Investment Playground.NET

On an earlier post, we talked about how easy it is to set up your child’s college fund. Just a couple clicks and a barely noticeable monthly deposit can give your child a secure future no matter what school he/she decides.

After posting the article, I received a couple comments via the CONTACT button above. One comment was very interesting. A small and thriving company has been developed known as The Freshman Fund, which enables people to give the GIFT of college - i.e. giving the gift of a deposit directly into a 529 fund. I dug through the site and thought about what a great idea this is. A gift that ensures it’ll be used for college and grows with time!

The way the site works is you sign up for a free account and create a student page for each of your 529 enrolled children. Very simply, the next step is to tell friends and family (using the site’s embedded address book feature) about the site, and inform them that now you can give your child the gift of a 529 deposit.

Alternatively, you can give a Freshman Fund gift certificate to someone who may not have signed up yet. This is a great method - because the moment you give a gift, you know that this amount will be accruing gains and returns for several years - making your gift much more valuable by the time the recipient goes to college.

That’s basically it - it’s really simple. What I like is the fact that instead of giving a cash gift which may or may not go to college (unlikely), this ensures your gift is going to certainly be used for college education. You are, in every sense of the phrase, giving the gift of college. And don’t forget our previous “accrued returns” posts. At a 10% rate of return, a mere $100 gift will grow six times in less than twenty years. For my son’s first birthday party, I’m wondering if we could collect perhaps $2000 from about 20 different people. By the time my son hits school, that one party we threw would have generated $12,000 toward his college. Not bad at all.

The site apparently is a free service. There are no commissions, monthly charges, nothing of the sort. The site does say that in the future they are planning to offer other types of 529-related merchandise, and I’m assuming they’ll start to generate a small revenue at that point. But for now, it seems like four guys with tons of start-up experience wanting to fill yet another void they’ve found… giving the gift of college.

This morning I checked my bank account and realized there was a mysterious $1200 extra in there! It’s only taking eight long years, but the Bush administration has done something right (for the time being — this won’t do anything to stimulate the economy though so after several months we’ll realize it was a big mistake). Nonetheless, I’m pleased with my $1200 and I’m going to invest it. $1200 earning 15% is nearly $6000 after ten years.

Building wealth takes time. Invest a lot of money wisely regularly and let the earnings equate to more earnings. A foolish thing to do is to spend my entire stimulus check on a big screen TV or something. Although I may cave and buy that espresso maker I always wanted, and invest the remainder. If you live within your budget, you’ll find yourself much richer than you realize.

The alternative option, by the way, is paying down debt. Run a financial analysis on how much money you save if you pay down debt with your stimulus check, versus how much you earn if you invest it. Then pick the best option.

I haven’t had a new post in a while. I apologize.

My wife gave birth to our first child yesterday - a healthy boy. So that’s why I’ve been a bit out of the posts lately. I think you’ll agree that my excuse is valid. But don’t worry - my baby will get to work soon and I’ll be doing daily posts as always.

So it seems fitting that for this post - from my hospital room - that I write about opening a 529 account.

Basically - when your kid turns eighteen years old, you will have a large bill come due. That’s the way you need to think about this. So it’s silly to think about saving “down the road” or praying he or she gets a scholarship. When this bill comes due - will you be able to pay up? A 529 plan is an education-based saving plan. The benefits are huge as your investments grow on a tax-deferred basis, and any distributions are federally tax-exempt. Also - you control the distribution of your investments - not the beneficiary (your child). Further, if your child does indeed get that great scholarship, you can easily switch the designated beneficiary at any point to anyone - including as a gift to someone. One of the easiest ways to make sure to have enough money to college is by investing a small amount automatically every month starting at birth. If you run the math, a $100 monthly investment earning 10% a year gives you enough for school. Your kid gets college for only $100 per month.

Every state offers a 529 plan. Check out what your state offers. Check out savingforcollege.com for a full detailed analysis.

Talk to you after we return home with our baby.

Firstly - I have to ask a favor. Over the next few weeks, this blog will be seeing some major changes. We’re transitioning to a new site with a new host, and this means new formatting and error checking along with other problems. Of course I’ll be on top of any errors we have, and continue to give you regular investing tips and suggestions. In the meantime, thanks for your loyalty.

Here’s a quick primer on the Federal Reserve Funds Rate. The Fed cut interest rates by 3/4 of a point today. Everyone was forecasting a full point, but the market reacted favorably to the 75bps anyway.

What is the fed funds rate? The fed funds rate is a benchmark used for what banks charge other banks in short term lending. To pass on the costs, banks will charge you on your loans something modestly higher than this rate so that they can earn a profit. So when the fed rate is down from 5.25% in summer of 2007 to 2.25% today - you can get access to funds easier.

Why do you care? Time to think about refinancing your car loan or home loan or perhaps consolidating your student loans. Most people unfortunately live on debt - so when you can get lower rates for your debt, obviously you come out winning. More money left over for saving and more money available for investing.

Why was it cut? If the rates are lowered, the Fed is hoping that you - the consumer - will do exactly what the last paragraph said. Basically flush the system with more money instead of tightening your spending. Also - the Federal Reserve cuts rates when they want to entice more activity between banks. At the end of the day - its all about loosening the money supply so that more money flows freely.

Side effects? Inflation. When people have access to money easily, they bid prices up higher and higher. Now that $2 gallon of milk you buy is actually $5 (in some parts of the country). Remember when you used to make a call for a nickel at a payphone? Now it’s fifty cents. Inflation is a big problem - which is why people sometimes prefer the Fed not to cut rates.

Action Item: Start cold calling banks for refinance rates. Make sure to mention that the Fed cut rates recently, and if their rates will fall as well.

I’m always a believer that it takes capital to earn capital. All of my investments success are calculated using ROI (or return on investment). Meaning if I put $10,000 to use and it earns me $2000 per year, I have a 20% ROI. The key question that most people ask me is - “naveedsmind how do I get to $10,000 in the first place??”

Bottom line - saving money on a consistent basis is the first step to successful investing. Allocating a certain dollar value or percentage to your savings account is fundamental. We all have dreams of being real estate owners, brilliant stock pickers, building and buying businesses, having pricey vacations, living off of huge dividends — none of it happens without saving money to invest first. Most people work just so they can pay the bills. Maintenance of life takes a priority over frivolous saving - they tell me. “How am I supposed to save money when my car payment takes up anything extra?” or “naveedsmind you don’t have three kids and alimony charges - what do you know??”

All I know is that the longer you focus on maintaining your day-to-day lifestyle instead of saving – you’re not doing anything to better your lifestyle either.

Rule #1 – Instill in your head that I will save a flat amount of money out of each paycheck by any means necessary

Rule #2 – Start small but consistent. Ask yourself – if I were to start losing money – what’s the maximum I could “lose” before it kills me? Once you have that number – increase it by half. We’ll see if it really kills you in the long run (doubtful).

Rule #3 – Give up something in exchange to save money. Look at your monthly income/expenses – what can I go without. Let’s say you have three fancy dinners every month at about $35 each. Cut it down to two and immediately increase your saving by $35. Or cut down your bar nights by one in any given month and you probably will save almost $100.

Rule #4 – Save BEFORE paying your bills. I know this sounds ridiculous. But there’s a general understanding that if you pay everyone else before you pay yourself – there’ll be nothing leftover at the end. Somehow – every month – you run out of money and you have no idea how? Automating your saving is also a wise idea. Twice a month – on the same day that I get paid – a have a flat amount immediately transferred over to my savings account. This way I’m sure to pay myself first.

Rule #5 – Live like a pauper. People that know me likely think I’m flat broke. I seem to always “barely have enough money to pay bills”. It’s okay! They don’t realize that I’m building my egg in steady amounts before paying my bills – and because of that I am “broke”. Being broke while having a meaty savings account is a good thing.

Rule #6 – Be patient and consistent. $300 per month, or even $1200 per month may not buy you some monster investment. But you do this for just a year of your life – you’ve got $14k right there – or your $3600 if you’re at $300 per month. $3600 is not a bad starting investment. It’s enough for your high interest emergency fund – or its enough for one or two mutual funds of your pick.

Here’s some simple motivation for you. My first investment property was purchased with less than $7,000 in cash. Some discipline, patience, and commitment can go a long way.

Here’s another chance to save money.

Don’t subscribe to Netflix.

Sure it’s a great convenience to have DVDs mailed to you. Shipping is free, envelopes included. It costs maybe $6, maybe $11, maybe $20 per month including tax. What a great idea. So I got duped into this plan and I’ve been putting up with them for a year now. Of the last eight DVDs I’ve ordered, SEVEN have been scratched beyond readability. My DVD player will spit the DVD back out, or the whole thing would stop playing in the middle, or it would skip so bad that I’d have to forward over ten or twenty minutes worth of quality viewing time. I’ve resorted to watching the ends of my movies on YouTube or I’ve had to go to Blockbuster and pick it up. Netflix has offered me a month free just about every time - but it doesn’t really matter does it.

Here’s the clincher - I’ve sent back scratched DVDs to Netflix and demanded they send me a new one. Interestingly, this problem happens so often that you can click a box on your account online and say “This DVD is scratched. Please send a new one.” So they’ve complied - and the new one they send is ALSO scratched.

Total frustrating waste of money. Save some money and avoid these two bit used DVD clowns. Go with Blockbuster online. If your DVD is scratched you can at least get a new one without paying more - and I’ve never had thta problem at Blockbuster anyway.

Great! You’ve decided to start saving for an emergency fund. “But where do I put this money?”

You’re looking for a liquid account that earns a return higher than inflation. Your bank’s savings account probably offers one percent a year. Laugh at them and walk away. Look for a money market account that pays the highest rate you can find. Or simply a high interest savings account. Go to http://www.bankrate.com/ to find some of the best rates. I did the dirty work for you as below.

I have an account at http://www.igobanking.com/. A reliable division of Flushing Savings Bank. They’re paying 3.86%, which is definitely the highest I’ve seen, with no minimum deposit. The deposits and withdrawals are seemless and all done online. You’ll get credit to your account within two business days.

WTDirect is offering a great 3.91%. The only catch is that it’s a $10,000 minimum to earn such a great return. Their offer for below $10k sucks - it’s a half percent. But if you want a real nice insurance cushion - here you go. 3.91% will give you $400 after a year - not bad for no work.

Word of caution: do NOT follow this posting if you are a person who has not developed the proper discipline to pay off credit cards according to a certain pre-set goal and style, nor if you have the financial capability to do so.

I’ll make this nice and simple. I got an offer on my current existing credit card for a 0% APR through to July of 2008. I just bought a ridiculously expensive car (which I love) at a 7.2% rate, the best in my Northeast US region. So is it smart to take a loan out on my credit card at 0% APR for a few months and pay down a few months of my 7.2% loan?

Well my answer is yes. ONLY IF you can succesfully manage your choices and pay off that credit card loan before paying any interest. If you pay a day of interest you’re eating into your savings REALLY quickly. Most people dont’ have this capability due to financial constraints, or more realistically they don’t have the discipline to maintain this payment. So proceed with caution.

First rule is read the fine print. This particular offer had a one-time 3% fee. I planned on paying off $1800 using this method, which meant immediately I’m being charged $54 for this service. Run your financial analysis and find out how much you can save, and how much it costs you.

In my case - let’s say I financed $27,000 for this ridiculously priced toy. At 7.2% and 60 month loan term, 5 years, my monthly payment is $537. After five years I’ve paid off the total principal amount plus $5231 in interest (bastards). Go to http://www.bankrate.com for amortization tables and payment amounts. If I add a one-time payment of $1800, it means the loan will be paid off in September of 2012 instead of January of 2013. Further, I’ve now paid a total of $4497 in interest, saving myself $728. Deduct the $54 cost of using this service and you’ve got your grand savings. Sounds like a pretty good investment to me. Bear in mind - the necessary cost that I must pay now is $300 extra per month to my credit card to pay off the $1800 balance before interest starts kicking in, in addition to my regular $537 car payments. If you can’t stretch yourself by the $300 more per month that I must do - you have to skip this plan. One month of 15% interest on a $1000 balance is $12.50, eating into your savings.

It pays to have good credit.

Footnote: Bear in mind - if you ever plan on using this card while you carry a 0% APR balance, you will pay interest on that new purchase you just made until you complete paying off the 0% first. It’s a game they play with you - if you pay off $x, that goes to the lowest APR category first, not the highest.