Dirt Simple

I love it when people read something with a critical eye, and come up with a better idea. Here’s an example.

Kroger (including its various subsidiaries) is offering gift cards with a 10% bonus to people who choose to use their tax rebates to buy the cards. But an article on MSN Money is encouraging people to “say no” to the cards, and put the money towards paying down debt, or into savings.

A blog called All Financial Matters puts a different spin on it in this post.

Even if you are planning to save your rebate, you can still take advantage of these offers. You have to buy groceries anyway, for instance, so let’s say your grocery budget is $150 per month (as mine is). I could use my $600 rebate to buy a Kroger gift card, use the gift card for groceries for the next 4.4 months, and put the $150/mo I would be spending on groceries during that time into my savings account.

Sure, if you’re drowning in high interest credit card debt, you’ll get a better bang for your buck by paying down the debt. But if you’re not, where else can you get an instant 10% return on your money? Great idea!

NPR’s Morning Edition is doing a five part series called Drowning in Debt, which looks at “the reasons for rising debt, and possible solutions for dealing with it.”

The first part was entitled Why Do We Borrow So Much, and includes a conversation with economist, Tim Harford. Tim writes a blog called The Undercover Economist for the Financial Times. In this 8 minute segment, he blames our propensity for borrowing on the greater availability of credit, and our tendency to choose instant gratification whenever we have the option.

The second part is, Making Changes to Head Off Credit Disaster, and profiles a woman who racked up over $20,000 in credit card debt, and is now working on paying it all off with some help from a credit counsellor.

A while back, I posted 15 Dirt Simple Steps to Improving Your Finances. In Step 4, I said, “Kill off high-interest credit cards, and loans first.” The next step was to start establishing your savings, or emergency fund. Then back in another post called Keeping Track, I said to be sure and start an automatic saving plan, but to just start with an amount which your comfortable with.

Well, I’ve been doing some reading, and have reconsidered my initial dismissal of the 10 percent rule. The 10 percent rule states that you should save 10 percent of your income right off the top. I was taught that it was best to tackle high-interest debt first, but in Why Smart People Do Stupid Things with Money: Overcoming Financial Dysfuntion (amazon.com), financial planner, Bert Whitehead, advises to save the ten percent regardless, because it is more important to take that money out of your spending pool to begin with.

Ideally, put a good portion of this money in a tax-sheltered account (an IRA, or your 401(k), or an RRSP for Canadians). Since there are tax consequences to taking the money out, people tend to be less likely to touch it.

My own experience bears this out. When I was about twenty, I started my Registered Retirement Savings Plan. I had a savings bond given to me, and started the plan with that $2000. I also set up an automatic contribution of $50 per month. This was less than ten percent of my income, but I wasn’t that disciplined back then. The money was invested in a single mutual fund, which was a balanced fund (a mix of stocks and bonds) sold by my bank.

All through my twenties, I continued to pay into that RRSP. Occasionally I made a lump sum deposit when I got a gift of cash. But for the most part, I was like most people in their twenties and spent every dime I earned–except for that fifty bucks a month.

By the time I turned 29, I had accumulated roughly $15,000 in my RRSP. Far from spectacular, but better than most people I knew. Part of that success was the good fortune to have been invested all through the bull market of the late nineties. But the simple act of saving a regular amount consistently over a period of years is unquestionably effective, even if you’re not so savvy with the rest of your money. I shudder when I think about how much more money I would have today, had I only doubled my monthly contribution.

So, consider committing to saving 10 percent of your earnings. Make it automatic. Make it tax sheltered. Stick to it. Once you’ve done that, you still need to kill off those credit card debts, but your net worth will be building automatically in the background.

While surfing through a number of other personal finance blogs, I stumbled across this concept of credit card arbitrage. It just goes to show you how un-creative I am when it comes to investing, because this technique never even occurred to me.

For those of you unfamiliar with the term, arbitrage refers to taking advantage of a price discrepancy between one market and another. In this case, the concept involves getting a cash advance on a credit card at 0%, and then investing that cash in a high-interest savings account at say, 3%. Just before the end of the 0% period, you pay off the full balance, and you get to keep the interest you’ve earned.

The technique is not without its pitfalls, and if you’re thinking about doing this, I suggest you check out Pitfalls of Using 0% Credit Card Offers To Earn Interest on another blog called Blueprint for Financial Prosperity.

Personally, I think the fact that it takes such a large amount of borrowing to really make it worthwhile is a major drawback. It seems to me that the kind of people who might be attracted to this kind of easy money scheme, are the same ones who are most likely to screw it up, and end up in trouble.

Is it just me, or did the President’s little announcement about the tax rebates sound a bit like he was doing a late night informercial?

If you’ve already filed your income tax return your rebate is on the way. Even if you don’t owe any income taxes you may still be eligible for a check, but you need to file a form with the IRS. And it’s not too late to do so. Now, you can find out information as to how to proceed by calling your local IRS office, or go to the IRS website.

But wait! There’s more! The first million Americans to file their tax returns will also receive this fabulous set of steak knives, ABSOLUTELY FREE!

Then there was his appearance on Deal, or No Deal…

I’m sure it meant a lot to the soldier on the show, and without question, he deserved the recognition, but I just had to cringe at the stilted, scripted humor. The whole thing just felt hollow.

I suspect a lot of Americans feel much the same way about the tax rebates which they’ll start receiving tomorrow. It’s nice and all, but a lot of people are either suspicious of it, or figure it’ll just get taken back from them somewhere else. That feeling is justified, because the fact is, the money isn’t really there to give in the first place. It’s all just part of this administration’s continuing practice of spending money they don’t have.

I’ve heard more than a few people calling it “free money.” It isn’t free at all. It’s borrowed money, and borrowed money costs money. You have to pay interest on it, and there’s an opportunity cost as well. The deeper in debt you get, the less flexibility you have to do the things you want to do in the future, and sooner or later, people start to question your fiscal credibility. The same rules which apply to individuals, apply to governments as well.

Politicians, will try to tell you otherwise, and make you feel like you’re not smart enough to understand national fiscal policy. They’ll say things like, “deficits don’t matter.” The thinking–if you can call it that–is that government spending stimulates the economy, which generates more tax revenue, and the party just goes on forever. But the national debt has increased by $3 trillion dollars, over 53% since 2000. Have tax revenues increased anywhere near enough to compensate? No.

So, am I suggesting we should all send back our rebates with a note asking to apply it to the national debt? Hell no! Spend it. Save it. Give it away. Do whatever you want with it. Sending it back wouldn’t make an ounce of difference. It would just get blown on something else anyway. Like the $42 million that the IRS is spending just to tell people about the rebates.

A while back, The Dividend Guy wrote a piece called My Top 3 Investing Mistakes, and suggested other bloggers share theirs. I’m a bit late to the party on this, but here goes.

Mistake #1 - Investing money that shouldn’t be risked

Many people put money into investments sort of haphazardly. They don’t really have a plan for their money, except to make it grow somehow. It’s important to have a good foundation before you start dipping your toes too deeply into the waters of equity investments (stock, or stock mutual funds).

Deal with your debt, and make sure you’re able to meet any expenses that might arise in the near term so that you don’t end up having to cash out an investment at a bad time, just to pay a bill.

If you have money set aside for a near-term goal (less than 5 years out), don’t invest it on a whim because your neighbour gave you a tip while you were out watering the geraniums. Two years later, you don’t want to be facing your child, who had visions of Harvard, and saying, “How do you feel about community college?”

Mistake #2 - Following the herd

Yes, I’m talkin’ to you, you little investment lemmings! This not only applies to the stock market, but the housing market too. Piling on to the investing bandwagon just because everyone else is doing it, is almost a surefire guarantee that you’re going to get kicked in the financial teeth in very short order. Then you’ll sit around with a bad case of stock market PTSD for three years while the smart money is picking through the rubble.

Now, I’m not suggesting you should try to time the markets. There are times however, when you can tell you’re in the midst of a mania, and all kinds of warning bells should be ringing in your head. I’m going to borrow from Jeff Foxworthy’s “You might be a redneck routine” here:

• If people are lined up around the block to buy condos, which have yet to be built, and which are to be located in the heart of your local skid row, you might be in the midst of a mania.
• If the folks down at the homeless shelter are watching CNBC and discussing the merits of the latest bio-tech IPO, you might be in the midst of a mania.
• When you overhear children bragging in the schoolyard and it sounds like this:
  “My dad’s return on invested capital is higher than your dad’s.”
  “Oh yeah? Well I bet your dad doesn’t even know what EBITDA is!” You might be in the midst of a mania.

Heed the words of The Sage of Omaha:

Be fearful when others are greedy, and greedy when others are fearful.

‘Nuff said.

Mistake #3 - Failure to stay the course

This has a lot to do with risk tolerance, and people thinking they’re a lot more tolerant of risk than they really are. I’m not saying there’s never a time when you should cut your losses, and move on. There are times when things go horribly wrong, and there’s nothing you can do but hit the eject button.

For example, if a company you invested in starts getting investigated for creative accounting, it might be time to bail. Usually by the time people are being indicted, you’re stock is wallpaper.

Having said that, if you bought say, a stock index mutual fund, and it’s down 10% over six months, or even three months, welcome to investing. We’re expecting some turbulence and recommend you remain seated with your seatbelt securely fastened.

Assuming you avoided Mistake #1, and you really don’t need this money until sometime in the distant future, relax, put your headphones on and enjoy the movie. Air sickness bags are located in the seat pocket in front of you.

In his regular Globe & Mail column, Canada’s tax guru at large, Tim Cestnick, is highlighting some last minute tips before the April 30th deadline.

One of the tips that a lot of people probably don’t think of, is filing a return for their kids. If your kids have any earned income (eg. paper route, babysitting, lawn mowing), filing a tax return means they will start to build RRSP contribution room. Assuming their income was less than $9600 for 2007, they won’t owe any tax, but they will start to build RRSP room for future contributions.

After that room is available, putting money in the RRSP early is a great way to get your kids a head start on their future retirement savings. It may seem odd to have your child starting a retirement account before they even have a “real job,” but the longer your child’s investments can stay in the RRSP, compounding tax free, the easier it will be for them to accumulate a nice big retirement account.

For example:

Suppose your child was able to put $2000 into an RRSP at age 15, and then never made another contribution. In 50 years, at age 65, assuming a rate of return of 8%, the $2000 would grow to over $93,000. Imagine the possibilities if your child continued to make contributions throughout their adult life.

I’ll admit, it might be a stretch to build up that much RRSP room by age 15, but the point is, the earlier the better, regardless of whether it’s in a tax sheltered plan, or not.

The Vancouver Sun lists 10 Things to do for Earth Day. Coincidentally, almost all of these things are money-saving tips as well.