, for the desire to own a beautiful $460,000 home, Mr Andrews made every worst possible financial decisions he could have made to screwed up his life: took on high interests loans, ran up credit card debts to cover daily expenses, and use home equity to cover credit card debts after run dry on cash savings.

It is a sad but very educational story. Reading this story will give you a new perspective on how to manage personal finance and how to think about the value of material things in this world. Mr. Andrews is coming out with a new book, Busted: Life Inside the Great Mortgage Meltdown, that tells the story in full details. I wish his book can sell well and use the incomes to pay off his debts.

Index funds beat actively managed funds

When it comes to mutual fund investing, I'm a believer of index funds. During the recent volatile market environment,  actively-managed mutual funds on average produced more losses than the losses of passively-managed index funds.

Average losses for stock-index funds last year were 39.1%, while actively managed funds lost 40.5% on average, according to investment researcher Morningstar Inc.

According to research, when there is a great uncertainty in the market, investors tend to switch their investments from actively-managed funds to index funds.

Actively managed stock funds saw net outflows of $221.8 billion in 2008, while index funds saw net inflows of $17.6 billion, according to data from fund-tracker Lipper Inc.

Index funds' share of the marketplace rose 1.4 percentage points in 2008 to 13.2% from 11.8% a year earlier. Total assets in index funds at year's end were $490 billion; actively managed stock funds held $3.2 trillion, according to Lipper.

I strongly recommend index funds for long-term investments. Low management fee and simple investment strategy of the funds are perfect an average investor.

Source: Actively managed funds lose share to index rivals, MarketWatch.com

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Depressing economy, but don't panic

It's really hard to find good news about the US economy. Everything seem to be falling apart: the real estate market is in trouble, banks are closing their doors and the stock market is a bear mode. I woke up this morning and asked myself, but what can I do today to protect my financial future?

First, don't panic. Don't let negative media news cloud your judgment. Don't sell your investments just because the market is in a bear mode. Don't sell your house just because its price is falling every week. Second, assess your family's financial situation. Know how much debt your family is carrying. Known how much asset your family has. Once you understand all these, evaluate your family's financial goals -- saving for retirement, children college education or a new house down payment. Third, develop plans to achieve your financial goals. Your plans must be independent from the current market condition. They should work in both good and bad market condition.

Let me argue why people should not panic. The ups and downs of the world economy are cyclical. Unless we expect the world comes to its end soon, there is no reason to believe that the economy will continue to go down and collapse completely. If you are lucky enough to live for a good number of years, you will experience many more ups and downs of the economy.

We shouldn't ask the question whether or not the current conditions will improve. We know for a high degree of certainty that it will improve. The question we don't know for sure if when. It's difficult to time the market.



Since no one has a crystal ball that can tell the future, we must rely on our understanding of the history. Because we expect the market to come back sometime in the future, while everything is cheap, it's a good time to invest.

Save money from your car insurance

The price of gasoline and oil are reaching a record high in the United States. In some places we are seeing a gallon of gas for $5.00. One way to offset the increasing cost is to reduce to your expenses. Start with how much you pay for your car insurance.

There are many ways to reduce your car insurance premium.

• Get quotes from different insurance companies. It usually pays to call different companies to find out how much they're willing to reduce your premium in order to have your business. If you are a good driving record, usually you can get discount by switching to a new company.


• Review your vehicle coverage. Your insurance premium is calculated based on the type of vehicle coverage you select. Unless you have an extremely luxury car, usually you don't need to select all coverages and have the maximum deduction. In particular, pay attention to PIP (Personal Injury Protection). Depending on your State law, you may be able to waive PIP coverage if you've sufficient emergence fund saved in the bank.


• Select higher deductions. You can reduce your premium if you choose to pay high deductible. You should alway choose the highest deduction that you can afford. Don't be afraid if you go from $250 to $500 or $500 to $1000. If you drive carefully, the chance you need to pay a lot of money to fix your car is relatively low.


• Ask for discounts. Call your insurance company and ask what kind of discount is available to you. Insurance companies usually offer different types of discount -- for example, university alumni discount, good driver discount, combine home and car insurance policy discount, and auto-pay via an checking account discount.

Gold, CD and real estate for 2008

It's almost the time to say "Good Bye" to the year 2007. I learned much about investing in 2007, and I'm looking forward to refine my strategies and apply them in 2008 and the years beyond.

Looking back 2007

In 2007 the development of three events have affected my family directly: (1) a slowdown in the US housing market, (2) a sharp decrease in the US Dollar value and (3) a significant increase in commodity prices, in particular, in food and energy prices.

The crash of the US sub-prime market caused a US housing slowdown. A minor drop in the home value in our neighborhood, though only damaged our net worth on paper, changed the way to we spend money. Because we felt that we have less money now, we have avoided purchasing many big ticket items.

A cheap US Dollar discouraged us from traveling to countries whose currencies are trading against the US Dollar in a record high. Similar to the effect of decreasing home value, a weak US Dollar hits my consumer confidence.

Expensive food and energy directly affected our household spending. Eggs, milk, wheat and corn products are now more expensive than what they used to cost. However, in some aspect, this has a positive consequence. We are more conscious about energy conservation and reduced the purchase of non-essential junk food.

Investing 2008

Two investment vehicles that I come to appropriate are (1) mutual funds that invest in gold and (2) high-yield CD. I believe that these two investment vehicles are useful for any personal investment portfolios.

Renovating expensive NYC apartments

The price of New York City apartments skyrocketed in the past decade. Not only people are paying millions for apartments, they also spend millions to renovate and remodel them. While money may get people expensive apartments, but it can't eliminate the mental stress of home renovation.

Julia Kim rapped her spiked Gucci heels along the floor of a Midtown furniture showroom earlier this year as she approached a $30,000 custom wraparound couch that will be the centerpiece of the Manhattan co-op apartment she plans to share with her fiancé, Stephen Rushmore.

This purchase was just one of many steps in the journey that began more than a year ago when Rushmore [and] Kim decided to buy a duplex just off Park Avenue for $6 million.

Indeed, even after paying top dollar for a luxury apartment, most buyers see the need for more work. Like Rushmore and Kim, they often embark on costly and lengthy renovations intended to reflect not only their own taste but also their ambitions to find a perch in the social and economic swirl of today's Gilded Age.

In fact, it's more stressful to own expensive homes because you have to do extra works in order to live up to the social expectation.

US food price are up 4.2% in the past year

The Consumer Price Index (CPI) report shows food price in the US rose 0.3% in July 2007. The price for food away from home (e.g., food in restaurants) increased 0.5%. The price for food prepared at home increased 0.1%.

In the past year, food price are up 4.2%.

Conclusion: it pays to prepare food at home and dine out less.

Source: MarketWatch.com

Cheap US Dollar

The US Dollar is trading historically low against many major currencies. Few questions come to my mind: (1) How did we come to this situation? (2) Who can and can't benefit from a cheap US Dollar? (3) Should small investors be worried about a cheap US Dollar?

How did we come to this situation?

According to The Economist article, the US Dollar is trading historically low for three key reasons: high oil prices, a weak US economy and a troubled US credit market.

Who can and can't benefit from a cheap US Dollar?

Individuals and companies benefit differently from a cheap US Dollar. For individuals, tourists travel in the US from countries with a strong currency can benefit. Travelers from Canada and EU find everything to be cheaper in the US. On the other hand, US tourists who travel abroad face a complete oppose situation -- everything is more expensive abroad than at home.

A cheap US Dollar can help US companies and depress the economy of foreign countries. US businesses with an international market can benefit greatly from a cheap greenback. This is because the price of their exports are now more competitive than those from countries with a strong currency. Developing countries whose economy depend on exports to the US may be hurt by a cheap US Dollar -- a weak US economy will demand less imports.

Should small investors be worried about a cheap US Dollar?

In general, small investors in the US shouldn't be worried about a cheap US Dollar, assuming that their investment portfolios are diversified and are aimed for long-term investment. Currency exchange rates are cyclical -- the US Dollar was the king in the late 90's. It's only a matter of time for the US Dollar to come out of its low (the question is when). Meanwhile, I think investors should continue to invest in the US stock market, in particular in S&P 500 companies. The profits of US national business may be hurt by a weak US economy, but multinationals should do relative well because of their diversified international markets.

Diversify your investment in cash

Experts believe that now it's a good time to diversify some of your investment in cash. This is because the yield of cash is very attractive given today's market condition.

1. Cash yield as much as long-term bond. As of July 9th, 2007, 10-year US Treasury yield is 5.16%, and 6-month CD offered by INGDirect is 5.15%.


2. The yield of cash investment is ahead of the current annual inflation rate, which is around 2%. If your cash investment yield 5%, then you enjoy real cash yields of 3%.


3. The Fed probably will keep the short-term interest rate at 5.25% for the rest of 2007.

For those who are interested in cash investment, I recommend CD laddering.

Source:

• Daily Treasury Yield Curve Rates


• INGDirect Orange CD


• Diversify into Cash?

Housing slump: buy or rent?

The New York Times runs an article that talks about the current US housing slump. It argues that people who don't already own a house should continue to rent. I disagree.

Before presenting my arguments, let me summarize the key points in the article. First, the author predicts that the US housing price will continue to fall in the next few years. Second, it's not really beneficial for people to own a house because there are extra expenses associated with the home ownership, e.g., property taxes and mortgage interests. Third, using paid mortgage interests as tax deduction can't completely eliminate the actual borrowing cost.

This is what I agree with the author. The US economy is currently in a housing slump phase. People should think twice about buying for real estate investment purposes. Unless you are real estate professionals, it's unlikely that you can make quick profits from buying and selling houses in this market. In addition, people should never borrow more than they can afford just for the sake to increase their tax deduction.

However, I disagree that renting is a sensible choice for everyone.

IRS wants everyone to be a US resident

US government policies are full with surprises. Illegal immigrates is a hot topic on the Capital Hill when the context is social responsibility. However, it's a rather simple issue when the context is taxation. In the US, almost everyone is required to file Federal incoming tax. This includes US citizens, permanent residents (Green Card holders), legal residents (visa holders) and illegal residents.

How do you count illegal residents as taxpayers? To IRS, no matter what your legal resident status, as long as you live in the US and receive incoming, you must pay taxes.

Here is the rule:

You can be a resident under substantial presence if you are in the U.S. for more than 30 days in the current year and if the sum of the current year's days plus one-third of the previous year's days plus one-sixth of the second preceding year's days exceed 182 days.

The surprise continues with tax deduction -- i.e., when you try to pay less taxes.

Collect additional $30-$60 from your 2006 tax refund

For those who paid long-distance phone bills in the past few years will be entitled to receive a special telephone tax refund. This refund is available this year only (i.e., 2006 federal tax filing).

[This refund] came about after court decisions found the excise tax, first levied in 1898 to fund the Spanish-American War, should no longer apply to telephone service as it's billed today. Taxpayers can claim a refund based on the 3% excise tax they paid on long-distance calls from March 2003 through July 2006.

How should you file if you're eligible for this refund?

• Option 1: Add up all that federal excise tax you paid based on your old phone records


• Option 2: Take a standard refund amount, based on the number of personal exemptions you claim. If you claim one exemption, you can claim a $30 refund; two exemptions, $40; three exemptions, $50; and four exemptions, $60.

For additional information, see the following personal finance articles from MarketWatch.com:

• No-so-easy money?


• Deductions and credits you're likely to overlook

Why women should save more than men and how

Everyone should care about saving for a secure financial future. This is true for both men and women. However, in the US women face more financial challenges than men. Why?

Women live, on average, seven years longer than men. But they often don't have enough money to live on during those extra years. Women face different financial challenges than men do. They still only make about 76 cents for every dollar men do, and they are also more likely to take time off during their careers to raise children. Furthermore, women also invest less aggressively than men do.

If you are a woman and want to save for a secure financial future, what can you do? Take a look at the saving tips for women by Marshall Loeb at MarketWatch.com.

Highlights:

• Take control of your own financial planning. Don't leave it to your husband.


• If your husband save 10% of his gross income each year, you should save 12%.


• Open an IRA account under your own name.

Shopping price comparison with Frucall

Frucall.com is a new phone call service that does real-time shopping price comparison. While you are in a store, to find out how much an item sells in online stores such as Amazon, call 1-888-do-frucall (1-888-363-7822). Enter the item's barcode number. Few seconds later, Frucall will read the prices to you.

Frucall also allows you to bookmark items. Once an item has been bookmarked, you can view them later online. At present, all services provided by Frucall are free of charge.

I tried the service to lookup a GFCI (barcode: 078477147641). The reported sales price ranges $14-$20. The service's response time was acceptable -- no long delays. Frucall may be a handy service for the coming holiday shopping season.

I wonder how Frucall plans to profit from this free service? Maybe it gets commissions from online stores when items are sold via Frucalls, and sells advertising minutes to be played during each Frucall.

Spotted on: Marshall Loeb's Daily Money Tip

Merill Lynch investment ideas for 2007

If you plan on adjusting your investment portfolios in the near future, here are few ideas from Merill Lynch strategists:

• Buy large-cap stocks in developed markets


• Invest in media, military-related and technology companies


• Choose AAA-rated corporate bonds


• Investing in dividend-paying foreign stocks and Japanese consumer stocks


• Avoid retailers (except discount retailers)


• Trim exposure to financial, energy and commodities stocks

Source: Ten investing ideas for the next 12 months

Warning: don't blindly follow analyst suggestions without knowing how changes will affect your own portfolio. For example, don't sell your index funds and buy HPQ and GOOG just because they on the analysts' buy-recommendation list.

The above ideas make great sense given today's economic and political outlooks. However, I doubt all 10 ideas in the article will remain as sound suggestions in the next 12 months. No one is really good at predicting the future. Even the most experienced analysts sometimes can be wrong.

The key is to define and study your own investment strategies. Consider analyst suggestions as suggestions not instructions.

Know your worst case scenario

Many things in life we don't have full control over. This includes starting your own business and accepting a new job. While we can try to do everything right, but sometimes failures are inevitable. If success is the best case scenario, then failure is the worst case scenario.

Professor Cornwell writes the importance and the necessity for entrepreneurs to consider worse case scenarios in their business plans. There are two problems that entrepreneurs often don't aware. First, mistaken the meaning of a worst case scenario, and falsely believe that which is equivalent to a less optimistic variation of what the entrepreneur think will actually happen. Second, some others go to the extreme, and consider declaring bankruptcy as the ultimate worst case scenario. See the post for a detail explanation of these two points.

You don't know you own shares GOOG

After seeing shares of Google stock price hitting all time high, a friend asked me if I own shares of GOOG. I reply "yes. And do you?" "No, unfortunately. I own shares of some index fund," he said. "So you probably own GOOG", I laughed.

Like my friend, I don't directly own share of GOOG in my investment portfolio. I own shares of an S&P 500 index fund and which makes certain amount of investment in GOOG. I'm happy when GOOG share price goes up, and I'm not too upset when it drops hard. This is why I think investing in index funds makes sense for most people.

Also, I think many mutual fund owners don't aware how their mutual fund works. This can be dangerous because they may end up overweighting shares of certain high-profile stocks like GOOG.