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Archive for January, 2008

Goals Review – January

January 29th, 2008 at 02:58 pm

My goals for 2008 are:

1) Pay off $6,000 CC by May 1st
2) Pay down car 1 by Aug 1st
3) Invest $10,000 by year end
4) Invest $15,500 in 401(k)
5) Review and reallocate retirement funds by end of Q1
6) Will by end of Q1
7) Life Insurance by end of Q1

So, how are we doing? Good in some and procrastinating in others. Probably par for the course.

1) Pay off $6,000 CC by May 1st

12/31/2007 - $6,000
01/31/2008 - $3,543 ($2,457 paid)

Nice. I might be able to pay this off by end of March. 2 months early. Keep the focus.

2) Pay down car 1 by Aug 1st

12/31/2007 - $5,726
01/31/2008 - $5,317 ($409 paid)

Well, if I can keep up the pressure and the focus, I might be able to pay this off by end of May. Nice.

3) Invest $10,000 by year end

Yea, well, you know… I’ve been real busy lately. Seriously, once car 1 is paid is will get attacked. On hold now but itching to start.

4) Invest $15,500 in 401(k)

01/31/2008 - $1,451

Right on target. Looks to complete in middle of November. (A little boost in income around Christmas by not having the old 401(k) deducted from the paycheck.)

5) Review and reallocate retirement funds by end of Q1

I have reviewed the allocations and mine are all out of wack. I have set up a spreadsheet to figure out the buys and sells automatically. I am just waiting for some of the volatility to leave the market. No sense rebalancing if I need to rebalance next quarter. I like to do it once or twice a year. So ready to go, just waiting.

6) Will by end of Q1
7) Life Insurance by end of Q1

These last two items I believe go hand in hand. I might push these off to Q2 because I want to get some advice from my CPA, and I definitely don’t want to rush it. I figure work out the general plan with the CPA (how the trust and wills work together for tax purposes) and then have a lawyer fill in the blanks. Now, I’m not a millionaire; but once I throw in life insurance for me and my wife, my estate’s value goes up considerably.

All and all, I think I am pretty much on target to get all my goals accomplished this year. In fact, I have two other goals I might add: pay off a second car ($16,432) and my wife’s braces ($2,496).

The funny thing was that when I started putting together my goals for 2008 in December I thought that they were tough and it was going to be a stretch to achieve. After the first month of January, I’m ready to add more goals to the list.

Even Lead Balloons Can Fly

January 28th, 2008 at 05:02 pm

I was watching Myth Busters over the weekend and they had a show where they were talking about how lead balloons can not fly. When you’re looking at material make a balloon, 2 characteristics come to mind: strong and light. Lead is neither. Lead foil rips easy and is 6 times heavier than aluminum foil.

In the end, the built a 10x10x10 cube and inflated it. All the time repairing rips. Make sure the various sides weren’t rubbing against each other. After it was inflated, it rose to the top of the ceiling and yes the lead balloon floated.

Sometime when I think of my finances, it seems that I am trying to get a lead balloon of the ground with debt and financial obligations being the weight of my balloon. The rips occurring so easily are my old spending habits.

So how do I get a lead balloon airborne? Well, I’ll follow what the Myth busters did.

1) Have a plan – So my plan is to start shedding debt. The order will be credit cards, my car, wife’s car, wife’s braces, and son’s medical. Basically it is from highest interest rate to lowest.

2) Implement the plan, working each step of the plan – In other words, concentrate on the first step. Let’s get the credit cards paid off before worrying about sending more to the cars.

3) Plan for the catastrophic risks – I may not know what the risks are, but I can plan for what happen when they occur. I have a budget that should take care of most things (car maintenance, house maintenance, etc.). I also have an emergency fund to go above and beyond this. I haven’t tapped into since I started a budget.

4) Review progress of the plan –
Now, you can review your progress to your plan. Is too aggressive, not aggressive enough?

5) Make adjustments as necessary – Little bumps are to be expected. Just rework the plan and make the small adjustments you need to.

And this is how I plan to fly my lead balloon. Tears rips and all, my toxic shining balloon will rise

Time to Rebalance ….

January 23rd, 2008 at 02:17 pm

I have been thinking of writing this for some time now. I figured today is as good as any day. A lot of you are feeling the pain of the stock market. It’s been down for 6 days and looking to go down again. The Fed lowered rates from, I feel, a position of weakness and not strength. The financials are leading the markets lower (even though yesterday was pretty good for some).

So what do I do now? Bury my head in the sand? Move everything to cash and put it in a mayonnaise jar?

Did you do that when you were creating a budget? No, you took a deep breath assessed things and came up with a plan. When times started getting tough with the budget, did you abandon it? No, you worked through the pain.

So what should we do?

1) Continue to put money in your retirement accounts. Remember, this to shall pass. Dollar cost averaging is a powerful concept.

2) Review your funds. Are some of these dogs that have been under performing for years?

3) Review your allocation.

The best way to illustrate this is the internet bubble. Internet stocks are growth stocks and in the late 90’s just took off. Chances are your portfolio was overweight technology and mostly likely you were taking on more risk then you wanted or intended.

It might make sense to review your portfolio and make sure your allocations are in line to your target allocations. I know for my portfolio, I am currently overweight international and emerging market, while underweight domestic stock and REITs. I reallocate every 6 months and am scheduled to do so in the next 3 weeks.

There are 2 ways to rebalance your portfolio:

1) Buy and sell shares in your accounts.

2) Tweak your buying so you buy more of your underweight and less of your overweight.

Lastly, don’t panic. Come up with a game plan that works in good and bad times and stick with it.

Ambac stripped of AAA…

January 22nd, 2008 at 01:55 pm

This was the other shoe I was talking about a few posts ago.

“The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records.”

The article continues….

“MBIA and Ambac both said they were surprised by Moody's decision to start a new review, less than a month after affirming their ratings. The flip-flop by the ratings companies is making investors wary of buying stock or bonds of the insurers, Giordano said.
``You have a market that has zero confidence in anything financial right now,'' Giordano said. ``You have the agencies who, in my opinion, have continued to make a comedy of errors. And you have very complex companies that are very hard to understand. It's easy for investors to just sit on the sidelines.'' “

I believe that the whole market will be in a panic this week. I believe that the Fed emergency rate lowering is coming from a position of weakness and not strength. I am looking at financials to start bottoming out. Besides a total meltdown of the financial infrastructure, I don’t see much more bad news. I would look at today setting up some lows in the financials and then testing these lows later this quarter.

I am starting to reevaluate my list of financials looking at the strong ones like GS. Not buying yet, but getting closer. I need to make my list and then look at some entry points.

75 Basis Point Cut

January 22nd, 2008 at 01:31 pm

Breaking news....

Fed lowered rates by 75 basis points at 8:20 today. Federal Funds rate at 3.5%.

For those looking to refinance, this week might be the week to do it. Keep an eye on the treasuries.

I expect with today's meltdown, money will be flowing into treasuries causing prices of treasuries to rise and the yields to plummet (proce and yield have inverse relationship, like seesaw). So, you should see mortgage rates down this week.

Subprime, SIVs, CDOs … oh my!!!

January 17th, 2008 at 03:51 pm

Merrill reported their earnings and just like Citi, the reports were not good. Merrill had a write off of $15 billion, which lead to a net loss of $9.83 billion. Or, $12 a share.

Since May, the banks and Wall Street have written of over $100 billion since May. Greatest quote - Chief Executive Officer John Thain called the results “clearly unacceptable”'. Do you think?

$11.5 billion was for subprime and $3.5 was related to bond insurance contracts when ACA Capital Holdings Inc’s ratings were sent to CCC (junk). When ACA got slashed, Credit Agricole and CICBC took write downs of over $7 billion combined. The culprit was bond insurers branching out from guaranteeing municipal bonds to getting in the structured finance products, like CDOs (basically a collection of mortgages, loans, and other things).

All the major bond insurers (MBIA, FGIC and Ambac) have been put on notice by the major rating agencies. MBIA just got an injection of $1 billion from Warburg Pincus. So what does this mean, if you have insured muni bond funds, they just got a lot riskier.
“Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.” (Source: Bloomberg)
Citi also took a writedown of $18 billion and reduced the dividend by 40%.
So to recap the last 6 months, we have had write downs of over $100 billion because of subprime, we have had cash enhanced and cash plus funds caution about trading below a $1, we have CDOs write downs that could affect bond insurers and hence muni insured bond funds.
At the moment, cash is king. I am and will continue to stay away from the financials. I think there will be more write offs around CDOs. In other words, I don’t think all the bad news is out there yet.


Thoughts about my will

January 16th, 2008 at 02:23 pm

One of my goals this quarter is to have a will in place. My wife and I haven’t really discussed the particulars, but I thought I would present it to my wife and she can tweak it as necessary.

First, and easiest, surviving spouse gets everything. What’s mine is hers and what’s hers is hers.

Now the tough part, if we both die. I thought the best place to start was what we wanted and didn’t want.

1) I don’t want my and my wife’s death to be a financial burden on anyone
2) I don’t want my children to be a financial burden on anyone
3) I don’t want to have higher education costs be a burden on my children
4) I would like to have funds available to help by children buy a house but not squander any remaining money

I know for a “we” thing I sure use a lot of “I”. Again, this is just my framework. The boss … er wife … will need to sign off on this.

So, I was thinking that the estate would settle up all the debt and sell all “stuff” (house, cars, sofa, etc.) and transfer all of our financial accounts into a trust. The trust then would dole out a certain amount every month to the guardians of my children. I have a figure of $2k - $3k a month, adjusted for inflation yearly. I have to see if this figure is realistic.

Also, I will also need to put in something about money for special circumstances (medical comes to mind), where one child might need access to the money.

Anything that is left over will be used to pay for college. Probably room, board, and tuition. I’ll have to figure out a fair way to allocate this. I don’t want one child using all the money and none being left for the other child. Maybe when the first child enters college, the money is split into 2 sub-trust, one for each child.

Lastly, if anything is left over, split evenly between the children at age 25 or 30. I want them to have some maturity about money before the money gets to them. Of course, there may be nothing left by this point.

One exception would be if my wife has special jewelry that she wants to give to her family, heirlooms come to mind.

And the good news keeps coming….

January 15th, 2008 at 02:47 pm

Today’s headlines from Bloomberg:

1) Retail Sales in US Unexpectedly Fall 0.4%, Capping Worst Year Since 2002
2) Citigroup Posts Record Loss, Cut Payout
3) Dollar Drops to Lowest Since 2005 versus Yen
4) Merrill, Citigroup Get $21 Billion From Outside Investors to Boost Capital

Yes, an additional $21 billion. Citi raised $14.5 billion and Merrill raised $6.6 billion. That brings the Wall Street bail out to $59 billion, mostly Middle East investors.

Citi said it was to shore up their Tier 1 capital ratio. This is the number that regulators look at to assess if a bank can withstand loan losses. With the injection of capital, the Tier 1 ratio will be 8.2%. Citi likes to see it above 7.5%.

So what does this mean? To me, US stock market should continue to be volatile with pressure to the down size. I expect to see more layoffs on Wall Street. Citi was talking about laying off 45,000 a few months ago.

I already heard that bonuses are way down. Looks like BMW and Mercedes dealership will be disappointed.

But I do expect financial to bottom out in the first half. I wouldn’t buy yet. Subprime mortgages are still out there. Also, some of the bond insurers are having issues, even though Berkshire Hathaway announced they were getting into the business.

Bottom line: Cash is king. And, it an excellent time to build up your cash position and your emergency funds.

These are pretty much my opinions and what I think about the current market.


Funding: The Magic to Budgeting

January 10th, 2008 at 03:20 pm

I have started to reach a really weird point in this budgeting project. I’m looking forward to paying bills.

Let me explain. Each month, ok I’m on my second budget, I create a budget and every week I get paid and allocate that paycheck into different items on the budget. During the week, we try not to go over the funded part of the budget.

I am currently $1.20 over budget on my groceries and $20 over the funded amount on eating out, but way within budget. BAD MERCH!!!! I should allocate other money from a different envelope, but I get paid tomorrow. So, I’ll take care of this tomorrow.

I use credit cards for all my transactions. keep track of all the transactions and I drop them into the right envelopes. When I need to pay the credit card, I look at the balance in Mvelopes and pay that to the CC, usually the same day I receive the bill.

No sense in waiting. The money is already spent on paper, just send out the check.

Now the worst thing about my bills is that they all are due at about the same time. For me, I have a mortgage, car payment, health insurance, escrow payment (house insurance and taxes), and medical bills all due around the 15th. This in the financial world is called a liquidity issue. For that week, my outflows are way greater than my inflows.

So what do I do? I save a piece of these bills every week, so when the 15th comes, the money is there. For me, it will take we 2 months to burn in my funding plan. In other words, January is going to be tight but it should set me up for a good February.

So, I’m keeping my eye on this month will looking forward to February. I still have goals on the left side that are realistic but I’ll need to keep a tight leash on the budget to accomplish everything.

Secretly, I’m wishing to accomplish more.

What's in your money market fund?

January 8th, 2008 at 02:16 pm

Top Treasury money market funds have yields at about 4.58%, but top performing prime money market funds have yields of 5.18%. What gives? Aren’t all money market funds created equal.

Alas, the answer is no.

To achieve the performance over treasuries, these prime money market funds, also called enhanced or plus cash funds, invest in asset backed commercial paper and SIVs.

What is a SIV? It is a fund that borrows short and buy long term securities at a higher rate. Well, there are 2 risks with SIVs: solvency and liquidity. Solvency has to deal with risk of the long term debt failing below the value of the short term debt (read subprime mess). Liquidity deals with outflows to the short term borrowers coming due before the long term assets pay (read credit crunch).

Everyone knows that a money market account won’t go below a dollar, right? GE Asset Management fund (an enhanced cash fund) hit $0.96.

Other headlines include SunTrust buying SIVs for a money market account from Cheyne Finance that defaulted last month. Bank of America is planning on providing as much as $600 million to fund debt from SIVs. Blackrock sent a letter to shareholders specifically stressing that “enhanced” and “plus” cash funds were not money market accounts. (

So what does this mean? The higher the yield, the higher the risk. But, I am not suggesting that money market accounts are going to be imploding all over the place. I do expect that most financial institution will put capital into the funds to maintain the $1 price.

So what should you do? If you are in an enhanced or plus cash fund, you should see what type of investments the funds are. For the AAA money market funds invested in treasuries, you should have no worries.

You could also park your money in 3 month CDs. They are FIDC insured up to $100,000 (I believe) and earn around 5%. If you need the liquidity, you might want to review the holdings of your money market account.

My wife drinks the Kool-aid

January 7th, 2008 at 04:18 pm

Yesterday, my wife decided to go grocery shopping, armed with a budget of $100. I gave her some coupons to use on stuff I know she buys. There is a ton of other stuff she buys that I don’t know about. Well, the coupons were $0.75 off of this $0.50 off of that.

She was talking about the gold old days when she didn’t have to use coupons. She also use to grocery shop everyday before we had a budget. It was like $40 at the grocery store and stop into CVS for another $30. Well, now we budget $100 per week for groceries and we eat out far less.

We used to eat every meal on the weekends out. We have changed that. I now spend $20 a week on pizza for Saturday night and we eat the leftovers for lunch on Sunday.

Well, when she said do you remember, I started remembering about double income and no kids. Living in a condo in Brookline (in 2004 it was $360k condo for 900 square feet). Eating at the Radius in Boston ($300 per meal, I recommend the chef tasting menu). And sleeping in late on the weekends.

Sorry about that tangent. Where was I? … Oh yes … grocery shopping.

My wife came back from the grocery store and showed me the receipt. She spent $77 this week for all our meals. She saved about $33 on coupons and sale items. She was talking about how she got a center cut roast for $10 that’s normally over $20. She was talking about how see saved on this and that.

Not all of the buys were great. She bought strawberries on the cheap and some of them were rotting.

I thought to myself, who is this woman and what did they do with my wife that left the house. And could I keep this one?

She must have had one of the light bulb moments in the store or the way back after seeing all her savings.

Where do those auto loans go?

January 3rd, 2008 at 02:49 pm

I was listening to Dave Ramsey the past few days.

The first caller I remember was a guy engaged. He had a 30k car and his wife to be had a 30k car. They were making 60k between them. The guy also just got out of bankruptcy. He also had a couch from Rent-A-Center.

I was thinking to myself “WOW, what the heck.” Could you imagine being the loan officer at the car dealership? “Let’s see. You make between 30k – 40k? And you just got out of bankruptcy? How about fully financing that purchase?”

So, who pays the price of this high risk loan? The dealership? The car company?

Neither, you and me take the risk on these people. See, Wall Street bundles up all these loans from GMAC, Nissan, BMW, credit cards, etc. and sells them to mutual funds (similar to mortgages). So the auto company sells their receivables to Wall Street then they offer securities based on these loans. These are called Asset Backed Securities.

Anything with a payment stream (auto loans, credit card payments, bank loans, boat loans, etc.) can be securitized.

No wonder store credit and loans are so easy to get. The stores don’t have to hold on to them sell the best ones to Wall Street and then the really bad ones to collection agencies. No need to wait for your money.

Where does this leave us as a society? The sad thing is that this isn’t a unique story.