Friday, February 29, 2008

Lifting light weights can lead to Remarkable Results

I first started this daily routine over 15 years ago after hearing a pro tennis player talk about the benefits of lifting light weights. He said it was truly amazing how lifting small amounts on a daily basis added muscle tone, strength and resiliency. He got into the program to gradually develop strength in his arm after having experienced several injuries, tendonitis and strains from playing tennis. He indicated that it didn’t just help him recover from his injuries, but it also helped prevent future injuries.

Most weight-lifting programs are so involved that it’s easy to say I don’t have time or I am too busy today to do my workout. But with light weights, that excuse is gone. It doesn’t take a tremendous amount of reps or heavy weights to get results. No sweating is involved. For $10 dollars you can significantly improve your muscle tone. One set of barbells can be used for numerous exercises. Get a 5 lb set to start. You may work your way up to 8, then 10 lbs. Do 10-15 reps of one exercise then immediately move on to the next.

It takes 5 minutes a day. I know from my own experience that it does improve strength and muscle tone. It will tighten up those flabby arms and thighs. Whenever I find myself wavering about doing my 5 minute routine, I remind myself of a few things:

It’s only 5 minutes
It makes all of the difference in the world
You can do just about anything for 5 minutes

The key is to make it a daily routine. I lift only on days that I work, so 5 days a week with weekends off. I have been able to stick with this little program for over 15 years, because it is not overly demanding of my time, its feels good to be doing something and it gets results.

To start, choose some simple, easy exercises that you like – bicep curls, arm extensions, bench press, shoulder press, crunches. Do not use a lot of weight. Start light, something that you can easily do 10-15 reps without fatiguing the muscle. Going for a slight burn will provide results even faster. Some will say your are not lifting enough. Don’t pay attention. It is better to lift light weights than none at all. Rotate or alter your routines. Don’t do the same exact thing every day. Choreograph a couple of routines that flow from one exercise to the next. I have several canned routines that I can quickly work through.

Here’s an example routine with 8 lb barbells:

10 squats that extend the barbell over head
10 shoulder presses
10 bicep curls
10 side arm extensions, alternate arms for each rep
10 forward arm extensions, alternate arms for reach rep
10 squats

Another routine using a bench/leg press. This one is great for cyclists. The leg extensions work the front quadriceps to help power up hills. I really noticed this having a positive effect on my riding capabilities. It’s great to be strong!

15 arm bench press
30 crunches
15 arm lateral curls/flys
15 leg extensions
10 pull down laterals
15 leg extensions
10 pull down laterals

If these routines sound simple and easy, that’s because they are. Give it a try for one week - you will begin to notice some improvements. In the past, anytime I started a weight lifting program, it didn’t take long to become disillusioned. Even with the best of intentions, it is difficult to maintain a schedule of lifting for an hour. Its time consuming to drive to the gym, get dressed, decide on which weights to lift, wait for the machine or station, then shower and drive home. All of that takes hours. These routines take minutes and it’s a great way to begin the day – and it’s pretty cool to think that you are ahead of almost everybody else from the start of the day.

For more fitness and health stories, please visit the Carnival of Total Mind and Body Fitness. My article “Exercise and Alcohol TOGETHER provide the most heart benefits" was included.

Thursday, February 28, 2008

You are Registered to Vote, NOT to Party

Texas is now in the midst of the presidential primary media blitz. The press has utterly taken over this election and is using all of their influence to sway voters – it is actually painful to watch.

Anyway, with all of the talk about candidates and voting, one of the common questions at my place of work concerns voting eligibility. People are wondering if they are restricted to voting in only their party’s primary? A typical question goes like this: I am registered in one party, but I like the other party’s candidate and I want to vote for him/her. Can I do that?

Because these types of rules vary from state to state, it is necessary to go hunt for the official answer. I googled the word “vote” and my county’s name to find the county election site. From there, I selected Voter Information FAQs. Fortunately, this was one of the first, most asked questions.

I was pleased by the answer, shown below.

Voting in the Primary Elections
If you are a registered voter in the state of Texas, you will simply choose your party and vote in that party's primary. To explain, we do not register by party in Texas. One becomes "affiliated" with a party by voting in a party's primary and the affiliation lasts for that primary year.

That’s good news, since no further action is required to “change” parties. Any party affiliation that we Texans may have had expired on December 31, 2007. We are now all free to vote in any primary, republican or democrat.

The web site also reminds voters that in the general election in November, a voter may vote for whomever he/she wishes, regardless of how or whether he/she voted in the primary or runoff primary election, since all candidates are on the same ballot.

It's great to have this information and the access to find it, but the fact that the rule varies from state to state just seems wrong. As if voting isn’t confusing enough already, do they have to make the rules different in every state?

I take voting seriously; considering it a civic duty, and an opportunity to exercise a constitutional right. And so I take the time to research these kinds of questions. But, a lot of folks don’t want to be “bothered” to figure out all these rules. They want to vote, but making the time and getting through all the widgets is a distraction that hinders or slows down their momentum to cast a vote.

I plan to take advantage of the early voting opportunities since I will be out of the state on election day. Voting early is also a great way to avoid the crowds and long lines. It makes voting a much more pleasant experience.

Wednesday, February 27, 2008

What would you do with $100,000?

Several years ago, I hit a huge financial milestone and like any accomplishment or good news, I was eager to share. I mentioned to a good friend of mine (former college roommate and fellow engineer) that I had saved and invested my earnings resulting in a nest egg of $100,000. (I also had a small mortgage at the time, so my net worth was actually much less)

Her response was that of surprise and prompted several questions: How did you ever do that? Do you invest in stocks? Where did you learn to invest?

I responded that what little investment knowledge I possessed was from self-directed reading of financial magazines and a few discussions with my family members. My folks and one grandfather had invested in stocks, so it was not totally foreign to me. In fact, I was always intrigued with the market. I have a flare for gambling and as a young, wide-eyed kid, the market seemed to be a gambler's paradise. Even so, at that time I only had a couple of individual stocks while the bulk of my money was in mutual funds.

Anyway, after answering her questions, I asked what she and her husband would do if they had $100,000. Without a second thought, she said they would quit their jobs and live off the money until they had to return to work. I was stunned.

For a little background, this friend is a very logical person, an engineer, a problem solver. She was from a middle class family just like myself and she had always had a job and always had money. I never heard her say even once that she didn’t have money to do something or go somewhere. And this was before everybody had a credit card. Back then you actually had to have cash in your hand to go have a good time.

I realized then that money to my friend was a tool to get things. Money just comes and goes in and out of her life. It is not something to hang on to for a rainy day or even to grow for future needs. Her attitude was that if she needed more, she would work to generate more. She would often say – It’s just money, I can always make more.

I admit that I do admire her confidence and positve attitude towards work. She seemed to be certain that it was never going to be a problem to get more money.

I have never thought in those terms, ever. I have always viewed money and even things as coming in discrete, finite, limited quantities. I must have lived a previously life during the depression, or something. LOL. I was one of those kid's that would never use my cool magic markers from K-mart, because I didn't know if I would get anymore, ever again.

For whatever reason, I have a great respect for money and even things - because they require money to get. And I enjoy watching my money grow with very little effort from me. It is extremely cool to know that your money is working for you all of the time. Even while you are resting, asleep, on vacation, shopping, etc. I saw it as a way to get off the treadmill, so that one day I wouldn’t need to work to make more.

By the way, my friend never asked me what I was going to do with the money. And that is another story for another day's

For more PF stories, please visit the Carnival of Money, Growth and Happiness. My article "What to expect for the average pay raise in 2008" was included.

Tuesday, February 26, 2008

Where your taxes are going in the 2008 Federal Budget

Have you had a chance to see the new budget for this year? Just like any business or household, the government has a budget, a plan for the future. This one is kind of different from other spending plans in that the government actually expects to exceed the budget. Consequently, the deficit is built right in.

The following graphic depicts the total outlays (expenses) and receipts (collections) for the 2008 federal budget. This graphic is a portion of the total budget graph which you can find here, called Death and Taxes. Although it does not compare to Napoleons’ March, which is my all-time favorite graph, Death and Taxes, does have a ton of data compiled into one visual illustration that is pretty amazing.

The data for the chart is from the president’s 2008 budget request that is yet to be debated and approved by Congress. The size of each circle is in proportion to the amount of funds allocated to that item. Also note that the percentage change from 2007 is included (in green/red type).

It’s humbling to realize that if you pay taxes then you have paid for a small part of every expense on this chart. What this chart provides more than anything is a glimpse at our national priorities. These expense items depict what are considered the most important programs for this country. Obviously, national defense is very critical coming in at #1 (biggest circle) at 717 billion. Next up, we are taking care of the disabled and retired/elderly with social security as a key priority – the amount of this one always astounds me. A distant third is Medicare. Notice that each of the top three got substantial increases for 2008.

It’s good to see that we are actually adding more funds, a 9% increase, to whittle away at our national debt. Too bad we are also going to run another deficit this year – kind of hard to ever get ahead when you keep spending more than you take in! The good news is that the deficit for 2008 is currently predicted to be less than last year by 2%. Way to tighten the belt, George.

Moving on to the income side of the graphic, we see that the primary breadwinner for this budget is the individual taxpayer. All of us together pay over four times what corporations pay in tax. And it appears that trend is going to continue as income taxes are expected to increase by 7% while corporation taxes will decrease by 8%. The second biggest income generator is social insurance, which is currently bringing in a lot more than it’s paying out for social security. That’s very reassuring, but, as we have all been warned that is bound to change with the boomers retiring soon.

Again, be sure to take a look at the overall Death and Taxes chart as it breaks these categories down into a lot more detail. It’s a large graphic and at times was a little unwieldy in my browser window, but still I could spend hours looking over that data.

One area that has always disappointed me, that is evident on that chart, is the paltry sum that is spent on science and exploration relative to other expenditures. Wouldn’t it be awesome if the advancement of science was the #1 priority? That would be a much better world.

Monday, February 25, 2008

Cycling’s silent but potentially ominous threat to your skeleton

Whoever said “everything in moderation” really hit the key to a long, healthy life right on the head. I recently read an article citing medical evidence indicating that if cycling is the only athletic activity in your life, you might be depleting the foundation of your body - your skeleton.

A study published in the August 2003 issue of Osteoporosis International reports severe bone loss in 27 male racers ages 40 to 60 who'd trained an average of 12.2 hours a week for 20 years. At an average age of 51.2 (when a typical man has no bone loss at all) the cyclists' average hip and bone densities were 10 percent lower than those of a control group of moderately active, non-cycling men of similar age.

Whoa. Slow down there. The riders averaged 12 hours per week??? That doesn’t seem too excessive, less than a couple of hours each day. But what’s even more unusual is that low bone density is typically a woman’s disease (4 out of 5 are women) yet these men are well on their way to osteoporosis. In fact the article expounds on other cases where young, fit cyclists have lower bone density than sedate couch potatoes! What is causing this dramatic effect?

The article goes on to say that because cycling is a low impact activity and unique in that you can ride hard for hours, your calcium stores can get hammered. An average man engaged in intense training loses 200 milligrams of calcium in sweat per hour. The recommended daily adult calcium intake (1,200 mg) has enough padding to handle one hour of exercise. A seven-hour century might sweat out 1,400 mg of calcium. That’s more than a day's recommended intake.

Even more disturbing is that when the cyclists added supplements, they slowed done the rate, but continued to lose bone density. That’s enough evidence to take action, even for recreational riders, and especially for female cyclists.

Below are several ways to maintain a strong skeleton.

  • ADD SUPPLEMENTS to get at least 1,200 mg of calcium per day.
  • ADD YOGURT, MILK and other high-calcium products to your regular diet and post-ride refueling
  • CUT BACK ON SMOKING, ALCOHOL AND SODA, all known bone thinners
  • DO BACK EXERCISES TWICE A WEEK to strengthen the lower vertebrae
  • RUN, HIKE, SKIP ROPE OR JUMP AROUND for 20-30 minutes, two to three times a week
  • GET A BONE SCAN. If your Insurance company won't pay for the DXA bone-density scan then inquire about a heel scan.

click HERE to subscribe to The Financial Engineer

Saturday, February 23, 2008

When are the Peak Earning Years?

As college educated professionals, we spend a lot of time and money preparing for our careers. Yet, many entry level jobs are not that high paying. Of course, we know that if we stick with it and work hard, the potential for salary growth is there and it will eventually all payoff.

So when does earning power typically reach it’s peak? I stumbled upon an interesting graphic relating income and age at Politicalcalculations blog.

The chart identifies the period of a typical U.S. individual's life where they are able to earn the greatest income. The chart is based on 2005 census data and shows the shifts from lower to higher income for the various age ranges. By comparing the various widths of the income strata you can see for instance that the number of low income earners decreases with age, as the low income bands grow narrower as age increases.

It also appears that a majority of the wage earners are in the $30,000 to $50,000 range, as evident by the wide bands in these areas.

Based on this data, it seems that your lot is pretty much cast by the time you are 35. If you are not in the money by that point, (>$50,000) then you will probably not reach the upper income tier. Notice that these wage earners, under $50,000, reach a peak in their 30’s and then start the decline from there. Of course, there are exceptions to every generalization and no one is locked in to any bracket. Your income could possibly cut through many layers of this strata over the life of your career.

As for the upper tier, it is apparent that the peak earning years occur later between the ages of 35 and 54. The number of people earning this high Income increases rather rapidly up to about the age of 35 and then plateaus out to age 54. At that point it starts decreasing - probably due to retirements. It’s also worth noting that there are fewer people in the 45 to 54 age bracket which results in this age group earning the highest income per capita in the U.S.

As you might expect all of the income ranges, low through high, all pretty much end up in the same positions as where they started out. But their paths were very different, as the higher earners have climbed a much higher peak and earned a lot more money during their working years.

Reaching the Peak money making years

Yesterday, I received my merit raise for this past years performance. The first thought that ran through my head when I saw the amount was – how am I ever going to be able to walk away from this money?

I have been planning, saving, investing most of my working life so that one day I could retire early, pursue whatever whim came my way and never look back. I have lustfully daydreamed of those stress-free days!

What is stopping me? Is it greed? A love of money? I don’t need all of the income. I can live comfortably on much less. I am sure there is some element of greed in the mix, but I think it goes beyond that.

First and foremost, I have worked hard to get here. How can I throw it all away? It’s my base, my foundation that I started building over 20 years ago. I graduated from an engineering school – some say that electrical engineering is one of the most difficult degrees to obtain. I worked to achieve it in four years, many take five or more. I also worked to land my first job, it was not handed to me.

And I have suffered. I have traveled extensively on business when all I wanted was to stay in one spot for awhile. I have given presentations when I was not comfortable with the data/info. I have participated in numerous stressful as well as excruciatingly boring meetings. I have received my share of awards, but I have also experienced backstabbing and co-workers claiming credit for my work. I have worked several 100+ hour weeks and received pay for only 60 of the 100 hours. I have made the leap from engineering to management, successfully. And from that experience, I have learned that while most engineering problems can be solved by applying logic, that is rarely the case with personnel issues. But that's another story.

I have lived through all of this and succeeded. It took a long time to get here, to climb to a high point. After more than 20 years in the workforce, I am firmly rooted in the most profitable, money making years of my career. I have arrived, so how can I leave now, when I have given (suffered) so much and worked so hard to reach this peak?

To answer my own question - I believe that there needs to be another peak. Another goal to pursue. You have got to be willing to come down from the mountain to move on to the next big challenge. The key is to develop an outside interest, hobby or second career that stirs up enough passion that you can’t wait to leave and move on to the next phase of life. That all sounds just wonderful, rah, rah, sis, boom, bah!

But, it falls short when you realize that you have been focusing all of your energy and effort into your present career. I have other interests and hobbies, but are they enough? Do I have enough of a foundation to build something that I can become passionate about?

Many of you may think that's crazy. And you may be telling yourself that you would have no problem retiring. But, keep in mind many people fail retirement for various reasons and return to work within six months. After today, I know it’s going to take a lot to overcome the draw of that money. The force field that surrounds it has taken over 20 years to create.

What to expect for the Average Pay Raise in 2008

Everyone wants to know what the average raise is for the year so they can compare their salary increase to the “average”. We all think we are above average, right? So by golly, I better get an above average raise.

Well, what happens if you don’t understand your raise? If you work for a large corporation and you ask your manager, he/she will probably tell you that this is the way HR set it up. The computer calculates your raise based on two things. 1) your performance rating and 2) current pay as compared to the industry standard.

If you are underpaid and get a good rating, then the computer will give you more of a raise. If you are paid to market and get a good rating, you will get an average raise. After all, you are paid to market, already. Why would the computer want you to get ahead?

In case no one has noticed, in the last 20 years there has been a sweeping change in the Human Resources field. At large corporations we are witnessing the building of an HR empire. Human Resource departments have grown as much or more than any other department. And HR has maneuvered a huge power grab by instituting cook book methods to control the hiring, firing and the all important salary.

So what does the computer say for 2008? According to a salary survey of 1000 companies by human resource consulting firms Hewitt and Mercer, the preliminary results show an average pay increase of 3.8 percent for 2008. That number does not mean too much by itself, as it is important to factor in inflation. That will tell you how much buying power you have gained or lost. In other words, are you getting ahead or falling behind?

The consulting firm, Mercer, has provided a listing of global salaries as compared to inflation for several leading countries. In a study of 62 countries, it has been determined that global salaries are expected to rise by an average of 6% in 2008 – 1.9% above inflation. The study included five levels of employees: Executives, Management, Professionals (Technical/Professional), White Collar (Clerical/Technical) and Blue Collar (Operational).

As you might have expected, North America and most Western European countries will experience the lowest salary increases in the world. Whereas, India will enjoy the highest pay increases at nearly 10% over inflation! Now that's a raise....

click HERE to subscribe to The Financial Engineer

Friday, February 22, 2008

Behavioral Finance - Available Tool Bias

This is the eighth in a series of posts about common human misjudgments. The series is based on a Charlie Munger speech at the Harvard Law School in 1995.

Why study human behavior in relation to finances?
Recognizing and understanding why people do the things they do, what drives them, and what are innately human tendencies is the first step in overcoming your own self and making sound decisions! We want to make rational, logical decisions, but emotions and irrational tendencies get in the way.

These behaviors are not all bad, many are good in some way - that is why they survived. In fact, these behaviors served some purpose that helped extend life at some time in the evolutionary process.

8. Available Tool Bias
This is a very common human tendency. We have all probably heard about the man with a hammer and how every problem he encounters tends to look pretty much like a nail.

Munger gives the example of how economists love the efficient market theory because the math is so elegant. It’s a neat tool and they want to use it. The efficient market theory is based on the premise that prices on traded assets, like stocks, bonds, or property, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. Because everything that can be known is priced into assets, the theory projects that there can be no undervalued assets. Of course, investors like Munger defy this logic. Charlie Munger and Warren Buffet have made a fortune investing in undervalued securities.

Available tool bias reminds me of the way corporations have jumped onto the metrics bandwagon. It has become the new mantra - everything must be quantified, tracked and reported.

Yes, metrics allow you to measure many factors, but sometimes there are other factors that are also important, yet there is not a precise numbering system that can be applied to these important factors. You know they are important, but the numbers to quantify the factors do not exist. Consequently, people have a tendency to overweigh the factors that can be numbered. Using only the information (tool) that is available yields to the statistical approach and techniques that people have been taught and want to use.

At other times, by over emphasizing metrics, the big picture gets lost. For instance, at my place of employment, there is a mandate to hire X new employees to “feed the pipeline”. In years past, the company got stagnant, and did not hire enough new folks. So now they are overcorrecting. Never mind that the company does not have enough work for these new people. But that’s another story.

To manage this mandate, metrics have been set up. As a result, hiring managers will bring in an unknown, un-tested new hire to meet the metric before considering transferring a current employee that is genuinely interested in the work or is the best fit for the job.

Metrics rule. Trying to apply any logic to this situation gets you nowhere but in the doghouse. Management loves the numbers and wants to force this tool upon everyone and everything and they just keep hammering away.....

Wednesday, February 20, 2008

Exercise and Alcohol TOGETHER provide the most Heart Benefits

Many times while finishing off a bicycle ride in the Texas heat, I think about how refreshing a post-ride beer would taste. Based on this recent report out of Denmark, I can now indulge, guilt-free. A Danish study has found that drinking alcohol in moderation has benefits similar to exercise. And combining exercise and alcohol consumption provides even greater benefits.

If this sounds too good to be true, consider that the research was conducted on 12,000 people over a 20-year period. The study, which was published in the European Heart Journal, was the first to look at the combined influence of exercise and weekly alcohol consumption on the risk of heart disease.

It’s well known that the heart benefits from exercise, but this study has shown that it also benefits from moderate alcohol use. The healthy improvements include an increase in good cholesterol (HDL) and a reduction of fatty deposits that are created by bad cholesterol (LDL) in blood vessels.

The Danish researchers found that . . .

  • people who never drink and don't exercise had the highest risk of heart disease
  • people who never drink but do exercise had a 30% lower risk
  • people who drink moderately but never exercise had a 30% lower risk
  • people who drink moderately and exercise had a 50% lower risk

Of course there are conditions to the rule:

The study imposed a limit of one drink a day for women and two for men. However, it did not distinguish among beer, wine and liquor.

The benefits of alcohol don't kick in until you're at the age of 45 to 50 where heart disease becomes an appreciable risk. Holy Mackerel! This is one of the first benefits of getting older that I have ever heard about! I can just imagine doctors advising their patients that once they hit 45, they need to start drinking one a day – for their heart. Cheers!

click HERE to subscribe to the Financial Engineer

Tuesday, February 19, 2008

Gold's Green Light is flashing a buy signal

Ah, Don’t you love mechanical buy signals? Could it be true? Is there a proven indicator, a green light, that tells us when it’s time to buy?

For the past 25 years the XAU/Gold ratio has been right on the money. Buying gold shares anytime the XAU/Gold ratio has fallen below 0.20 over the past 25 years has been a slam-dunk. And that trend is continuing even today as we speak. Anyone buying gold at the previous dip below the 0.20 mark which would have been Feb 5th is now enjoying a gain of 3.77% in 10 trading days.

For those that are new to this modern day gold rush, the XAU is an index of gold mining stocks. And as most gold traders will tell you, gold stocks typically lead the bullion. However, in the last few weeks the opposite has been happening. Gold shares have lagged the metal sending this XAU/Gold ratio down to a low of 0.1945. This doesn’t occur very often and to illustrate that point I have plotted the XAU as a ratio to GLD, which is a gold ETF. GLD is one of the easiest ways to own gold bullion in the market. Because it trades at 1/10 the price of spot gold, I have multiplied GLD times 10 to preserve the ratio.

As you can see, the ratio has dipped below 0.20 three times in the last 4 years that GLD has been available for trade. Twice in May of 2005 and then again in August of 2007 and each time the gold bullion (gold line on chart) takes off for a nice gain. You may have also noticed that the ratio has dipped again in the last few days!

What is most interesting is that GLD has had a huge run-up in the last few months and yet the indicator is signalling a buy. Since Aug 2007 it has gained over 40%. Is there room for more growth? Many think so and the market certainly wants gold to hit $1000/ounce.

With the large gains over the last few years, I am a little leery about adding anymore to my current GLD position. I also cringe at the tax implications of GLD. Long term gains for gold is taxed at 28%.

After a little research, I now know that gold is actually a better deal if you plan to make a short term trade! The taxes on gold gains held less than one year are at your income tax rate. It’s not a big break, but it is something to think about.

Why is the ratio low? The value of gold stocks is heavily weighted to the price of gold bullion. But with the large gains in bullion and weak overall stock market, the stocks have not been keeping up. Gold bullion has been pummeling every sector of the market, even the gold mining stocks.

How to reduce heat loss from the 3 biggest holes in the typical home

Sometimes, it’s hard to see the forest for all the trees. While we examine our homes for cracks and small leaks, many of us overlook some of the biggest holes that are in the house. This is definitely a case where it’s most prudent to first address the largest openings and then get out the caulking gun and weather stripping.

1. Chimney
Warm air rises and the chimney is like a big chute that allows this warm air to escape. To mitigate the heat loss, keep the chimney damper closed and the glass fireplace doors closed when not in use.

Of course, that does not stop the air from leaking around these structures since they are not sealed. Is there a better way? I found an inflatable insulation device that fits up into the chimney and blocks the air passage, but the device is costly and would certainly be filthy after one use. If you wanted to actually use the fireplace, you would need to deflate this contraptionand then store the whole messy thing somewhere….

2. Attic stairs
Many homes have attic staircases that pull-down to allow easy access from inside the home to the attic. Typically, the area above the ceiling is insulated, except at the staircase, where only a sheet of plywood is used. Additionally, there is a seam around the stair case – you may even be able to see light coming from the attic through the gaps around the staircase.

First of all, always keep the staircase closed – it leads to the attic which has several vent openings to the outside. To address the seams and lack of insulation, I found a nice attic box design with easy instructions here.

I have already built an attic stair insulation box and recommend it highly. After installing the box, I have noticed that the area near the pull down stairs has a much more constant air temperature. The box is constructed of inexpensive insulation board and caulking. It fits over the frame of the stair case in the attic, blocking off air leaks between the stair case and the frame around the stair case.

3. Dryer vent
I never gave this much thought, but sure enough, this is another hole in my house that leads directly outside. The dryer vent has flaps on the exterior of the house that close off the vent when not in use. The flaps are typically made of plastic or thin metal and have no insulation properties. I have found broken and missing flaps in the past and replaced the vent structure, but maybe there is something more that can be done.

The more efficient, energy saving vent cap designsthat are available commercially are rather unsightly. Perhaps, I will take a closer look at this vent structure and brainstorm on a better design. If you have any ideas, feel free to share them.

Saturday, February 16, 2008

Tax Stimulus is Steroids for the Economy

Move over Roger Clemens, Congress has taken a lesson from “The Rocket” by injecting an artificial stimulus (tax rebate) into the economy. Lowering interest rates to provide cheap credit wasn’t enough of a stimulus, so this administration has given us a direct hit into the vein, sending cash right into the consumers pocket with instructions to spend it pronto.

It seems a little ironic, but as Congress shows their dismay and disappointment with Roger for using steroids to pump up his performance, they follow his lead to artificially stimulate the economy. Everyone cheered as Roger was pumping up and winning seven Cy Young awards, while ignoring the unnatural physical changes – see Roger’s physique when he entered the league (Photo on right) as compared to more recently (below).

The doping of the economy has been going on for a long time with the administration cheering the growth of the GDP. It was growth at any cost. Who cares about trade deficits, dollar devaluation, inflationary prices, skyrocketing home prices? Cheap and easy credit was the mantra.

This stimulus package is a temporary fix, another quick high, that will increase inflation and fall short of fixing anything. It’s time to cut the junkie off and let the natural market forces go to work. Instead of giving consumers more juice, congress should ask them to live and play within their means. The withdrawal symptoms (a recession) will be excruciating for those speculators and victims of rate scams, but it’s the only way to allow the free market to wring out all of the bad debt and begin the healing process.

Friday, February 15, 2008

Rebalancing when its UGLY out there

If you're like most investors, your portfolio has seen some pretty dramatic swings in the last 3 months. The S&P 500 has declined 19.4% since its high mark in mid October 2007 to its recent low on January 23, 2008.

And because some assets go up or stay steady while others fall, your asset allocation is probably out of whack by more than just a percent or two. It’s probably time to rebalance. Argh. Nobody wants to sell their winners and feed the dogs, c’mon. There has got to be a better way.

The best way I know to keep an allocation balanced, is to adjust my dollar cost averaging scheme. I prefer to affect the rebalance by adding new money to the asset that is lagging. I am able to stomach that more easily since the purchases are in small chunks and I am letting my winners run. I also adhere to the classic rationalization that I am buying more shares at cheaper prices.

When my asset allocations start to deviate from my plan by more than a couple of percent, I take action. I begin by redirecting a DCA purchase from a winner to the lagging asset, which could result in doubling up on the amount of money going into a particular asset.

VGSLX is at the top of my laggard list. It’s a Real Estate Investment Trust fund and it’s the worst performing asset that I own. However, it is a permanent holding, meaning it is part of my diversified portfolio that I plan to hang on to forever. Forever is a long time and certainly this fund will rebound given some time.

Of course, we would all like to buy in at the bottom. I keep watching VGSLX gyrate up and down, but mostly down. How bad are things going to get? Is the economy going to slow down even more? With all these uncertainties – it’s a good thing that I have DCA or I might never buy in!

Thursday, February 14, 2008

2008 Tax Rebate Lookup Tables

With all the questions concerning the tax stimulus checks, I thought it might be real handy to have a simple table to determine your check amount. No formulas or calculators needed - just a table.

Two tables are provided, one for single and another for joint tax filers. The first column is Adjusted Gross Income or AGI. Scroll down to find your estimated AGI, then move across based on the number of kids you claim as tax deductions. The number at that intersection is the amount of your estimated tax stimulus check.

Some of the questions I have overheard about the stimulus:

1) What's AGI? AGI is Adjusted Gross Income. For 1040EZ filers, it is the amount of your income that you will be taxed on before taking your standard deduction. It can be found on line 4 of 1040EZ.

For those who itemize and file 1040A forms, it is calculated by subracting deductions such as 401(k) contributions, IRA deductions, tuition and fees, moving expenses, etc from your gross income. You can find it on line 21 of your tax form. And on line 36 of form 1040.

2) Do pensions count towards AGI? Yes, pensions and even some social security income is included in AGI. Basically, any earned income that you have paid tax on, is included.

3) What about head of household? Is this a prebate on next years tax? These are good questions that have not yet been addressed.

Single Filer Tax Rebate Lookup Table

Joint Filer Tax Rebate Lookup Table

Wednesday, February 13, 2008

How to Calculate your tax rebate

Here's an easy formula to help you determine the amount of your tax stimulus check. The formulas can be pasted or typed into Excel or punched out on a calculator, if you prefer. These formulas account for the 5% phaseout rate for tax filers that have adjusted gross income above the caps of $75,000 for single filers and $150,000 for joint filers.

First you need to know your 2007 Adjusted Gross income. Since a lot of you have already completed your taxes, you will have that number on the tax form. For others, you can estimate by using your 2006 AGI.

Second, count up how many kids you have under the age of 17 that you claim (on your taxes)

Next, pick which of the following categories you fit into:

For single filers
if your Adjusted Gross income is less than $75,000, use this formula:
tax rebate = 600 + number of kids * 300

if your AGI exceeds $75,000, use this formula:
tax rebate =600-(AGI-75000)*0.05 + number of kids * 300

For joint filers

if your AGI is less than $150,000, use this formula:

tax rebate = 1200 + number of kids * 300

if your AGI exceeds $150,000, use this formula:
tax rebate =1200-(AGI-150000)*0.05 + number of kids * 300

A single person with no kids can have an AGI of $87,000 before their rebate is completely phased out.

While a married couple with no kids can have an AGI of $174,000 before their rebate is completely phased out.

*You can also bypass all these calculations by using these lookup tables*

Tuesday, February 12, 2008

The tax rebate that wasn’t or where is my stimulus check?

I just read through CNN's article on the rebates. Or whatever they are supposed to be called -prebates, bonuses, stimulus checks, etc. It's amazing that the media can not read through this legislation and make an accurate report. Some of the media are reporting that these are prebates meaning that they are an advance and that the money will be taken out of your taxes next year. Huh? Note to the media: It's your job to get the facts straight beforehand.

Anyway, after reviewing the "qualifications" to my surprise (sarcasm) I do not qualify for any rebate. Zippo. Gee I paid taxes, a lot of taxes, more taxes than any of my peers at work. In fact, I paid more taxes than I spent on expenses last year. Frugality might as well be a four letter word. Is this the part where I am supposed to be grateful for social capital?

That is my tax money that is being redistributed. I work just as hard as any body else, but the government has decided that I have earned more than my fair share. I think it's even more silly that some are saying that this rebate is effectively eliminating the first tax bracket. Hello?? I pay marginal taxes just like everyone else, so yes, I have money that is in that first 10% tax bracket, also. Please return it to me.

As long as people are getting the cash, they are ecstatic - no questions asked. Print those checks, who cares what it does to the value of the dollar. Just print more money. I know quite a few co-workers that are looking forward to their rebate gifts. They are just giddy about the new flat screens, Wiis and guitar heros that they can now run out and buy. I have none of those things.

Nothing like having your money frittered away on junk. And if you don't think that stuff is junk then tell me where your black & white TV set and your Atari Pong console are?

Let’s examine the bright side, there must be one. This rebate is supposed to stimulate the economy. If it does and business sales pick up, stock prices should also go up. Because I have invested in stocks, my “ship” should also rise with this economic tide, right? The difference is that I must earn it by making sound investments. It is not guaranteed and nobody is writing me a freebie check.

Really, the only solace that I find in this situation is that I know this will not continue. It’s all coming to a glorious end. It won't continue because I plan to leave my high paying job behind and it's tax burden. If I have no salary income, my taxes will be much less. I will still have income, but it will be from different sources that are not as heavily taxed. Kind of like the big shots, you know, like Ross Perot, for instance. He does not report squat for salary income and in turn his effective tax rate is less than 9%. The guy makes millions from his investments and pays a lower tax rate than a middle class worker.

This is not exactly a news flash, but in this country, the rich and the poor do not pay a proportionate tax, while the middle to upper class folks shoulder the tax burden for all. How long can that inequity continue?

Well, if they follow my lead it won’t be long at all because this middle class worker is fixin’ to check out and soon there will be that much less tax to be redistributed.

Monday, February 11, 2008

The Last Password you will ever have to Remember

Wouldn’t that be great? One password and one username to securely logon to all of your internet sites.

We are moving closer to that day. Last week, Microsoft, Yahoo, IBM, VeriSign and Google all signed up with the OpenID standard. That is a lot of muscle backing the OpenID Foundation which is an industry-wide effort to empower users with portable Web identities, or OpenIDs.

OpenID is free technology that simplifies the on-line user experience by eliminating the need for multiple user names across Internet sites, enabling individuals to take more control and ownership of their digital identities.

The way OpenID works is that it would recall your username and password from one central site instead of each web site having to store that information. That should reduce account management costs and reduce the risks of security breaches by limiting the amount of personal information businesses need to store and protect.

OpenID enables individuals to convert one of their already existing digital identifiers -- such as their personal blog's URL -- into an OpenID account, which then can be used as a log-in at any Web site supporting OpenID.

More information on this technology can be found at

For more on personal finance check out the Carnival of Taxes. My article: Gold ETFs - the good, the bad and the taxes was included this week.

click HERE to subscribe to the Financial Engineer

Does Social Capital beget Wealth?

Is it true that only when people live under favorable social circumstances can they create wealth? The central premise of social capital is that social networks have value. Social capital refers to the collective value of all people and the inclinations that arise from these networks to do things for each other.

How does social networking create wealth?
People can earn large amounts only when they live in positive social situations, and most importantly they don’t create those circumstances by themselves. So if you have money beyond your basic needs, then you must acknowledge that society is responsible for much of that wealth.

Warren Buffet, one of the wealthiest people in the world acknowledges the importance of social capital for him when he says, “If you stick me down in the middle of Bangladesh or Peru,” he said, “you’ll find out how much this talent is going to produce in the wrong kind of soil.”

The Nobel Prize-winning economist and social scientist Herbert Simon estimated that “social capital” is responsible for at least 90 percent of what people earn in wealthy societies. What Simon means by social capital is not only natural resources but, more important, the technology and organizational skills in the community, and the presence of good government. These are the foundation on which the rich can begin their work.

I agree that infrastructure, markets, etc. are necessary to build capital, but I also think that some folks are so resourceful and adaptable that they would come out on their feet no matter where they fell. While researching this topic, I came upon this from the

Social capital is the amount of community spirit or trust that an economy has gluing it together. The more social capital there is, the more productive the economy will be.

Yet, curiously, one of the best-known books to address the role of social capital, "Bowling Alone", by Robert Putnam of Harvard University, pointed out that Americans were far less likely to be members of community organizations, clubs or associations in the 1990s than they were in the 1950s. He illustrated his thesis by charting the decline of bowling leagues. Yet the American economy has gone from strength to strength.

This has led some economists to question whether social capital is really as important as the theory suggests, and others to argue that membership of bowling leagues and other community organizations is simply not a good indicator of the amount of social capital in a country.

I don’t know that bowling is a good indicator – it seems people have replaced that with other activities. Some of which are sociable as well (poker tournaments, attending pro sports games) and some that are not (internet surfing, television). What has not changed is that humans have an innate need for socializing. We have just found other ways to meet that need.

It is apparent that we have become more dependent on each other. People are not as resourceful as they once were. They rely on others to do more and more tasks. When was the last time you butchered a cow? painted your house? cooked your own dinner? harvested your own grain? You get the point. It was not that long ago that individuals had all of those skills.

Social capital has allowed us to become more specialized. To concentrate on one skill and hone it to perfection, while subcontracting out all the other work. Sure that allows us to be more efficient, but it also makes us very dependent on others.

For instance, I work in a specialized field of engineering and am able to buy everything to meet my basic needs off a portion of my salary. What do I do with the rest of my earnings? Do I re-invest into my own business? Buy more land to farm? No, I invest in other people’s businesses. I invest in the stock market. And if you have investments in the stock market, you are depending on that social capital, as well.

click HERE to subscribe to the Financial Engineer

Saturday, February 9, 2008

Setting the Bar for Philanthropy

The Gates foundation, founded by Bill and Melinda Gates of Microsoft fame, is reportedly four times the size of the next largest foundation. This single organization gives more than $3 billion annually. It’s difficult to comprehend a billion of anything. I read over at Blueprint for Financial Prosperity that one million dollar bills stacked on top of each other would reach a height of 361 feet. Multiply that by 3000 and we get a $3 billion dollar tower of bills that’s 205 miles high! Can you imagine handing out this money? Every year? What an awesome responsibility.

I assume the emotional payback is off the charts, after all don’t you feel great after helping someone, even if it’s just one person? Philanthropy is quite an interesting study into human behavior and for more insight, I browsed through the recent Fortune magazine interview with Melinda Gates. In the following, I have listed some of the more remarkable takeaways from that exchange. I say remarkable because I can actually recall these points several days after reading the article!

  • She and Bill plan to give away 95% of their estate

  • She follows the Warren Buffet strategy that she will give her kids everything they need to succeed, but not so much that they could do nothing with their lives

  • The foundation directs it’s funds towards areas of greatest need in the world. Melinda notes that “We literally go down the chart of the greatest inequities and give where we can effect the greatest change."

  • The foundation supports proven scientific approaches that help mitigate world health issues independent of religious doctrine that bans those same proven methods and practices that can help save lives.

  • The foundations #1 goal is to find a vaccine that will prevent AIDS, but they also hope to eradicate malaria, spark an agricultural revolution in Africa and ensure that every child in the United States has access to a quality education

The Gates do not take this responsibility lightly. Certainly they are both very intelligent people that have worked very hard in their lives to succeed. But this level of success and money has got to be difficult to comprehend. How would you react given such tremendous power? Evidently, Melinda Gates feels compelled and obligated to develop an efficient and effective strategy to deploy this power to improve humanity. The world is very fortunate that she is a part of the largest charitable foundation in the history of mankind.

click HERE to subscribe to the Financial Engineer

Friday, February 8, 2008

Improving my Cash Flow Process

After reading a couple of PF blogs describing their cash flow process, I decided to review and update mine. From the comments on those posts it’s apparent that a lot of folks operate their monthly cash flow on slim margins. Quite a few are nearly zero!

I would like to squeeze as much efficiency as possible out of the process, but I am not willing to operate that close to default. I will always have a cash cushion in my checking account, because I never want to have an overdraft and I don’t want to be constantly checking the account to see when a check cleared. Who needs that kind of additional stress? Life is too short for that.

So, it's necessary to find a balance. I want my hard earned cash making interest for as long as possible, not sitting in a zero interest checking account, and no overdraft worries. Let's take a look at my current cash flow system and figure out how it can be improved.

My current cash flow process follows:

  • Direct deposit approximately 20% of my pay check into my checking account. It’s a bricks and mortar type credit union that is affiliated with my place of work. I am still dragging my feet on going with an online only bank. Maybe with the new availability of Checkfree, I will finally make the leap.

  • Almost all of my bills and expenses are first paid with my credit card (cash back rules). I then pay off the credit card each month via my checking account.
  • Direct Deposit the remainder of my pay to a Vanguard Money Market account. The MM account is currently paying 4.11% interest. I use this account to fund my dollar cost averaging, value averaging, brokerage account purchases and it’s my emergency reserve.
  • For any special or unusual purchases, I must transfer money electronically from Vanguard to my checking account.

For the most part this cash flow system works well, but sometimes extra cash builds up in the checking account and earns no interest. For instance, right now I have $3,678 in my account. That's more than I need in one month. I am missing out on $50-80 of interest over a year by not managing this account more diligently.

Setting a target account value
Just for fun, I thought I would do a more rigorous analysis to figure out an optimal target amount for my checking account. To do that, I need to get my cash flow numbers and decide on a sufficient cushion.

I fired up MS money to build a report of monthly cash flow for each month over the previous year. The software has an export feature to Excel where I added it all up and calculated the monthly outgo.

Monthly expenses do vary substantially, since there are some one time charges like property taxes, new tires and insurance, etc. So, I removed those one time charges and ran the average again. That number was just short of $1000/month for expenses.

Now, for a cushion, I plan to use 1X my average monthly cash flow and subtract out the amount that I direct deposit each month. That makes my target checking account value at $900.

I will still need to make one time money transfers from Vanguard to my checking account for any big ticket payouts. But, at least the money will have earned a little interest in the meantime. And another benefit to limiting the cash in a checking account is that because it takes time and effort to make a transfer, I have more time to re-consider if I really need that big ticket item.

click HERE to subscribe to the Financial Engineer

Scan checks from home for deposit to your online bank

No more excuses. This new feature may finally do it. I have been dragging my feet, but now this system may allow me to get rid of my “bricks and mortar” credit union for good. The news is that online banking service provider, CheckFree Corp., is rolling out technology called Remote Deposit Capture, for everyone. This technology has been around for years but it was limited to business use only.

You will need a scanner, a computer and an Internet connection. Logon to your home banking website, enter the amount of the check, scan both sides, and submit it to the bank. Banks will have the option to add their own fraud protection. And of course, normal processing times will apply.

The ability to remotely capture a check is expected to become part of the standard features and functions of online banking. CheckFree said the service is available starting this week for those who bank online, as long as their banks offer it. Supposedly, this technology is already in the top 150 banks.

According to a recent survey about 20 percent of banks had the technology or planned to get it, and another 20 percent were considering it. In addition, a large majority of 90 percent either use the technology with business clients or want to.

I will be actively looking for an online bank that will provide this service – right after I break down and get a new all-in-one scanner/printer. LOL

Thursday, February 7, 2008

Your Fuel Conservation efforts are working

Experts forecast a drop of up to 50 cents per gallon by Spring! What a turnaround. Most of us have been listening to forecasts that oil and gas prices would continue to climb – after all we have been told that the world’s oil supply has peaked. Instead, we are witnessing market forces at work. Evidently, the high fuel prices and the looming threat of a recession are encouraging US drivers to conserve.

The U.S. Energy Information Administration (EIA) is reporting that U.S. gasoline supplies hit a near-14-year high of 227.5 million barrels last week helped by falling demand for the fuel. Stock “piles” of gasoline are growing.

That’s great. How much conservation is required to affect prices? The demand for gas over the last month has grown one percent over that of last year. That is about one percent less than the average growth according to the EIA.

That’s it? A one percent reduction in demand has this much influence? Let’s see, a drop of 50 cents for $2.98 gallon is a 16.7% decrease. Wow, that’s a great return on investment. Of course, one month is not long enough, we must sustain this for a few more weeks and then gas prices are expected to start reversing.

It’s also worth noting that U.S. refineries last week were only running at 84.3 percent of capacity. On one hand, this indicates that a lot more fuel could be processed with increased capacity. On the other hand, this low capacity rate doesn’t allow much margin in the event of refinery maintenance problems, hurricanes, unstable dictators or increased demands.

After digesting this news, I am left with the awareness that the US gasoline industry is in a fragile balance. It is overly sensitive to a multitude of factors. Like any engineer worth his/her salt would say, we need more margin. So much of our economy and everyday activities depend on gasoline. Who can argue that we don’t need a more robust energy policy that includes developing diversified energy sources and conservation incentives?

Tuesday, February 5, 2008

Insidious 401(k) Fees

Have you ever tried to determine exactly what your 401(k) plan charges in fees? It's nearly impossible. Sure, the plan sponsor will usually provide the investment management fee. That's the fee assessed by the firm managing a particular fund within the 401(k). If the fund is public, then that fee information can also be found at Morningstar or other similar sites, as well. But what about the plan sponsor’s fees?

I have never seen any fee or expense broken out on my 401(k) statement. And based on the statement below by a major financial investment company the fees may never be disclosed!

In a letter to the Department of Labor, Fidelity Investments, the nation's largest plan sponsor, says ample information is available on fees, and additional disclosure will confuse workers and deter participation: "The complexity of the choices presented to participants when deciding to participate in a 401(k) plan already represents a barrier to enrollment. Overwhelming participants with even more information could discourage participation further."

That is an incredibly condescending statement made by an out of control, greedy capitalist. Evidently, their industry would like a little more oversight and government intervention.

What are these fees? Here’s a summary of some of the possible fees and expenses:

Plan Administration Fees - The day-to-day operation of a 401(k) plan - such as plan record keeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole. These fees may be deducted directly from investment returns thus making it very difficult to identify. Or they could be paid directly by the plan. In that case, the fee is either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account.

Investment Fees – this is the largest component of 401(k) plan fees. Fees for investment management are assessed as a percentage of assets invested and are deducted directly from your investment returns. These fees are not specifically identified on investment statements.

Not only are these fees hidden from you, the employee, but in some cases not even your employer knows the fee! The experts say that because the fees are subtracted before investment returns are reported, buried in "bundled services," or not disclosed at all, employers may not be aware of the true costs of their plans.

On the bright side, there are some members of Congress trying to change all of this. Legislation was introduced last month that would require disclosure of all fees to plan participants. Let's hope it passes.

More information on this topic can be found here: The 401(k) Fee Flimflam.

Monday, February 4, 2008

For all the Money in the World

As much as I enjoy PF and building wealth, I have always placed health and fitness at a higher level. I would rather have my health than money. We have all heard that money is worthless, without your health. Those words are more than a cliché and it's not just talk, I live that statement. From time to time, I plan to write posts about health and fitness and how it can add riches to your life.

A key element to my fitness routine is my bicycle. No bike ride is ever the same, it seems every ride has its memorable events. You just can’t pedal 20 miles and not see something or have something notable happen.

Yesterday as I was riding, a motorist that was behind me slowed to allow a car to pass before he/she passed me on my bike. It only took a moment, but it made the situation much safer for all. As he/she passed, I waved and thanked them. I thanked them for treating me like the human being that they would want to be treated like in the same situation.

Before I say anymore, I know a lot of you get upset when bicycle riders take up the whole lane or ride in large groups and give no consideration to motorists trying to pass them. I don’t like that behavior, either. But, that is no reason to take it out on all riders – some of us are responsible and just want to share the road.

I typically track the outside white line whenever possible, but sometimes I am forced over into the lane. There are lots of reasons to have to take that added risk - potholes, dogs, abandoned vehicles (this is Texas, after all), joggers/walkers, road debris, and trash all pose road hazards to a cyclist. The take away is that no matter what someone else has done to you today, choose the high road and act like the person that you have always wanted to be.

Later in my ride, I was so thrilled with the boost in creativity and energy from exercising outdoors, that I did not even mind when a dog took chase. I noticed he was an Australian shepherd mix and so probably smarter than the average canine. I decided to use a different tactic – instead of shouting for him to back off to show dominance, or squirting him with water, I would use kind words…... As he raced along side me in the grass, barking and occasionally lunging at me, I told him he was a good boy, a good dog. He quickly changed course and shot off straight for a point ahead of us – uh oh. Perhaps he plans to cut me off? And then like most dogs he screeched to an abrupt halt at the boundary edge of his home turf. He barked at me a couple more times for good measure then sent me on my way.

Nothing like a good dog chase to bring you right back in the moment. All of your other problems and worries vanish. Some dogs are relentless, others are just eager to play. I have been fortunate in over 30 years of riding on the road - No dog related crashes, just a scratchy throat from shouting and a racing heart from trying to outrun the chasers. All in all it was another great day on a bicycle!

For more on personal finance check out the Carnival of debt reduction. My article: How I paid off my Home with a HELOC was included this week.

Click HERE to subscribe to The Financial Engineer

Sunday, February 3, 2008

Gold ETFs – The good, the bad and the taxes

I have a small allocation of my holdings in GLD. It’s an ETF that owns gold bullion. Each share is valued at 1/10 of an ounce of the Gold spot price. It has performed extremely well over the last 3 years that I have held a position in my portfolio.

Gold is often considered a haven in times of crisis. It’s price typically moves in the opposite direction of the dollar. It certainly provides diversification in a stock portfolio.

However, it also tends to attract emotionally driven and speculative investors who can add to its inherent volatility. In addition, it has much less practical use as other precious metals like copper and silver, making it conducive to even more speculation. Consequently, as gold has been reaching all time highs as of late, I have decided to set a target sell price. I plan to sell the ETF when it reaches that target.

Even though I will net a large gain in the sale, I have actually been dreading that sell date. Because, the ETF owns gold, it is considered to be a collectible and is taxed at nearly twice the rate of capital gains. Therefore, I will have to report it as gains from the sale of collectibles and pay a rate of 28% on those gains. There is no way around this – even though some have suggested reporting it as a stock trade and paying only the 15% rate. That's a good try, but when I make the sale, my broker will supply the IRS with that record, so trying to get around this would not be worth the risk.

It’s interesting that if I had sold the shares after holding for less than one year, I would get a lower tax rate. The short-term capital gains rate for gold or silver ETF shares is the same as for other investments: your ordinary income tax rate. The IRS is essentially encouraging short term trading of gold!

Yes, I know it’s a good problem to have. It was a successful investment. Unfortunately, not only do I not want to sell, but because of the extreme tax rate, I do not plan to buy any more shares of GLD. This 28% tax is so onerous that it actually stifles business transactions.
Instead of purchasing gold in the future, I plan to add to my holdings in gold mining stocks, which are taxed like any other stocks.

Now, before I completely eliminate the possibility of ever having gold bullion in my portfolio there is one other way that I could possible buy gold again. This may be surprising to some…..

Even though the IRS considers gold to be a collectible and collectibles are not allowed in an IRA, the IRS has made an exception. As of August 10, 2007, the IRS privately ruled that:

Shares of ETFs in the form of a trust that mirror the price of physical gold and silver do not constitute an acquisition of a collectible if they are acquired in an IRA.

The IRS has created yet another double standard. As a result, a gold ETF in an IRA will not be subject to the 28% long-term tax rate on collectibles. So there’s no reason (at least at this time) to worry about avoiding the collectibles tax rate when holding gold or silver ETF shares in an IRA.

Saturday, February 2, 2008

Releasing stress with a painless, healthy habit

This past week at work turned out to be rather stressful. And today I keep going over and over the events in my mind. I would like to be able to get rid of these thoughts and enjoy my two days away from the office. From previous experience, I know that it usually takes at least a day or so to get past a stressful encounter, but by then the weekend is gone and I am headed right back to work.

I also know that it helps to keep yourself busy. So, I went to happy hour with friends last night, then came home and watched a DVD movie and today I am catching up on reading some favorite PF blogs, but those nagging thoughts are still there. Ugh.

This morning, I found an article at Yahoo Health that caught my attention concerning habits to increase longevity.

For the most part, I already practice 4 of the 5 healthy habits. And since the 5th habit involves reducing stress, why not give it a shot?

The first four summarized:
Eat five small meals a day
Climb the stairs (exercise a little)
Laugh it up
Drink eight glasses of water a day

The fifth healthy habit for increased longevity:
Unwind with meditation.
Stress is the root cause of most of the diseases that shorten our life span. In our modern society stress will continue to increase - unless you find techniques to manage it. Meditation is the best way to release tension and revitalize your being. It teaches you to breath properly, which is critical for eliminating up to 70% of your body's toxins and wastes. It also quiets your mind, lowers your stress hormones, and teaches self-discipline, which is a necessary attribute to achieving your health and longevity goals.

Try this beginning meditation:
Sit comfortably on a chair or the floor. Breathe naturally and close your eyes. Each time a thought appears, put it inside a balloon and let it fly up into the sky and disappear. Do this until the thoughts are exhausted. After a bit, your body will feel very light, and your mind will become still. The first few times it may take a while, but it will get easier and faster with practice.

This is quite different from what I have traditionally considered the path to mitigating problems and ultimately reducing stress. I have always tried to work through the situation, to think about it and work it out. I would try to find a logical answer to something that may not be very logical. Looking back, that approach may have only prolonged the stress!

Depending on what is causing the stress, there may be times when it's best to just eliminate the thought. I kind of like the idea of blowing the thought into a balloon, tying the balloon off so it can’t get out and then releasing it. It does seem to help!

It's truly amazing that tricks or mental exercises like this can be used to essentially override or re-direct the brain. It all points to the fact that we have a lot more control of our thoughts than many of us realize. And with practice, we can improve our thoughts and the actions that they lead to in a powerful way.

Friday, February 1, 2008

Speculate some, but Diversify more to build Wealth

CNN money has an interesting article on how the experts invest. As you might expect not all of them follow what they preach/teach.

The article presents results from a survey that was conducted of more than 600 finance professors at major U.S. universities to find out how they invest their own money. The survey found that in their classrooms, these professors lecture on complex theories of how markets balance risk and return, while in their portfolios only two-thirds of the professors have diversified the bulk of their assets into index funds.

What about the other one third? They are throwing the theory out the window and chasing stocks based on price growth - not fundamentals.

It seems that a lot of these professors are just like the rest of us. We all know how hard it is to beat the market, but we never stop trying. We are not satisfied with getting anywhere slowly.

The article culminates with some interesting lessons from the survey.

First, whenever anyone tells you that research "proves" a novel method of investing is a market beater, bear in mind that the professor behind the paper is most likely an indexer who has never road-tested his theory in the real world of trading costs, taxes and other expenses.

Second, remember that even many of the people who know best can't resist chasing hot stocks, so you have to control your behavior in advance.

Get rich quick schemes rarely work. Since it is so difficult to control this tendency to chase the latest trend, hot stock, etc, why not strike a compromise? You don’t have to give up completely on trying to beat the market, but you must have a foundation. Just in case you don’t hit it big!

Why not develop a diversified core holding of index funds and then enhance that with a handful of select stocks? This allows for some speculation to feed those "get rich quick" tendencies we all seem to have, while still ensuring that the majority of your funds are working towards "getting rich slowly".