Return On Equity Is Always Zero
I wanted to share with you a lesson I learned from Douglas Andrew and his writings. For anyone that has read his books before Douglas is a little over the top but as with most financial books there are at least some great pieces to take out of it. For anyone who hasn’t read his books he talks about utilizing the equity in your house versus paying off your house in full. If you are interested in learning more about his books a great one to start with is The Last Chance Millionaire. I will warn you that it is definitely extreme and might be a little over the top for you.
To get back to the post…Probably the thing that sticks with me the most when reading Douglas Andrew’s book is his visual representation of separating the equity from your home. Now I’m going to attempt to paraphrase his example in my own worlds and hope not to butcher it too much.
In one hand you have a pitcher with water in it. This will represent you personal accounts and the water being your cash. In the other hand, you have an empty glass. The glass is your house. Let’s say your house is worth $100,000 and you have $100,000 in water (cash) in the pitcher. This means that your total assets are $200,000.
| Assets | Liabilities | ||
| Home | $100,000 | Mortgage | ($100,000) |
| Cash | $100,000 | ||
| Total Assets | $200,000 | ||
| Net Worth = | $100,000 |
Then you pour all your water (cash) into your glass (home). Now the pitcher is empty but the glass is full of water. You’ve reduced your assets by $100,000 and eliminated your liability (mortgage). So your net worth is still $100,000 and you have a full glass of water.
Now let’s assume your house appreciates by 5% next year. It’s now worth $105,000. If you water (cash) is still in your glass (home) that means that your assets are $105,000 and your net worth is $105,000. Now let’s pour the water back into your pitcher (personal account). You still have your house worth $105,000. We brought back the $100,000 liability. How did your cash do? Did it earn 5% as well? Then that asset is also worth $105,000. This is what it looks like now:
| Assets | Liabilities | ||
| Home | $105,000 | Mortgage | ($100,000) |
| Cash | $105,000 | ||
| Total Assets | $210,000 | ||
| Net Worth = | $110,000 |
The point being that when all your cash is in your house you only have one asset working for you versus two. The rate of return on the equity in your home is always zero. The equity isn’t an asset. People want to talk about it and count on having it down the road and maybe even plan on using it. All it is, is imaginary. If you want to make it real at some point you most likely go to a bank and ask the bank’s permission and prove to the bank that you should be allowed to access your equity. Is it really yours?
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| Assets | Liabilities | ||
| Home | $100,000 | Mortgage | ($100,000) |
| Cash | $100,000 | ||
| Total Assets | $200,000 | ||
| Net Worth = | $100,000 |
Do You And Your Child a Favor
There’s always a lot of debate around the concept of buying life insurance on your child. Most people say that life insurance is only for protecting those who depend on you and your income. Of course a child has no one who depends on them. Or do they? You don’t depend on your child financially. That’s the argument. Unless your kid is a child movie star, they aren’t bringing in any real money to the family. So what is there to replace?
What is your favorite activity to do with your child? Maybe its reading a book, playing catch or beating them at checkers, we both know you don’t let them win. Who spends more time with your child? We know that someone has to work but the other spouse probably spends a lot of time watching, playing with and dragging your kid everywhere. The younger the child is the more time that needs to be spent with him or her. Would you notice if you woke up tomorrow and your child wasn’t around?
Obviously this wouldn’t cost you money, right? Well funerals aren’t cheap nowadays. How else would it affect you? I’m guessing your life would change pretty dramatically. Something tells me that you wouldn’t want to go to work. You probably wouldn’t even want to get out of bed and I don’t blame you, I know I wouldn’t. I’ve had the unfortunate experience of going through a miscarriage. I wouldn’t even wish that upon my worst enemy. I could never imagine what it would be like to lose a child.
What would force you to go back to work? I’m guessing the reason we all work, money. If money was tight you might be forced to get back to work as soon as you can or when your personal time runs out. It would be great to go on leave but you still need money. Wouldn’t a small life insurance policy help you make your own decisions? Isn’t that what it’s all about? You taking the time you need to figure out how to cope with a situation. Don’t let green stuff push you into something you are not ready for. Take out a small policy so that the choice is yours to make. For as little as $22/month you could get $50,000 of Whole Life insurance in MA.
While you are at it why not provide a benefit to your child? What if you could lock up their ability to get a lot more insurance in the future. There is a rider, or add-on, that provides the option to add insurance at future dates. This varies from company to company but usually starts around age 25 and then every 3 years you have the option to purchase more insurance up to around age 45. More importantly you can exercise your option at life changing events such as getting married or the birth/adoption of a child. All of this can be done with no underwriting. Let me repeat that, no underwriting, that means your child would be guaranteed the offer for coverage. For less than $3/month you could add the ability to lock in $800,000 of future insurance to the above mentioned Whole life insurance policy in MA. That sounds like a great gift.
E-mail me with your questions, follow my feed and follow me on twitter.
Sunday Link Rodeo 7
I have this weird problem with my keyboard, my 7 doesn’t work all the time. I’m not going to say it has anything to do with my girlfriend but she her last computer she had to copy and past some of the letters. Then the computer stopped working all together. That was after the screen broke on her computer before that. Now she’s got a netbook. Sorry, I got sidetracked…
Base Salary Isn’t Everything from @SuburbanDollar In a time when a lot of people are looking for work, make sure you take into account more than just the base salary that is offered to you. Today employers are putting more and more responsibility on the employees so you need to know what is important for you.
Knocking Out The Beliefs That Hold You Back from @jdroth We all have beliefs instilled in us that affect the decisions we make. The good news is you can change your beliefs.
How to sell a dollar for more than a dollar from Marginal Revolution A great little trick with a lesson built in.
When Should You Invest Your Million from @behaviorgap This is the first time that I see a good use of dollar cost averaging. Most people try to justify DCA with numbers. I don’t buy it. When you throw in emotions it starts to make sense.
How Much Money Do You Feel You’ll Need To Save For Retirement? from @JeremyVoh I’m not a huge fan of financial calculators. It is important to have an idea of what you need for retirement. This is worth reading even just for the poll.
When Money Doesn’t Matter from @FrugalTrader This is a great post about perspective. Money is a means to an end?
Don’t miss my appearances this week:
- Tax Carnival #59: Standard Tax Time from @taxtweet
- Friday Finance Followers – Wacky Webbies Edition from @SuburbanDollar
Make sure to follow my feed, follow me on twitter and e-mail me.
We all have our vices: Monopoly at McDonald’s
In Sunday Link Rodeo 3 I openly admitted about a vice of mine, I love Monopoly at McDonald’s. Every year I collect Monopoly pieces and try to win something. I never win anything good usually just some free food. I guess you could say I win because of all the calories and fat I get to eat, right? Actually I don’t think I do too bad with eating there. Truth is I get my fill of McDonald’s by like my third time going. Then I just go for the game pieces. Make sure to check out How To Win McDonald’s Monopoly Game from @bargainr.
My Totals
| 4 Baltic Ave | 1 St. James Place | 4 Pacific Ave |
| 0 New York Ave | 5 North Carolina Ave | |
| 6 Oriental Ave | ||
| 2 Connecticut Ave | 5 Indiana Ave | 3 Reading Railroad |
| 4 Illinois Ave | 5 Pennsylvania Railroad | |
| 4 St. Charles Place | 2 B&O Railroad | |
| 1 States Ave | 4 Atlantic Ave | |
| 1 Marvin Gardens | 5 Park Place |
Total game pieces: 56
Financially
I went to McDonald’s for lunch 4 times and dragged my girlfriend along twice. I also grabbed breakfast 4 times. Lunch was always a value meal mostly being the new Angus meals because you get the most game pieces (6). For breakfast I would just get 2 hash browns which would give me 4 game pieces. I was also lucky enough to 6 game pieces given to me. I would estimate that lunches ran about $7.37 and breakfasts were about $2.1o. In total I spent around $53.
I thought I went more than this. It seemed like it. I just get sick of McDonald’s food. Once in a while I want it but as soon as I have some I have no desire to have more anytime soon.
Winnings
None. Big fat zero. I didn’t get any of the good pieces but even worse, I didn’t win any free food. I was amazed that I didn’t. I’m guessing they didn’t do this part of the game this year. It baffles me that they didn’t give out the free food. I would think that from a business standpoint a free small fry or breakfast sandwich would bring in more money by getting people to visit McDonald’s when they otherwise wouldn’t. Either that or they are likely to buy something to go with their free food.
There’s always next year.
I was reading Seth Godin…
Have you read Seth Godin’s What you buy when you buy a lottery ticket? You should. Actually, go read it so that my post makes more sense to you.
As I read it it made me think about investing. Is it similar to the lottery for people? Do you think people invest to get rich or just for the thrill? The biggest differentiator may be that with the lottery you expect to lose and with investing people expect gains. You don’t really expect to get rich in either event but that is the ultimate hope and dream right?
The lottery is just a random drawing of numbers. No one wins those things. So you throw a few dollars at it in hopes of a miracle but expecting nothing. You could even argue that the best thing for the lottery are the smaller prizes. How many times have you won $2, $5 or $10 on a scratch off ticket and just used it to buy more tickets. You want to continue the journey and feel that thrill again. The small prizes make you play more. They show you the possibilities. It’s a taste of the thrill. It keeps you playing. And the best part is this time it doesn’t feel like you’re spending money because it’s winnings going back in.
Investing might be more corrosive. You play with larger amounts of money. You have more of a feeling of control. Especially since you are picking which companies or people to invest in. You do your research and there is no reason you won’t make money, hell, with a little luck you might get rich. Are people disciplined enough for this? How is it that the average investor continues to trail the market badly? Is it the “thrill of possibility”?
Unfortunately, most people don’t have a full understanding of the market. Even the money managers aren’t right all the time. The Bogleheads tell us that you can’t beat the market in the long run. So do you try just for the thrill? Is it the short-term wins that keep you investing?
Maybe this conversation should be reserved for penny stocks or small caps. Isn’t that more similar to the lottery? A lot less expectations, a better chance of losing it all. What if they aren’t doing it for the money but for the chance that it will pay off bigtime?
DIY Scare: Update
This is an update to DIY Scare that I wrote yesterday.
I’m pretty sure I figured out what happened. Today, I did the next step for Insanity which is a plyometric cardio workout. It’s a pretty ridiculous workout especially for the first one. I was dripping sweat after like 5 minutes. I’m not one for all the cardio fitness stuff but this was pretty cool. I’m a fan of plyometrics from my college athlete years. This was a ton of jumping, running in place, high knees, more hoping, power squats and a few push-ups thrown in for good measure. Yes, this time I made sure to exercise with my girlfriend. I definitely wasn’t going it alone.
So then at the end of the program we were stretching out as part of the cool down. I started to get a bit dizzy and then I heard something. On Insanity the guy said to make sure to rise up slowly with your chin on your chest. Viola, it worked. I was okay. No nausea or dizziness. I mean the work out kicked my ass but I didn’t feel like I was about to pass out or throw up or anything. I asked my girlfriend about it and she’s like yeah everyone tells you to do it that way and it definitely works. Stupid me, I should have known.
6 Reasons To Buy Your Insurance Online
I have to say it must be the way to go. It’s the popular thing nowadays. It’s everywhere. On the internet the ads are all over the place. If you work in the industry you are bombarded by offers. Online insurance quotes are the way to go.
- Where else can you get 2-3 phone calls within 2 minutes of submitting the information? You raise your hand to say that you are interested in insurance and they call you right away wanting to sell it to you. Perfect.
- It’s the best way to get the cheapest policy. That’s what it’s about right? Price. It’s an easy choice who to go with just take the lowest priced policy. All insurance is the same. What’s company rating?
- They know what’s best for me. In only a few minute conversation or maybe no conversation at all, I get my quotes. People call and can give me exactly what I need right away, perfect. That brings me to my next point…
- They are here to help me. They want me to have the best insurance policy on the market. I can trust that they are going to help me and my family be protected. And they get their 80+% commissions.
- I might need other insurance. It’s great that they pass my information around to people who sell other types of insurance. I love getting more phone calls from people I don’t know trying to sell me something. Auto, health, homeowners, renters, business, I might just need it all.
- They’re the insurance best-of-the-best. Think about it. The most successful insurance people must be the ones buying the leads. It’s the successful ones that are waiting around the phone to call as soon as they get the lead in their inbox and then get into a price competition and sell something to someone they have never met.
It’s really the perfect scenario. I type my personal information into a website I saw on tv. They send it to 4 or 5 people who can really help me. These people call me right away with all the answers to my problem. They know what’s best for me and sell it to me as quickly as possible. Go to the websites and put your information in now.
DIY Scare
Okay, here’s a true story that just happened to me tonight. Well my girlfriend got Insanity in the mail last week. She was excited to start it today and was wondering if I wanted to do it too. I said sure. For those of you who don’t know what Insanity is it’s a new at-home workout put out by Beachbody. I would even go so far as saying that Beachbody might be the leader in at-home fitness. For those of you that are do-it-yourselfers this experience changed my view on going it alone.
Insanity starts with a fit test. Earlier in the day, my girlfriend did hers while I was busy working from home. Then this evening she had to work so I figured I’d get my test in and make sure I beat her scores. I don’t pretend to be in great shape. To give you some background, I try to exercise 2-3 times per week and it mostly consists of pick-up basketball and then sporadic running. I have pretended to be an athlete my whole life. I use to play 3 sports in high school and went on to play 2 in college but this was all many, many moons ago. My point is that I’ve been through a lot of different types of workouts with no real problems. Today was different.
The fit test consisted of 8 exercises in which you do as many reps as you can in one minute. The Insanity workout is described as max interval training. Instead of doing a few minutes of low intensity then 30 seconds of high intensity, it does a few minutes of high intensity followed by 30 seconds of low intensity training. I made it through the fit test which grueling doesn’t begin to describe. Then I was doing the stretching/cool down at the end. I stood up and felt like I was going down. I’ve never fainted before but I didn’t think I’d be able to stay on my feet.
So I sat down and it wasn’t helping. I really didn’t know what to do. Is it better to stand, sit or lay down? Should I have my head up or between my legs? I had no idea. So I sat down first. It wasn’t helping, I was actually feeling worse. So I put my head down and that just made me feel like throwing up. I can’t remember ever getting sick from a workout. Then I laid down.
The scariest part for me was that I was home alone. I figured I was fine it’s just really weird to feel worse than you ever have before. I don’t even know how to describe it. I didn’t know what to do. First, I called my girlfriend but she was busy and I didn’t want to bother her. Then, I called my mom, not because I’m a momma’s boy, because she’s a nurse and I wanted to know what to do to feel better. She said lay their with your feet up, drink water and check my pulse. She said my pulse was fine but the water was on the other side of the room and I definitely didn’t feel like moving. So I laid there for like a half hour and finally got up to get some water and have something to eat.
There is probably a good explanation for what happened and I’ll probably talk to someone to help figure it out or maybe someone will read this and give me some advice. I know for sure that next time, yes there will be a next time, I won’t be home alone. In fact, I’ll have an expert around. As I lay on the floor it made me think of all the d0-it-yourselfers out there. It’s a lonely feeling. What do you do when you don’t have help? Who do you call?
You build your investment portfolio from the ground up yourself or you put together your own financial plan. Then 2008 and the market tanks. What do you do? Do you chase returns? You can’t call the writers of the books and blogs that you read. The investment companies give you an 800-number. Does that really help? You’re all alone feeling the pain or maybe you just have the woozy, light-headed feeling and you are about the pass out or throw up. Who do you turn to? Are they qualified to help or just shooting from the hip? I know next time I do Insanity it will be with my girlfriend around, she’s a personal trainer. I also know that because I work in the financial world I have people I can go to with questions. Who I go to depends on the question. I have a fairly extensive background in exercise, working out and playing sports, so I never expected this to happen. But it did. I’ll learn from it and do my best to make sure it never happens again. It was a horrible experience with even worse feelings. Good thing I know someone who can help. Do you? E-mail me, follow me on twitter and follow my feed.
Sunday Link Rodeo 6
This is the late night edition. I need to get to this earlier in the day but life happens. Doesn’t that always seem to be the case? Things to get done and life gets in the way. It’s funny, on the weekend I think I put off the things I need to sit down and do whereas during the week I think it’s the opposite. Must be my personal fight to enjoy my weekends and not have to work. Yet I always seem to be doing some work…
Let’s see who’s in the rodeo this week.
Another Interesting Look At S&P 500 Index Returns from @AFMBlog I always enjoy the stats and charts that you can find here. Looks like we are bucking trends in September and October, let’s hope December doesn’t follow suit.
Personal Finance Doesn’t Absolve Personal Responsibility from @fiscalgeek It’s sad to me how many people let their futures depend on chance. I don’t know that I agree with his arms but I love the concept.
Understand How the Wall Street Game is Played from @RetSav I think we all need to remember that mutual funds are a business. They main purpose is to make money for the company not you. You should also remember rule #1: buy low, sell high.
What is a Guarantee Worth? from @BehaviorGap Times have changed. The industry has changed. Maybe, just maybe, it might be time to re-evaluate what you have accepted to be true. We need to get back to value. Value is a personal thing.
I saved the best (titled) one for last…
How to trick dumb kids into eating less Halloween candy from @ramit Makes me ask, have you looked at yourself today? At the very least, it definitely sounds like a useful trick for those of you with kids. It just might be more than that though?
Don’t miss my appearances this week:
- Economy and Your Finances Carnival Oct 25 2009 from OneMint
- Carnival of Twenty Something Finances for October 26 from @howisavemoney
- Carnival of Financial Planning – October 30, 2009 Edition from @simplepraveen
Make sure to follow my feed, follow me on twitter and e-mail me.
Verizon Storm 2 Question
Yesterday, I had the joy of going to Verizon Wireless. My girlfriend’s cell phone wasn’t charging anymore and she has had her heart set on a Blackberry Storm 2, so we went to look at them. A little while ago, we had combined our two lines onto a family share plan which helped us save about $30 per month. I am happy to save $360 per year. I knew my line was eligible for an upgrade. Actually, my line has been for a while, Verizon doesn’t have very good smartphones mostly due to the fact that I’ve avoided Blackberrys.
So we start talking to the sales guy. I ask him about the Storm 2 and the mail-in rebate they are offering. It’s funny, I think every phone in the place had some form of a mail-in rebate. $50 here and $100 there, nothing upfront all mail-in. So the Storm 2 costs $179.99. That’s what they tell you. So I’m like no, how much do I need to pay. Because I pay $279.99 out of pocket and then get a form on the receipt to fill out and mail-in for my rebate. Time to get rebate 2-6 weeks, but they guy said it usually comes closer to 2. I’m sure it does.
Then I inquired about the buy one, get one free. That’s a good deal, how do I get that? So the guy had to look my account up. Of course he starts off by telling me how my number is eligible for an upgrade and I have an upgrade credit of $100 (which I knew about). Great! Then he looks and says the other line on the account is not eligible for an upgrade until February. So I can’t get the buy one, get one free. There’s the catch, both lines need to be eligible for an upgrade. My first thought is ‘does that ever happen?’ But of course if you open two lines at the same time then your upgrade eligibility would be at the same time.
- Tip: If you’re on a family share plan, do all your phone upgrades at the same time. That’s how you get the best deals.
I never thought of that. Unfortunately, we couldn’t wait another 4 months because we basically had a broken phone. So I start asking the guy if there is anyway that we could get the buy one, get one free. His response, ‘get another line’. My first reaction is ‘how does that make any sense?’ I go through the math in my head. It’s a $180 phone. The new line would be at least $10/month plus with a Blackberry you need to have the data feature which costs $30/month and you need to sign a 2 year agreement. So that means that I would pay $40/month for two years just to get a free phone. That’s paying $480 to save $180. Does that make any sense?
The sales guy then tells me something that I almost fell over at. He says “It’s a way to finance your phone”. What?!? Why would anyone do this? He says it happens all the time. Let’s do the math. Taking an equation from Wikipedia, the interest rate comes out to 63.299%. How do you feel about that? I guess the best sales technique here is that they never mention rate because it’s not an actual loan. So people say oh $40 a month I can afford that.
I’m not a Verizon guy but I think you could technically move the phone to your main line and reduce the cost of this new line to $10 per month. I believe the Blackberry would need to be on the line for 24 or 48 hours (something like that) and then you would need to transfer another phone on that line, to pull this off. This would then reduce your payments to $10/month instead of $40/month. Now let’s look at it. Using the same equation I came up with 15.470%. That’s a little better, I guess.
I’m going to be honest. My original thought was to get the free phone and sell it on ebay. I figured that I could make money off this deal. My phone is fine so why do I need a new one. I am waiting to see what comes over to Verizon at the start of 2010. With rumors of the Palm Pre and even possibly the iPhone, I have no problem waiting until next February to upgrade my phone. The Storm 2 retails for $539.99 so I figured I should be able to get $400 or $500 for it. That would be cool. However, it doesn’t work as easy as I wanted it to, so I didn’t do it.
I also learned that people come in all the time and pay full retail price for phones. A cell phone seems to be a great example of people trying to make a statement or status recognition with their possessions. Whatever it takes to get the coolest phone right? Full retail or some form of ‘financing’. Is it a scam to use the term ‘financing’ to get someone to make a sale? Do Verizon Wireless employees get paid commissions for sales? Initially, this was my basis on writing this post but it’s changed as I been writing and now I need your help.
I just came up with something while writing, please let me know what you think. Is it worth it to open up this other line and get the free phone? I mean I could pay $10/month and sell the free phone for $450 (let’s say). Is that a good deal? Leverage the free phone to make $450 – $10/month. Or maybe it’s better to cancel the line. The termination fee is $175. So instead of paying $10/month for 2 years or $240 I would instead pay $175 and not have to worry about it. So I could keep the line active until I sold the Storm 2 on ebay then terminate the line. So even if I got $400 for the Storm 2, the most it would cost me is $40 for the first month of service plus a $175 termination fee for a total of $215. I would make $185. That sounds like a good deal. What do you think? Should I see if I can pull this off even though I bought the phone yesterday? They should let me change my mind right?
