Third party checks: cash them if you can!

Recently I’ve come into possession of a 3rd party check drawn on a BofA account. For the sake of discussion, Alice wrote a check to Bob, and Bob signed it over to me by adding:
“Pay to the order of Charlie” and his signature.

Even so, Charlie was unsuccessful cashing this check without Bob being present. Uniform Commercial Code (UCC) does not require banks to accept such checks, and while many used to do that in the past for trustworthy customers, very few will do it now fearing fraud. It’s not a rational move; exception would not be made even on a $100 check for a valued customer with 1M in assets.

As large banks move farther away from serving and delighting customers, there’s greater room for credit unions and small thrifts to step up and offer additional services that used to be commonplace.

Extended Warranties, pros and cons

Among financial advisers, it’s a well established fact that extended warranties don’t benefit the consumer, but rather the seller of such warranties.

With car extended warranties, it’s even worse – I’ve heard enough horror stories about high deductibles, tricky fine print and unscrupulous adjusters to avoid having any business with those 3rd party warranty providers, thus far.

And yet, today I spent almost $6K to extend the factory warranty on my car for 60 months and 60,000 miles. Going against my better judgement? Hardly.

For about $100 a month, I have assurance that my ownership experience of a once-expensive vehicle will continue to be pleasant and worry-free, with no-cost repairs, roadside assistance and loaner cars during my service visits.

At the same time, the Infiniti extended warranty is unique in the industry:

• It’s backed by Infiniti (Nissan), so it’s a factory warranty.
• It covers *more* items than the factory warranty.
• It is pro-rated; you can cancel and get a refund at any time.
• It’s transferable to the new owner, increasing the resale value of the car.
• It’s currently financed at 0%, so you don’t even have to prepay for it.

Now I’m  just waiting  for something expensive to break. Bring it on!

Amateurs buy stocks. Professionals accumulate.

A stock buying tip from a CFO rep of a multi-billion dollar company: when thinking long term, don’t buy stocks – accumulate them instead. How? By writing covered puts, of course!

This particular gentleman had hundreds of millions dollars allocated for one purpose: stock buybacks. The goal was to turn half a billion dollars into company stock over the course of five years, at the lowest possible price.

Five years may seem like a long term for day traders, but perfectly reasonable for retirement planning purposes. Suppose you’ve got $12K per year to blow on a particular stock that you plan to keep long term. How to get the best return on your cash?

This guy’s advice: write covered puts. On any given day, writing a put will commit you to buying a stock at a price *below* today’s price. Depending on the market forces, sometimes you’ll get the stock, other times you won’t, but the stock you do get will be at decent discount compared to other popular strategies, even compared to the strategy of dollar-cost averaging.

I’ve been using this strategy in my own IRA for the past three years, and happy with the results so far. Not a get-rich-quick, but an extra 3-5% is a welcome addition in this economy.

Stocks: Dollar Cost Averaging

Listen to any advice on retirement planning, and you hear: Dollar Cost Averaging, it’s good for you. Most personal finance software support it in one form or another. It goes like this: if you accumulate equities (stocks) for your retirement account, and spend a fixed amount each month, you will be ahead of someone who buys a fixed number of shares each time. Let’s throw some numbers on it, to quantify the benefit.

Let’s take a relatively stable stock – Microsoft (MSFT). It hasn’t moved much in 10 years, and some think it may be a safe place to park your money, if your expectations are low.

Let’s say our friend Terrence bought 10 shares of MSFT at the opening of the trading day every week from December 3, 2010 to November 9, 2011 – that’s 50 weeks in all. By now, Terrence will have bought 500 shares for $13,063.04, averaging $26.13 per share. His smart buddy Phillip follows the dollar-cost averaging advice, investing $260 weekly. As a result, he owns 498.72 shares of MSFT for the total cost of $13,000. Average price per share is 13,000 / 498.72 = $26.07. Phillip wins, but not by much: quarter of a percent.

This example shows that while dollar-cost averaging does better than fixed share purchases, the benefit is miniscule when applied to stable stocks. For stable stocks, the pricing structure of your broker may be more important than the perceived advantage of a “bulletproof” investment technique.

Borrowing Like a Pro

Advice on debt usually states: pay the highest interest debt first. Personal finance software gives the same advice – prioritize paying off the most expensive debt. The question is – why take on expensive debt when cheaper debt exists?

Consider John: he has a 200K mortgage at 5% (tax-deductible, so it’s really closer to 4%), a 20K car loan at 6% APR and 10K in credit card debt, at 18-25%, depending on the card. In the next month, John will pay:

• $670 in mortgage interest (using tax-adjusted 4% rate)
• $100 in car loan interest
• $200 in credit card interest

A total of $970 in interest each month – no wonder John is looking for financial advice! Or, if he could borrow only at the lowest rate available to him (4%), his interest payment would be $770, a savings of $200. Many consumers borrow from a variety of sources at different rates because they are not aware of the alternative: HELOC. HELOC stands for “Home Equity Line of Credit”. It combines the benefits of a credit card, a mortgage and a checking account. Specifically:

• a HELOC has a low interest rate, like a mortgage (often lower; 3% rates are common)
• a HELOC typically comes with a card that can be used as a credit or debit card
• You can write checks against a HELOC account; there are no fees
• There are no cash advance fees when pulling cash from a HELOC
• Unlike credit cards, the HELOC minimum payment is the interest for that month

If John rolls all $230K of his debt into a 3% HELOC, his monthly interest will drop to $575, saving him $400 each month, and since most uses of HELOCs are tax-deductible, the actual realized savings is closer to $500/month, cutting his interest expense by more than half!

What are the risks?

• The “unlimited” nature of a HELOC requires fiscal discipline. Having immediate access to a quarter million in cash is a risky proposition for a problem gambler.
• HELOC rates fluctuate with the US Prime Rate. For the last 4-5 years, the Prime Rate has been very low, but if inflation were to suddenly pick up, 30-year fixed 5% mortgages would look very attractive in comparison.
• A HELOC loan is secured by your house – so failing on your very efficient loan can still leave you homeless, just like a mortgage would.

If you have multiple debts at varying interest rates, have equity in your home and want to optimize your present or future debt, a HELOC accounts is a very attractive consolidation tool that removes the need for many other forms of credit.

AceMoney

Not available in the USA: Australian Mortgages

I subscribe to a number of car magazines. Quite often, I see the phrase, often associated with an interesting, innovative vehicle: “Not available in the USA”. A discussion on why this happens could fill many blogs.

Turns out there’s also a mortgage product not available in the USA: an “Australian mortgage”, also known by the name “offset mortgage” in the UK. In a nutshell, if you keep your deposits in the same bank as the mortgage, your monthly loan interest is reduced as if the deposits were part of the loan. Most personal finance software can track this type of mortgage as if it were a credit card account.

Example: Pete has a $150K mortgage and a $30K savings account in the same bank; with an Australian mortgage, Pete’s monthly interest will be accruing on the $120K, not the full $150K he has borrowed. A savings account does not in itself generate taxable interest, but rather reduces Pete’s debt to the bank, thus reducing the interest on the loan.

How much does Pete save with an Australian mortgage? Let’s assume Pete took out a 30-year loan at 6%, earns $60K a year ($5K per month), and does not have any savings. Pete’s average balance in his checking account will be around $2K, which will reduce his interest by $10 each month. Over the life of the loan, his savings will amount to $3,600, not a bad return for a risk-free decision.

If Pete stashes his $3K rainy day fund in the same checking account,  he will see his monthly loan payment drop by another $15, saving him $9K over the life of the loan.

Up Next: how to obtain an Australian-type mortgage in the US.

Rental or Own?

Does it really make sense to rent a car for a road trip when you have your own?

I’m sure it makes perfect sense in some cases. If the car you own is incompatible with road trips (Unimog comes to mind), is a horrible gas hog, or just too valuable or too unreliable to be driven long distances, a rental is a perfectly good alternative.

To find out if it works other times, I picked a hypothetical driver John who owns a clean, two year old Lexus ES 350, a perfectly reliable, efficient and comfortable car. According to Edmunds.com, each mile in that car will reduce its value by 7.5 cents, so a round trip from Miami to Disney World (about 600 miles) will drop the car’s appraised value by $45, and take it closer to the next dealer service. If Lexus charges about $80 every 4,000 miles, that’s another $12, for a grand total of $57.

What can John rent for the $57 he saved by not taking his car on a two-day trip? Around the Miami area, not much. The cheapest rental for two days is $86, and perhaps with a coupon or another promotion he can get it down to $57, breaking even on his combination.

However, for a week-long trip totaling 4,000 miles it would make better sense: John is saving $380 dollars by leaving his car home, and for about $150 he can get a low weekly rate on a full-size sedan.

If John leases his Lexus, none of the above math applies – in a leased car the miles are either “free”, if you are well under the annual limit of the lease, or they are very expensive, 20 cents per mile or more. If your actual accrued mileage is getting close to the lease allowance, taking a rental to that long trip may be a very good idea indeed.

Figuring Out The True APR

For many years now, lenders have been required to disclose not only the rate and fees, but also estimate the APR – Annual Percent Rate, which is supposed to accurately represent the borrowing cost and account for expenses associated with the loan.

If you haven’t taken a mortgage before, here’s a crash course on long term lending:
- loan rate refers to the monthly rate x 12 (or daily rate x 365)
- points refer to optional fees the consumer may pay to lower the interest rate
- origination fees are simply bank charges

It always puzzled me how a person with good credit can get a $60,000 credit card with a single signature and no fees (sometimes even a bonus), but a mortgage of $60,000 secured by collateral takes days to create, costs hundreds in fees, and in many states requires the involvement of real estate attorneys. Must be the tradition, I guess.

For example, let’s review 30-year mortgages listed at http://www.bankrate.com/. As of October 2011, a well-qualified borrower in Portland, Oregon can count on a 30-year, $60,000 mortgage with a 4% rate, zero points, $950 in fees and a stated 4.133% APR. The extra 0.133% comes from the $950 in fees spread across the 30-year life of the loan.

But what if you decide to refinance in five years? With a little spreadsheet magic, I came up with 4.45% APR when accounted for a 5-year term – a whopping 11% increase over the base rate! At that point a no-cost 4.5% loan starts to look like a bargain.

Bottom line – the stated APR can be way off for long term loans, because with a future refinance any upfront costs amortize over a much shorter period, hiking up the rate.

Paying Taxes Early? Are You Mad?

November is when Florida homeowners receive their property tax bills.

Unlike citizens of some other countries like Peru (no real estate tax) or Monaco (free housing provided by the prince), most homeowners in the United States pay annual taxes on the housing they’ve already purchased, with rates ranging between 1% and 2% of the property’s assessed value. So before you accept that 5 million dollar mansion as a gift, consider how you will pay the $70,000 annual tax (which is, mercifully, deductible from your federal taxes).

Back to the tax bill: the November invoice is actually for taxes due in April of next year, with the following twist – for each month the bill is settled early, the county will knock 1% off the amount. That’s 12% APR, a pretty spectacular rate these days.

The conventional tax strategy is to accelerate deductions and delay payments. Florida property tax may be one of those rare instances where it’s beneficial to pay tax early, even if you pay it with borrowed money (borrowed at less than 12% APR, naturally).

Someone paying this tax in November rather than in April is paying 5% less, and also deducting it from federal tax a year sooner. For a $6,000 property tax, that’s $300 saved, and a tax liability reduced by $1500, assuming the 25% federal tax bracket.

What is Your Time Worth?

It happens to most of us:
Your friend is moving into a new apartment, and needs an extra pair of hands. Or your dear aunt asks you to take her to the airport. Or your in-laws have trouble with the computer again and need your help. None of these favors are difficult, but they can be time consuming.

Helping others builds “karma points” and general goodwill, but sometimes makes you wonder – what’s your time worth? If it were a stranger, what would you accept as an equitable compensation for your time?

I asked my (salaried) friends this question over lunch, an no one had an immediate answer. Eventually, however, most answers clustered around 50% of their hourly rates at their places of employment. This is different from the “market rate” for labor, which is dictated by laws of supply and demand for a given skill.

Here’s what others said about valuing your own time:
http://lifehack.org/articles/productivity/what-is-your-time-worth.html
http://thesimpledollar.com/2007/05/20/figuring-out-exactly-how-much-your-time-is-worth/
http://blogs.wsj.com/juggle/2011/06/15/whats-your-time-worth/
http://www.inboundsales.net/blog/bid/22818/What-is-your-time-worth

Does your perception of your own time value match the 50% rule? I’m curious to find out.