WallStreetDropout

Boston College’s Center for Retirement Research has a new paper out that outlines how you can effectively get a free loan from Social Security by “paying back” claims you received from ages 62 to 70, and then “start over” at age 70 — at a higher payout — by repaying the what they have received so far.

A PDF of the paper is here.

Of course, the point of BC CRR’s paper was not so much to highlight a loophole, but to show that this could cost the Social Security system $5.5 to $11 billion.

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In a move that seemingly contradicts a number of Jim Cramer’s principles, he gave a warning to investors to SELL on October 6, 2008, on the Today Show.  He cautioned that we could see another 20% decline in the markets and that anyone who will need to draw on funds in the next 5 years should sell now.

Contrast that with comments from Wall Street Journal personal finance writer Brett Arends, who on October 7, 2008, wrote the following in an article titled Words to Calm the Woozy Investor:

In the midst of Monday’s meltdown, here are several points that may help steady your nerve.

First, a lot of this crash is simply forced selling by hedge funds. It will take a long time before we get accurate data from their secretive world. Nonetheless hedge funds operate with borrowed money, and in September many of them took a double hit. Their stocks fell, and a lot of their clients demanded their money back. In some cases they took a triple hit, as their lenders demanded money back, too.

All of that forces them to sell shares, regardless of what they want to do.

That should not, at heart, be meaningful for you. If your next door neighbor is forced to sell his house at a loss to pay off his debts, does that make you want to sell your home too?

Second: If you’re worrying about a Wall Street “crash,” we’ve already had one. We’ve collapsed about 20% since the start of September. Worldwide, markets have slumped a remarkable 40% since last year’s peak. Yes, they could still fall much further. But history and math both make it pretty clear: The further into a “crash” you buy, the better your long-term prospects.

To put it simply, $1 invested in world markets today will always be worth about 67% more than a dollar invested at last year’s peak.

Crashes are great times to invest. It’s a pity they don’t happen more often. The real pity is that so many of us — and I have been guilty of this too — buy shares when times are “normal.” We should just sit on our hands and wait for the next crash before buying.

Third: We have a lamentable tendency in our culture to view the stock market index like it’s the home town team. It’s up! It’s down! Hooray! Disaster!

The corollary to that is the idiotic and infantile idea that somebody who isn’t “bullish” is somehow un-American.

In reality, the index just measures the average price you can buy stocks at today. Nothing more, nothing less.

Some days there are more sellers than buyers. So prices are lower. At other times, there are more buyers than sellers. So prices are higher.

Do you run screaming from the January sales? Me neither.

Four: Many shares are now good value investments.

Share prices world-wide now trade for an average of about 1.5 times book or net asset value, the lowest level since 1985. They’re less than 0.8 times annual sales, their lowest levels since 1992. The dividend yield — if you trust it, of course — is nearly at a quarter-century high. According to FactSet, a market data monitor, share prices world-wide average less than 10 times forward earnings, also the lowest levels since the bargain-basement era of the early 1980s.

No, I can’t prove markets are “cheap.” But they’re not expensive either.

For some specific stock-picking ideas, Fred Wilson, in Silicon Alley Insider suggests looking at names like Microsoft, Google, Apple, and Starbucks who are trading at lows while generating decent cash flows.

Do people actually fall for Bank of America’s “Keep the Change” program? Where they will round up the price of your debit card (see Aside below) purchases and transfer the rounded up amount fro your checking account to your savings account?

While BofA’s match for the the rounded up amount for the first three months is interesting, the palty interest they pay on the savings account doesn’t seem to offer a whole lot.

Wachovia is offering a program called Way2Save, which is a little more interesting in that because the savings account pays a pretty nice 5% for its first year, on top of some matching from Wachovia.

Of course, these programs are designed so that you forget about the initial “bonus” period and keep your money within BofA or Wachovia.

Q: What would I do instead?

A: Easy; I would look to putting my money in an ING or HSBC on-line account instead. ING offers a great checking account rate with their “Electric Orange” account, and HSBCdirect offers one of the best rates around on a savings account.

Aside :I never understood the attraction of debit cards? As I see it, a credit card let’s you 1) defer your payment 2) offers fraud protection, limiting your loss potential and 3) offers some buyer protection/dispute resolution services whereas a debit card gives 1) merchant direct access to your checking account 2) could run you into overdraft fees on your checking account and 3) can doesn’t offer the same kind of protection from fraud as a credit card.

Here’s a tip: Fix the small things that are wrong with your life. While I mean this to apply to things like your house and your car, the message could also be applied to more personal things, like your job, your relationships, your health. The reason being, that if you fix small problems along the way, you won’t end up looking at a situation years later wondering “How did it get like this?”

You may have heard of the broken window theory popularized in the 1980s that suggested that vandalism can be minimized by fixing problems when they are small. (See the Wikipedia entry for more details, but basically what this theory says is that if a landlord tolerates a broken window, maybe they’ll tolerate some grafitti. If they tolerate some graffiti, maybe they’ll tolerate an occasional break-in, etc…)

You might also be wondering, what does this have to do with personal finance? I view it this way: If you take the time (and expense) to fix the small things wrong with your house and your car (things you have sunk a lot of money into), you will enhance the value of those assets, as well as your enjoyment of them.

Here’s one way to look at it: Would you rather drive a 5-year old car that looks brand new, or a 5-year old car that has some scratches, a dent, a window that won’t go up, and a tire that keeps losing air?? OK, nobody would say they’re prefer the car in worse condition, but some of you might think “Look at all the money I saved by not putting it into a 5-year old car that probably isn’t worth all that much!”

Now ask yourself this: Which one of those cars would you want to trade-in for a new one in the next year or so? If you were the owner of the beat-up car, you’ve probably been eyeing some of the shiny newer cars on your ride to work. Or maybe you’ve already been test-driving a few replacements.

Even with cost of regular maintenance and the occasional cosmetic fix, chances are you are saving a lot more money by keeping your car longer, than frequent upgrades or replacements. And with a car that looks good and runs well, you’ll feel better about driving it, too.

The WallStreetDropout thinks this applies equally to other assets. Your house, for example. Your better off fixing (or having fixed) that bit of rot in the trim by the garage door now, then you are waiting until it becomes a bigger and more expensive problem. Don’t wait until that small water stain on the ceiling become a big hole. When those repairs add-up, it can become overwhelming to try to manage. So, my advice is to fix the little problems as they creep up. If you can’t do it yourself, call a handyman or specialist (roofer, plumber, carpenter). It can be a hassle, but it’s worth it.

You don’t have to be as compulsive about it as the WallStreetDropout, but one thing I find helpful is to keep a list of repairs to be done to my house or car. In fact, I keep it these lists as Notes in Outlook, sync’d to my PDA. For examples, in my House Projects, I have 1) replace broken outside light fixture and 2) clean up the stains on the garage floor. Under “Car Service,” I had “Wiper blade inserts” but crossed it off, because I referred to the list before a recent service and had this done.

Of course, for an asset that depreciates in value, there will come a time when it no longer makes sense to fix, and you will have to determine that time for yourself. For example, I got rid of an 11 year-old Audi with 225,000 miles on it that looked and ran fine, because I had just gotten sick of it. And “new” features like an air bag were starting to look like appealing in newer cars. But I am sure that fixing the small things along the way with that Audi, contributed to that cars long life, as well as my ability to enjoy it for 11 years. While I had my car serviced at the dealer when it was new, I found a car repair shop that specialized in Audis. Finding specialists for most makes should be fairly easy to find in any metropolitan area.

And while this is a personal finance blog and not a personal development blog, I wouldn’t be surprised to hear how the “fix the small things” philosophy applies to other aspects in life, as well.

Free Money, Part 1 focused on how to put more money in your pocket right now. Part 2 focuses on how to put more money in your pocket when you retire, if you have a 401k plan where you work.

You all know that you should make the largest contribution to your 401k that you can. The way to maximize some free money available to you, is to make sure your contribution maximizes your employer match. Many, if not most, employers provide some kind of matching contribution to employee 401k plans.

A company I worked for described their contribution as something like “one-half of 1% of employee contributions up to 6%.” While the language was a little confusing, what it meant was that if I contribute 12% of my paycheck to my 401k, my company will add another 6% on top of that. (It also means that if I contribute 15%, they’ll still only put in 6%). That’s like a 6% raise (which goes straight into savings) for free. Of course, depending on how far away you are from retirement, the power of compound interest means that money could be worth significantly more when you actually start withdrawing from your plan. How much more? Let’s look at a hypothetical example:

For someone who earns $50,000 per year, a 6% matching contribution would be $3,000. Yes, if you need to increase your 401k contribution to maximize the match, you will be taking some money out of your pocket today. But a couple thousand bucks out of your pocket today means big bucks later.

Assuming a 3% inflation rate (increasing your salary by that amount per year), and a 10% capital appreciation rate (that’s about the same as the long-term growth rate of the S&P 500 and a good number to use to approximate how much your matching contribution could earn over time), your employer’s matches would be worth over $200,000 after 20 years. That’s worth over $8500 per year in today’s dollars over the 20 years — again thanks to compound interest. So that 6% match is really worth much more than the $3000 it looks like today.

Here’s the downloadable Employer Matching Contribution Calculator I used to arrive at these results. If you want to see the results based on your own inputs, download it and tweak the inputs, as indicated.

So, to sum up, make sure that you’re contributing enough to max out your employer contribution. And if you’re employer doesn’t offer a match, pester the people in HR. The more they hear employees want this benefit, the stronger they’ll consider it.

Free money? That’s right, there are many sources of free money that are available to you for relatively little effort. This post will focus on one of my favorite on-line shopping secrets: FatWallet.comHere’s how it works

First you need to create an acount. Next, when you’re shopping for an item, say a pair of shoes you found a great deal on through Froogle (aka Google Products) at www.shoebuy.com, or a new bike seat from PerformanceBike.com, put the items you want in your shopping basket, as usual.

But before you checkout, log in at www.fatwallet.com and look for the store you’re buying stuff from. In that list you’ll see the rebate that you’ll be getting by making the purchase through FatWallet. So click on the name of the store, then the “Cash Back Available” link. This will open a new window to the store, and from there you can go straight to the shopping cart links and check out as usual. That’s it! In the case of ShoeBuy, you will be getting a 10% rebate (that can add up quickly), or 3% from Performance Bike. Rebates vary by store. Not all stores are FatWallet partners (amazon.com is a notable absentee), but it’s always worth a look before you check out.

As a note, you can also start your shopping at FatWallet, but I find that when I know the item I’m looking for, I try to find it at the best price first from price comparison sites like Froogle, MySimon.com, or DealTime.com. Then I go to FatWallet to complete my purchase.

After 15 years of industry experience followed by an additional 6 plus years on Wall Street as a research analyst, I have left Wall Street in search of a more balanced life. My career on Wall Street provided me with some excellent financial and life lessons that I plan to share with you, as well as some money in the bank. As a personal finance blog, I plan to explore ways of making money, saving and investing, as well as enjoying or spending money.Unlike other personal finance sites, WallStreetDropout is less about my own personal finances and more about how the lessons I’ve learned as an investor, employee, consultant, and consumer can help you in your own personal finances. My goal is not to provide you with specific investment advice (you need to do that for yourself), but to provide you with tools to make wise investment and spending decisions.

WallStreetDropout is also not a news aggregator, though I may refer to current events, it would be for “lessons learned” rather than reporting. As I learned as a Wall Street analyst, investors are less interested in hearing you regurgitate the news, and more interested in your interpretation so that they can make wiser investment decisions.

There are three themes the lessons of this blog with center around:

• earning
• saving
• spending

In the area of earning, my focus will be on passive income generation, such as investing in stocks. I am keenly interested in other methods of passive income and would welcome a dialog on them.

When it comes to savings, an abbreviated version of my philosophy would simply state that as long as income exceeds expenses, you can’t get yourself into too much trouble.

I also enjoy spending money, but believe in spending money wisely. The Wall Street lifestyle of high income, leads easily to a lot of spending, sometimes without much thought. With a smaller income, and more thoughtful spending, I find myself appreciating what I spend money on. I also enjoy getting a better deal, so I will share some of my knowledge there, too.

The order that I think about sources and uses of money is no accident either. Making money comes first, because it provides funding for basic expenses and enables you to save money for the large expenditures (a house, college, retirement) in the future. Managing those expenses effectively (income minus expenses equals savings), leaves you with some money to enjoy.