Recurring Expenses Will Bleed You Dry

A colleague forwarded me this article in the WSJ entitled "ROI: Is the iPad 2 Really Worth $2,000."  In it the author realizes that when he uses his capital to buy the iPod, the capital is no longer available for investing.  Consequently, the cost to him is not only the $500 up front cost, but all of the return that he would have made on the invested $500.

However, far more important is the insidious impact of recurring expenses in in drastically reducing the amount of money that you will have available for retirement.  For example, consider a $100/month cable bill - if the money was instead invested (even at a fairly conservative rate of 8%) then after 35 years you would have $100,000.

A $400/month car lease?  $400K after 35 years.  A $50/month telephone bill? $50K after 35 years. So what do we do about these recurring expenses?

Increasing Return on Education Dollars

Paul Krugman's article in Sunday's New York Times is generating a lot of talk.  Krugman points out that a lot of jobs considered "white collar" are subject to automation and are currently being outsourced.  From this point he extrapolates that "education is not the answer", but instead the answer is to give more bargaining power to unions.  

Over at Restoring Dignity To The Law, J-Dog emphasizes that although increasing education may have led to a better life 40 years ago, the same may not hold true now.  He also mentions that education has shrinking economic returns.  Over at Law School Tuition Bubble, Matt also references the article.

Is Krugman right?  Should we just encourage our kids to be janitor with strong unions instead of going to college?  More below.

Converting To A Roth IRA? - Part 2

This is a continuation of Part 1 with regard to Converting to Roth IRA.

Converting To A Roth IRA? - Part 1

As many of you know, in 2010 the AGI limitation for converting a traditional IRA to a Roth IRA has been removed.  For many lawyers, this means 1) a great of questioning as to whether the lawyer should be converting a traditional IRA into a Roth IRA, or 2) that the lawyer may have their first crack at actually putting any money into a Roth since the program began - due to the income limitations for contributing directly to a Roth that previously existed.

But does it make sense for you to convert to a Roth?  The question is actually best answered in the context of your total IRA and 401K situation.  I'll outline a methodology for determining whether you may want to convert to a Roth IRA below, and then address some concerns about the conversion.  This post got kind of long, so I have broken it into two Parts.

Which Is Better - Stimulus or Austerity?

Here's an interesting article comparing the ongoing responses to the fiscal crisis that started in 2008 - both the European response and the American response.  The American response has primarily been one of stimulus - the government is taking on additional debt to provide a stimulus to the public sector.  Conversely, the European response has primarily been one of austerity - cutting government workers and programs and raising taxes.  Let's take a look at the likely outcomes of these policies - and how these may impact your investments in the future.

"Diversify" With Whole Life Insurance?

In response to my recent post about life insurance, a commenter said:

Great blog, thanks for your efforts. I'm curious if you think there is a diversification value in whole life insurance. That is, are there circumstances under which one is better off putting $500 per month into an S&P index and $500 per month towards a whole life policy as opposed to putting $1k into the S&P?

That's a good question.  Diversification can be powerful and sometimes whole life policies are marketed this way.  However, I think that they are often disingenuous in this regard.  For example, a policy might promise you a minimum 4%/year, but often what you get is not what you expect.  Also, the purported diversification is extremely costly in your example.  See below for more details.

Life Insurance - Do You Need It?

I have had a couple of people ask me about life insurance lately.  One thing that new attorneys sometimes don't realize is that once your bio and contact number go up on the firm website, you become target #1 for salespeople - after all, they "know you make a lot of money because you are a lawyer," right?  One of the areas that seems to be aggressively sold to lawyers is life insurance.  Lately, insurance salespersons are also approaching young lawyers under somewhat false pretenses by emphasizing their "certification" as a financial planner or something similar.  They say that they want to give the young lawyer a "free financial planning checkup" or something similar.  The attorney goes to a meeting with the insurance salesperson and "lo and behold!" it turns out that what the young attorney needs more than anything else (in the eyes of the salesperson) is insurance - typically life insurance.  The fat commission to the salesperson is not mentioned.

On the other hand, life insurance is not all bad - and can be something that you should have in some cases.  However, there are a whole host of confusing questions to consider.  I'll provide some answers below.

Investment Advisors - Part 2 - Market-Beating Advice

In Part 1, we took a look at several types of investment advisors.  We concluded that if you have very little experience at investing, then it may be cost effective to go to a fee-based financial planner to get a basic education about investing - although a similar education can be had by reading books.  However, most other types of investment advisors (at least in my experience) don't deliver an increased return on a consistent basis. However, there are a couple of things that have been working well for me for the last few years to deliver above-market returns - and I'll tell you about them below.

Investment Advisors - Should You Have One?

A reader recently sent me the following question:

I've just discovered your blog and have enjoyed reading through your prior posts.  I'm curious about your thoughts on when to use an investment advisor/portfolio manager and when to go it alone.

That's a good question.  Let's take a look at the types of investment advisors and their potential services below:

Emergency Fund Example

Here's a comment that I got in response to a recent article on Emergency Funds:

So, given the reality that the average associate is using all 'extra' money to pay student loans and probably isn't saving much more than max 401(k)/IRA contributions (if that), do you advocate having a separate non-retirement brokerage account for emergency fund purposes, or is it good enough to have the ability to borrow from the 401(k)/withdraw from the IRA if needed? This isn't hypothetical; I'm a second year associate with about $50,000 in retirement savings, a few hundred in a traditional brokerage account, and never more than $2,000 in the bank. A HELOC isn't an option, as I live in NYC and rent.

That's a great comment and it raises several points to consider.  Let's take a look at them below.

The Hidden Cost of Emergency Funds

"Emergency Funds" - It seems like just about every financial advisor these days wants to tell you you are doomed (DOOMED!) if you do not have an emergency fund.  Most of them agree that an emergency fund is an amount put aside in a savings account or money market that you can quickly access in case of emergency.  How much?  Well, some say 3 months, some 6, some 8 or 9.  Also, some base the number on living expenses and others base the number on salary.

I say that emergency funds - as envisioned by the "experts" - have significant hidden costs (100K+) over the life of the average employee.  Also, there is no need for the "expert's" vision of emergency funds.  The average person can set up something that provides more value with no loss of timeliness of access.  Read on below.

TIPS Are Not Good Inflation Hedges

TIPS - Treasury Inflation-Protected Securities - are a fairly recent type of government bond that provides the owner with interest at a rate formed by adding two factors (1) a fixed rate, and (2) an adjustable rate based on inflation.  The concept is that the total interest paid on the TIPS goes up when inflation goes up, so the TIPS are sold as inflation hedges.  The benefit to the seller (US Government) is that they can typically sell TIPS to the public at a lower price than regular bonds because the buyers figure that the payment will go up when inflation goes up and so are satisfied with a lower initial interest rate.  TIPS have become very popular, but most people don't seem to understand that they are not really getting what they think that they are buying - and that other options would most likely be better.  Below, we will discuss the downside of TIPS and what people might want to consider doing instead.

The Bubble In Bonds Part 3 - Other "Bond-Like" Instruments

This is Part 3 of a 3-part series about bonds.  In Part 1 of this series, we discussed that while bonds are generally believed to be "safe", they some bonds may actually lose 40%+ of their value in a rising in a rising interest rate environment - and from our current historically low interest rates, interest rates have no where to go but up.  In Part 2 we discussed some ways to invest more safely in bonds so that when interest rates rise and the current bond bubble bursts, you are not faced with worse losses than in the 2008-2009 stock market decline.  In Part 3 we will talk about some bond-like investments that you might consider in addition to or instead of bonds.

The Bubble In Bonds Part 2 - How To Invest More Safely

This is Part 2 of a 3-part series about bonds.  In Part 1 of this series, we discussed that while bonds are generally believed to be "safe", they some bonds may actually lose 40%+ of their value in a rising in a rising interest rate environment - and from our current historically low interest rates, interest rates have no where to go but up.  In Part 2 we will discuss some ways to invest more safely in bonds so that when interest rates rise and the current bond bubble bursts, you are not faced with worse losses than in the 2008-2009 stock market decline.

The Bubble in Bonds Part 1 - Appreciating Risk In Bonds

We know all about the bubble in stocks in 2000 and the more recent housing bubble, but many people don't seem to recognize that we are in a huge bond bubble right now.  However, a few people seem to be catching on - see this post and this article.  The bubble in bonds can be really dangerous because many people seem to associate "bonds" with "safety" and fail to appreciate that there is a huge difference in risk between bonds - even bonds issued by the same issuer just having different maturities.  In this series, we will discuss 1) some ways people fail to appreciate risk, 2) how to invest more safely in bonds, and 3) other bond-like instruments to consider that may be safer than bonds.  Part 1 of this series starts below.

Equity and Financing Costs - Buying vs. Renting - Part 3 of 4

This is Part 3 of our 4-part series in toward establishing a methodology for determining whether renting or owning is more financially advantageous.  Part 1 can be found here.  Part 2 can be found here.  In Part 3, we will be discussing the Equity and Financing costs associated with owning a house.  Part 3 starts below:

Ownership Costs - Buying vs. Renting - Part 2 of 4

This is Part 2 of our 4-part series in toward establishing a methodology for determining whether renting or owning is more financially advantageous.  Part 1 can be found here.  In Part 2, we will be discussing the Ownership costs associated with owning a house.  Part 2 starts below:

The Varied Housing Market - Buying vs. Renting - Part 1 of 4

In a recent comment, an associate posed the following quandry:

I think many associates erroneously think that renting a place to live is always throwing money away, while buying a house is always good, not understanding that they're investing (or "investing") on borrowed money in an asset that may not appreciate it at all.

This is a question that I get asked a lot.  Although at first it seems like a simple question, there are actually several issues wrapped up in the comparison of renting vs. buying.  We will unpack and examine these issues and develop a formula for making a direct financial comparison in this 4-part series (it is just too big for one post).  In Part 1, I will review that the housing market varies widely geographically and that any determination of ownership vs. renting really relies on your local factors.  Part 1 starts below:

Efficient Charitable Donations Can Earn You $300K For Retirement

In this recent post about the book Debt Is Slavery, we touched on the author's proclaimation that possessions are really a prison - that just about everything that you own costs money, time, and peace of mind.  However, the Giant Marketing Machine (GMM) as the author calls it, is out to convince us that we need more and more "stuff" - and that only through "stuff" can we achieve happiness.  The author advocated "putting stuff back into circulation" by selling it or donating it and taking the write-off on your taxes.  This aspect may also be particularly relevant right now as people being preparing their taxes.

However, I have noticed that people, especially some lawyers, just don't want to let things go or donate them because they feel like they are not getting a good "deal" on the exchange.  For example, they don't think that recouping 33% (or 28% or 35%) of the fair market value by donating the item is a "fair price" or that is does not match the emotional value that they assign to the item. 

Although the decision to donate or sell an item seems like a straightforward transaction, there are actually some financial aspects that might not be immediately apparent, but can be valuable to consider. These aspects could actually have a financial impact worth several multiples of the fair market value.  More on this below.

"Closed" Mutual Fund vs. "Closed End" Mutual Fund

One thing that I see a lot is that there are certain investment products that are marketed (and are consequently well-known) and that there are other investment products that are not marketed, or are marketed much less (and consequently are not very well-known at all.)  Unfortunately, in many situations the less-marketed investment product may actually be the better choice for some investors.  First, a note - this is not investment advice, just educational advice.

In this regard, I have had at least 3 lawyers in the past month confuse a "Closed Mutual Fund" with a "Closed-End Mutual Fund."  That's unfortunate because closed-end mutual funds can often provide an investor with substantially better returns - as we will discuss more below.