Harry Chen Thinks Aloud

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.

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.

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.

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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?

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

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.

Many home owners pay close attention to property values, but not too many pay attention to property taxes. This can be dangerous. The New York Times reports that property taxes has grown two to three times faster than personal income from 2000 to 2004, and many home owners are running into financial troubles despite tremendous property value increases.

Here is a real life testimony from a N.J. resident:

“In 1997, my taxes were $2,600; now they’re $8,000,” said Dan Mackey, 42, a credit manager who lives in Somerset, N.J. “My salary certainly hasn’t’t tripled in the last nine years, and I don’t know anyone’s that has.”

There are couple different ways to think about this problem.

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In addition to hotels and plane tickets, there are some important travel expenses that many people may have overlooked. These include (1) emergency medical expenses, (2) emergency cash in case of wallets are lost, and (3) wireless communication.

Before you travel, call your medical insurance company and find out whether your policy will cover any medical expenses you may have in a foreign country. If the policy doesn’t provide any coverage, consider buying a travel insurance from a trusted insurance company. It pays to have peace of mind.

Before you travel, have a plan for emergency cash in case your wallets are lost. One easy plan is to take advantage of your credit cards. Check if any of your credit cards offer emergency cash assistants. I know American Express does. Know how to in touch with your credit card companies while you are in a foreign country (collect call numbers, toll-free numbers, websites, email addresses etc.)

If you plan to make phone calls in a foreign country, look around for alternative wireless plans other than the ones offered by your current cell providers. If you have a Tri-Band GSM phone (unlocked), you may be able to acquire prepaid SIM cards for one of the local service providers.

Similar tips spotted on this IHT article.