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Wednesday, 29 November 2006

Measurement of Household Wealth

There have been a many discussions on the pf blogs about how one calculates new worth - should we or shouldn't we include our cars, our stereo, our collection of yo-yos (not so silly: see this recent article about the value of old yo-yos) in our estimation of new worth? I came across some useful information about this which is worth sharing [ref: Annual Review of Sociology: Vol 26, p.502]
* Wealth is commonly identified with net worth and assessed as the difference between the total value of family assets and the amount of debt.
* There are various categories of household assets, with different features, so it is important to distinguish between them. Depending on which assets you include, net worth can be defined [Wolff, 1995] as:

Marketable Wealth - net worth excluding consumer durables such as automobiles, television and household appliances. The rationale being that these have less resale value than their consumption service to the family, so would usually not be sold to raise funds. This exclusion tends to impact poorer households to a greater extent, as consumer durables, especially cars, are the main "asset" of such families.

Financial Wealth - marketable Wealth minus equity in owner-occupied housing. As you need to live somewhere, it is often difficult to convert it into cash in the short term. In places such as Australia where superannuation is "preserved" (unable to be used for any purpose) until retirement age, it may be worth also excluding the value of your retirement account. I do both - my Net Worth tracked with NetWorthIQ is by "Marketable Wealth", and in my daily Net Worth spreadsheet updates I also have a column of Net Worth minus home and super.

Augmented Wealth - this includes some items not normally included in net worth estimates. Specifically, a discounted present value is calculated for any pension and social security retirement benefit.

BTW - while reading this paper I also came upon the following factoid:
"According to the Lampman-Smith_schwartz time series [Committee on Ways and Means 1992, p.1564], the richest 1% of the US population owned 36% of household net worth in 1929, but by 1982 the figure had dropped to 20%" although the data since 1982 is less clear - the decline may have continued or reversed somewhat.

ie. The Rich are getting POORER! This is probably why social commentators have recently started lamenting the income gap between CEO salaries and the average wage, rather than the traditional cry that the wealth gap between rich and poor is widening (although they still raise this topic on occasion - they simply refer the difference between rich and poor increasing in dollar terms, rather than in % terms, which wouldn't support their agenda.

Student Loans

It's generally accepted that, provided you choose the right school and qualification, higher education can be a good long-term investment. The problem is, it can require a substantial amount of money at a time when you are not earning much, if anything, and you probably do not have an accumulation of savings to draw upon. For this reason student loans are often required, and you may also be interested in a Private Student Loan from NextStudent.com.

Undergraduates and graduates can borrow annually up to the full cost of expenses (less any financial aid received) or $40,000 (whichever is the lesser amount) from NextStudent.com. Even if you're not shopping around for a private student loan, their website also has some useful information on:
* Student Loan Advice
* Financial Aid Tutorial
* Scholarship Search
* Compare Loans
* Tools and Resources
* Directory of Schools

Tuesday, 28 November 2006

Coins or Paper?

There have been a few posts recently about the new US dollar coins that will be coming out. They probably won't replace paper for a while as the paper notes will remain in circulation. As we've had polymer notes and $1 and $2 coins for many years in Oz, I was wondering if the "paper for dollars" hang-up is specific to the US. So I had a quick search around to find out what paper/coin currency mix other developed countries are using:

Country Coins Both Notes
Australia% 5c,10c,20c,50c,$1,$2 $5^ $10,$20,$50,$100
United Kingdon 1p,2p,5p,10p,20p,50p,£1,£2 - £5,£10,£20,£50*
United States 1c,5c,10c,25c,50c $1^ $1,$2,$5,$10,$20,$50,$100
Eurozone 1c,2c,5c,10c,20c,50c,€1,€2 - €5,€10,€20,€50,€100,€200,€500
Japan ¥1,¥5,¥10,¥50,¥100,¥500 ¥1000,¥2000,¥5000,¥10000

amounts marked with an * are not in common use
amounts marked with a^ are mainly in use as notes
% - Australian also produces a range of silver and gold "legal tender" coins in deominataions such as $3, $10, $100, $200 - but these are issued in proof or uncirculated condition for coin collectors, not general circulation.

I believe that larger US notes (over $100) are similar - they exist (I think they were initially intended for bank transfers of funds) but are not in general circulation.

It certainly appears that the USA has the smallest denomination folding money still in use.

Monday, 27 November 2006

Mortgage Fraud

If you are investing in a house for yourself or as an investment, it will probably be one of the biggest investments you make. You can help avoid being a victim of fraud when you obtain your mortgage loan by learning the ins and outs of borrowing intelligently and how to spot and avoid mortgage fraud and data abuse. PersonalHomeLoanMortgages.com has articles about
* The Truth in Lending Act
* The Basics of home mortgages
* Prequalified vs Pre-approved Home Mortgages
* Home Equity Loans
* The Mortgage Refinancing Boom
* Leveraging Home Equity for Debt Consolidation
* Understanding Home Equity Loans
* Understanding Mortgage Brokers
* Reverse Mortgages

A Word a Day: "Beta"

A measure of non-diversifiable, or market, risk that indicates how the price of a security reacts to market forces.

Sunday, 26 November 2006

The Four Deadly Sins of Personal Finance

An very interesting article in the NYT reminded me, again, of the four deadly sins of personal finance:
1. Greed - "just a little bit more" can easily become "too much", whether it be chasing higher investment returns, pinching pennies, or getting "top dollar" when selling or "a bargain" when making a purchase. Remember the old adage that if it "looks too good to be true it probably is". When looking for "overlooked" investment opportunities it's also worth bearing in mind that there are several billion other human beings out there, millions of whom are also looking for the "overlooked".
2. Sloth - most people apparently spend more time planning the annual holiday than they do on planning their finances. Aside from generally financial planning, you also have to put in sufficient effort to analyse each potential investment on its merits. Buy things purely on the say-so of a friend or relative and you will have no-one to blame but yourself if things don't work out.
3. Trust - yes, BLIND trust can be a very bad thing. As they say in auditor-land "trust but verify" - don't take anyone's word for something that you could verify. And if there is nothing to back-up someone's verbal assurance, flag this mentally as having an "unknown amount of risk"
4. Envy - just because every one else seems to be making a fortune investing by in "X" doesn't mean you should try it. It doesn't even mean that they are actually making any money from "X". Not only can appearances be deceiving, I'd say that they usually are deceiving.

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Saturday, 25 November 2006

All I want for Christmas

Yet another Christmas approaches with the usual breaking of the agreement that the adults won't bother exchanging gifts. I've previously tried insisting that I really didn't want anything for Christmas from my parents (aside from watching DS1 opening his presents from his grandparents after the traditional huge family Christmas Eve dinner), but I always ended up getting "something" - usually an electronic knick-knack that I don't really want which then just clutters up the house for several years until it gets thrown out.

So, this year I decided I may as well prepare for the inevitable and ask for something that has an intrinsic value, I'll actually like, and won't take up too much space - silver coins. I already have a coin collection, so a few additions each year won't create any new storage problems. My mum had no idea how to order what I wanted, so I ordered them online and mum will pay me back (apparently adults don't need a Christmas present to be a surprise, but do need a wrapped up present to exchange). As my birthday is a couple of weeks before Christmas I ordered two items - a 2005 1oz costing $30 for my birthday present and a 1999 2 oz 99.9% Silver Kookaburra (Perth Mint Privy Mark, 1933 Shilling) coin costing $75 for Christmas.

The silver content of these coins is worth about 50% of the cost, and the same 2oz proof coin is listed elsewhere and on ebay for $120, so I think it's a good buy at $75.



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Payday loans

Payday loans are short-term advances that are due on your next payday, unless your next payday is 4 or less days away from your loan date - in that case your loan will be due on your second payday. Hence, the maximum loan term is 16 days. Payday loans are available from nationalpayday.com and others. Payday loans short-term advances intended to be paid off quickly - so they're really only suitable for SHORT TERM cash flow requirements. The loans involve a standard fee of $25 per $100 loaned, so the effective APR values are not really relevant - you're getting 75% of your pay in exchange for receiving it in advance, and have to pay off the full amount when you get your pay check. Thus you should really only use such loans in an emergency, hopefully in order to avoid pay even higher fees elsewhere.

For example, you might need an emergency cash advance via a payday loan to avoid eviction, avoid hefty late payment penalties and higher interest rates on your CC debt, or other emergency cash requirements. Sometimes it can be more expensive to source funds for apparently cheaper sources - for example, although the APR rate for a personal loan or bank overdraft facility may be lower, there may be an establishment fee that ends up higher than the $25 per $100 charged by nationalpayday.com. There can also be costs associated with setting up a bank overdraft facility that is seldom used, either a monthly admin fee or a charge based on the overdraft limit, even when not in use. For these reasons, it can sometimes be more economical to make use of a payday loan for emergency cash requirements, even if you were able to source funds from another source. One other potential benefit of a payday loan from nationalpayday.com is that they don't make a credit check when you apply - so this might mean that your credit rating doesn't suffer from a hard credit enquiry.

A Word a Day: "Market Order"

An order to buy or sell securities at the best price available when the order is placed.

Friday, 24 November 2006

How much can a kid earn?

Well, aside from child actors - I mean how much can your normal, average kid earn? I've no idea really, but it's been interesting to see how much my son managed to earn doing a couple of casual jobs. DS1 earned about $80 a week doing a paper round for almost two years - he enjoyed the morning walks with his dad and stuffing the folded papers into the letter boxes. As it took 2 hours to deliver the papers, five days a week, this works out at $8 an hour for him - a pretty good hourly rate for a primary school kid. But, this isn't counting dad's time spent supervising and lifting newspaper bundles, or the cost of driving to and from the paper route.

More recently he'd started learning the recorder at school, and enjoyed performing at the school concerts, so I got him a busking licence from the city council. When he was in the city for his Saturday morning music lessons we'd take the opportunity to let him busk for a short while. At his age he gets lots of interest from the passing tourists, especially when he's wearing his medieval jester's cap. He has sometimes earned a surprising amount in a very short time - the exact amount depending mainly on the location chosen. In the main city park there was a lot of passing trade, but very few people stopped to listen. The average amount contributed was also small - around 10c-50c per person from this audience. The return was much higher outside the public art gallery - the pedestrian traffic flow was less, but the audience was more appreciative, included lots more tourists, and the amount contributed was typically higher - some contributions were $1 or more.



My son enjoyed busking for short periods - after 10 minutes he'd lose interest and need a break (a quick tour through the art gallery was always fun). Then, after a second 5-10 minute session he'd knock off for the day. One time he got carried away and kept playing for 45 minutes! He quite enjoyed earning the money, counting it afterwards, and depositing it into his savings account. Now that he's finished his music lessons in town he probably won't get a chance to do any more busking unless we're in the city anyway to visit a museum, go shopping or take in a movie.

He's been busy learning Christmas carols in his recorder class, so if we go into the city to visit the Maritime museum before Christmas he may get another chance to busk this year.

So far his earnings from busking are:
15 mins $ 2.35 (park)
15 mins $ 6.30
20 mins $ 6.80 (park)
20 mins $12.15
30 mins $10.65
30 mins $19.85
45 mins $49.65
20 mins $10.95

All up, $118.70 for 3.15 hours work = $37.68 an hour!

His annual busking licence cost me $41 and expires next May. (For Sydney City busking details see this) I don't think I'll renew the licence next year as we probably won't be in the city often enough to make it worthwhile (I pay for the licence so it doesn't cut into his earnings, but I'd like him to make more than the licence cost me, otherwise I may as well just increase his allowance and he can spend the time practicing at home). Unfortunately our local council only allows busking in very restricted areas and the licence fee is exhorbitant, so it's really the City or nowhere.

A Word a Day: "Risk-return tradeoff"

The relationship (theoretical) between risk and return, in which investments with more risk should provide higher returns, and vice versa.

Xmas Gift Idea: Microscope for the kids

I always loved science as a kid, and one of my favourite toys (aside from my Tasco telescope) was my microscope kit. The good thing about microscopes is that they can be used anytime, they're educational, and you can find endless things to study around the house and in the garden. Later on, its a good tool for studying practical biology.

www.Microscopes.com is a brand new site from the best optical dealer www.OpticsPlanet.com. It has microscopes, accessories and gift packages at huge discounts up to 65% OFF & Free UPS on orders over $29.

For children high powered microscopes are most popular as the kids can use them to see "invisible" things like blood cells, amoebas and bacteria. As well as all the tiny critters living in a drop of pond water. Do not buy a plastic "toy" microscope, as a poor quality microscope is totally useless, so you're just throwing your money away and will disppoint the child (same goes for telescopes with poor optics and cheap, flimsy mounts). Purchase a model with a built in light source. Models with mirrors are rarely sold today. There are no manufacturers of microscopes in the US - the best "economy" models are made in China. There are some very good products from China, but also some poor quality instruments, so be careful what you buy. A good microscope can be used all through to University and beyond (my parents are in their 70s and still use a simple microscope to check for parasites on the grass at their alpaca farm).

Thursday, 23 November 2006

The Other Forbes Rich list

And now for something completely different - guess who Tops Forbes Magazine's Fictional Rich List? I'll give you a hint: Lucius Malfoy comes in at number 12... check out the who's got riches beyond your wildest dreams here.

I am Sad



My attempts to give some constructive criticism seem to have gone awry ;(

Leigh Ann was moved to write

"...your life is so tainted into thinking that everyone is bad. Maybe if you spent more time getting to know people you would make more friends and be more grateful for others and their lives" after reading my comment and post. (To be fair she may not have meant that particular bit about me - she was also talking about someone else's comments in the same post. I couldn't tell exactly which bits of her post were aimed at whom.)

I glad that in the same post she pointed out that she has "... never said a bad word about anyone and I always try to keep this blog positive.", otherwise I might have got the impression she didn't like me ;)

Wednesday, 22 November 2006

Save EnoughWealth

Help! I'm deep in debt and I don't know what to do. I've run up $14,384.34 on my VISA, Discover, Mastercard, Amex, and Diner's card and earn barely enough to pay the minimum each month! I'm sitting here in Starbuck's sipping my Cashacino and looking at the $18.50 doodad holder I just bought at Target (because I felt so depressed about my debt and went shopping to feel better) - I'll have to return it later today as I really shouldn't have bought it [I also shouldn't have accepted the new store card they offered me while I was there]. BTW you can send me cash donations via my Paypal account, details of which I've accidentally put up on my site. I'm basically a really nice person, just in a bit of financial trouble....

OK - that's a load of BS. It's just that I get irritated by the SaveKaryn and SaveLeighAnne's of the world - those bloggers that have run up large *personal* debts, get help from many generous people, and basically use OPM to pay off their debts.

Now, I don't have anything against Karyn or LeighAnne wanting to pay off their debts, I don't resent them getting some help, and I certainly won't criticise anyone for being generous and donating cash to such folk to help them out. BUT - I worry that this is a very a bad example of how to "solve" your CC debt problem. And I really start to worry when I read that "I am going to start helping other's with their finances as soon as I can"!

Update: For some reason this post gets a lots of hits, so if anyone came here thinking they were going to be asked to donate money, here are some good causes (I have no association with any of them):
https://www.teamseti.org/
http://astronomerswithoutborders.org/about-us/become-a-donor.html
http://www.womancareglobal.org/

A Word a Day: "Tax Risk"

The risk that governments will make unfavourable changes to tax laws, reducing after-tax returns and market prices for certain investments.

Tuesday, 21 November 2006

Carni-Festivals I contributed to This Week

What's better than pfblogs.org? Why, the Carnivals and Festivals each week - get all the best posts and none of rest! Enjoy these two already up this week:

Monday, 20 November 2006

Sheer Lunacy

In yet another example of "off the wall" market timing theories, academics Ilia D. Dichev and Troy D. Janes have postulated that returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates. A similar result was reported by Lu Zheng in the paper "Are Investors Moonstruck? Lunar Phases and Stock Returns" which showed that stock returns are lower on the days around a full moon than on the days around a new moon - the magnitude of the return difference is 3% to 5% per annum.

As is often the case in such academic studies, there is little likelihood of creating a profitable active trading strategy out of this information due to the cost of trading 13 times a year compared to the magnitude of expected outperformance (3-5% pa). However, it may be worth bearing the lunar calendar in mind when you are thinking about buying or selling shares in your portfolio, provided that there is no urgency in completing the trade. If you are routinely adding to your portfolio in the week immediately before or after the full moon, and selling within a week of the new moon adds 3-5% to your overall returns (pa?) it could be a worthwhile strategy.

The article in the NYT shows the lunar cycle effect for various markets around the world:



A Word a Day: "Pyramiding"

The process of using unrealised gains to partly or fully finance the purchase of additioal securities using a margin loan.

Sunday, 19 November 2006

Anyone want $5?

I redeemed some of my MyPoints points for a $10 Webcertificates.com "giftcard" - they've emailed me the ID code and once its activated it will work like a debit card for making $10 worth of online purchases...

Only problem is that the webcertificates.com website only allows US residents to activate their giftcards (the server checks the IP address being used to connect to their activation page, and I can't get round this, even using an anonymous proxy server). So, I can send the $10 gift card details to anyone in the US who'd like to activate and use it, if you'll deposit half the value ($5) into my Paypal account (once you've got your $10 benefit).

Early "Retirement"?

I'm currently enjoying my work and not too stressed out, but I can see a time in 2-3 years when I'll have been working for the same company for ten years, and with my 8 weeks "long service leave" then becoming fully vested, I could consider making another career change.

My first career, straight out of uni, was as a research scientist working on minerals processing equipment (with a bit of computer modelling and computer systems admin thrown in). This made good use of my first degree (in Applied Chem) but I actually found the programming of more interest than the chemistry (although playing around with the analytical equipment was a fun way to make a living).

After ten years my first employer laid off a large portion of the research staff in a cost-cutting drive, so I took the chance to change career into the "real world" of a private business-services company, and make use of my GradDip in Industrial Math & Computing. After taking an initial pay cut to get my foot in the door, I soon was earning more than in my old job, and had opportunity to progress up the "management ladder". But after 8 years I'm thinking of what I want to do for the next 20 years or so.

I'm currently half-way through a Masters in IT by distance ed, and I've just been accepted into a Post-Grad Diploma of Secondary Education course for next year. The plan is to finish of the MIT and the GradDipEd in the next couple of years, and then get put on the waiting list for a High School science teaching position. If I nominate only schools in the area we live (Sydney Northern Beaches) the waiting time for a position will be quite long (although they seem a bit short on Science teachers), so I probably wouldn't get a position immediately.

The plan is to accept a suitable teaching position (which will mean a pay cut of 50% or so), and treat the new job as a sort of "early retirement". The change of career should make the job interesting (at least for a decade or so), and the daily hours and amount of annual leave entitlement should make the hourly rate similar to what I currently earn - sort of like changing to a part-time job ;)

I'm sure any teacher's out there will say that teaching is anything but a part-time job, but, at least on paper, it looks like a good idea.

What do you think?

The Rich get Richer and the Super-Rich get envied

A recent study by the Center on Budget and Policy Priorities in Washington reported that while the percentage change in average real household income between 1990 and 2004 was an increase of 57% for the top 1 percent of American taxpaying households (with a annual income of $940,000 in 2004), it was 85% for the top 0.1 percent, and 112% for the top .01 percent. That is, the richest are getting richer almost twice as fast as the rich.

An article in the NYT outlines how this is leading to resentment by the bigger and poorer group, the "lower uppers" which consists largely of professionals (doctors, lawyers, management consultants, most Wall Street execs), for hedge fund managers and some astronomically paid C.E.O.’s who are seen to be undeserving of the huge amounts they receive.

It's difficult to feel sorry for the "merely rich" though - in the same time period the percentage change in average real household income was an increase of 2 percent for the bottom 90 percent of American households.

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Saturday, 18 November 2006

Frugal living: Bottled Water

I take bottled drinking water to work - although Sydney tap water is of good quality, I don't want to drink the tap water in my office because the building is an old converted factory building, and I'm not sure how good the pipes are. Having bought a couple of bottles of drinking water I now rotate the bottles and refill them each night with chilled filtered tap water. The filtered water costs a few cents a bottle, and the quality is just as good as your typical bottled water brand by all accounts.

If you want to impress your workmates you can spend it up on the initial purchase of bottled water and have "exclusive" name brand bottles for your home made bottled water ;)

I usually also pop half a tablet of aspirin into the bottle in the morning - I happen to like the taste of aspirin, don't have any stomach problems, and the 150mg a day of aspirin might be good for my health.

Carni-Festivals I contributed to This Week

What's better than pfblogs.org? Why, the Carnivals and Festivals each week - get all the best posts and none of rest! Enjoy:

Blog Monetization: Why I love PPP

There are many, many nice things about PayPerPost, the word of mouth marketing service:
1. They pay (I got my first $4.00 paid into my PayPal account a few days ago, so I can vouch for this).
2. They pay a reasonable amount of money per post, so it's actually worthwhile.
3. They have a range of "opportunities" available, and new ones appear all the time.
4. Some of the opportunities are relevant to my readers, as they deal with PF related topics/services, or I can personally relate to the produce, so its worth a blog.
5. They don't mind posts being tagged as sponsored - in fact they encourage it!
6. There are lots of "opportunities" that allow either +ve or -ve comment, so I can write as I see fit. ps. Even if the "opportunity" only wanted +ve reviews, I'd still review it if I had looked into the site and had negative views to express - I just wouldn't take the PPP opportunity and get paid for my comment.
7. The turn around on accepting your posts and approving them for payment is very quick - usually only 1 or 2 days.
8. Their website is very clearly laid out and easy to use.

A Word a Day: "Liquidity"

The ability of an investment to be converted into cash quickly and with little or no loss in value.

0% CC Balance Transfer Arbitrage

A lot of posts on the Personal Finance blogs have outlined the hows, whys and wherefores of doing a 0% balance transfer Arbitrage to earn interest on OPM. Lots of other blogs deal with those struggling to pay off CC debt, and who could benefit from transferring their current balance to a lower rate CC. But how do you find the best CC available?

I've just had a look at a site which lets you compare the various features of Credit Cards - it even has a page listing cards that have a 0% balance transfer available! All in all this looks like a very useful site for my US readers.

My Investment Loan Interest Rates

While asset allocation is probably the most important factor in your long term investment performance, and fees and charges the second mosst significant item, the interest rate you pay on any investment borrowings are also a major consideration. A few percentage points extra can mean the difference between the use of gearing adding to or reducing your ROI. There can be considerable differences in the interest rates charged by different lenders, so it pays to shop around. Also, there may be price breaks from larger loan balances, so this is a time when diversifying between different lenders can be counter-productive. My investment borrowings are a bit of a mish mash, due to changes in investment stratgey over time, and using new lenders (at cheaper rates) for new investments, while keeping the old accounts in order to not realise capital gains just by shifting assets between accounts.

My investment loans:

Property
$230,602.65 @ 7.37% - home loan (non-deductible) - variable rate
$118,250.00 @ 7.09% - rental property loan (deductible) - fixed rate (5 yr term)
Shares - AU - three margin lending accounts
$19,474.16 @ 8.85% - St George Margin Lending (St George Bank) - variable rate
$12,042.90 @ 8.90% - Commonwealth Securities (Commonwealth Bank) - variable rate
$82,065.38 @ 7.95% - Commonwealth Securities (Commonwealth Bank) - fixed rate (1 yr term)
$150,000.00 @ 8.25% - Leveraged Equities (Adelaide Bank) - fixed rate (1 yr term)
$5,607.76 @ 9.15% - Leveraged Equities (Adelaide Bank) - variable rate
Shares - US
$59,175.20 @ 7.09% - St George Portfolio loan (secured against property) - variable rate
Other
$ nil @12.99% - Citibank*

* This Line of Credit is used to capitalise margin loan interest prepayment in June, and is then paid off with my tax refund in November.

Overall, the interest rate on my property loans currently averages 7.275%, and the interest rate on my stock portfolio loans currently averages 8.041%. The use of 1-year prepaid interest fixed rate loans helped lower the overall interest rate, as the Reserve Bank has raised rates a couple of times since June. The opportunity cost of prepaying interest for a year can be ignored as prepayment brings forward the tax deduction for the interest payment.

Thursday, 16 November 2006

World's Biggest Double Counting Error?

I don't get it - how can W. Gates III still be "the world's richest man" with a NW around US$50b, when this appears to still count the $25b or so he donated to his charitable trust a couple of years ago?. Surely his net worth is now "only" $25b or thereabouts?. Either the money is still his, or else he's donated it to the trust and it isn't "his" anymore.

Year NetWorth (Forbes) in Trust (total)
2001 $58,700,000,000 n/a
2002 $52,800,000,000 n/a
2003 $40,700,000,000 $24,000,000,000
2004 $48,000,000,000 $27,000,000,000
2005 $46,500,000,000 $27,000,000,000
2006 $50,000,000,000 $29,000,000,000


A quick look at the Microsoft share price since 2001 shows that his net worth probably dropped from $52.8b in 2002 to $40.7b the following year - so he didn't suddently have an extra $24b to donate into his charitable trust - it must have come out of his net worth.

Blog Monetization update: Nov 2006

My first payment appeared in my PayPal account yesterday! A grand total of USD$4.00 - this exactly covers the pfblogs.org friends fees I've paid so far ;)

Over the next month there should be some more noticeable amounts deposited into PayPal, as my earnings for the past month posts start to become due for payment.

So far total accrued blog earnings are as follows:

Amazon.com $2.71 (1 sale from 64 click thrus)
AdSense $x.xx AdSense earnings are Top Secret (let's just say the x's give you a good indication of scale)
Adbrite $0.00
PayPerPost $82.01 (13 posts)
Blogsvertise $15.00 (3 posts)
ReviewMe $20.00 (1 post)
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TOTAL TO DATE: $128.49 EARNED
TOTAL TO DATE: $4.00 PAID (INTO PAYPAL)


I don't have exact visitor stats from launch as I didn't put sitemeter onto my blog until it had been running a while. However, the adsense hits should accurately reflect the # page views, and the page view:visitor ratio seems faily constant around 1.5, so I can estimate the total # visitors.

Blog start date: 19 July 2006
Days running: 120
total posts: 130
total page hits: 3,552
total # visitors: 2,368 (estimated)

This works out at about 5c per visitor, or $0.99 per post.

Sadly, with all the time spent fiddling with templates, reading other blogs, researching posts etc. the hourly rate would work out at about 25c an hour. Just as well I'm doing this blog for a bit of fun (and maybe the posts be of some use to others). I would be spending the time reading pf blogs and fiddling with my finances anyhow, so the monetization is just for a bit of fun.

ps. My wife thinks I'm a bit strange to get excited to find out that I earned $2.71 Amazon.com commision (OK, she thinks I'm a bit strange anyhow). Now, if I could just build up my blog readership to include some of the other 4 billion people on this planet I could start making some serious cash out of this internet thingy ;)

pps. Slap me if I ever put one of those PayPal "Tips" buttons on this blog!

Wednesday, 15 November 2006

Will Uncle Fred Leave me a Fortune?

I must admit that the question of inheritance doesn't take up much of my time - I expect to have enough accumulated to fund my own retirement, and there's a good chance my parents will still be around when I retire - I have a Great Aunt still alive in her 90s, and two of my Grandparents lived to 94. So if I ever inherit anything I'll probably be too old to enjoy it anyhow.

However, for a lot a Baby Boomers who have been "living in the moment" and are only now starting to get concerned about where the money will come from in their retirement, the possibility of an inheritance bailing them out may have been in the back of their mind.

I had read that this hope was misplaced, with the current crop of retirees planning to spend their money, and possibly use a reverse-mortgage to spend the family home as well. So they'd bit little left for the Baby Boomer's to inherit.

But a new Citibank report contradicts this belief. Apparently most retirees are living within their means and around 85% plan on leaving a bequest to their children.

The average amount expected is $427,000, but some are planning on leaving a lot more:

Expected size Proportion of
of Estate Retirees
<$50,000 9%
$50,000 - $199,000 10%
$200,000 - $299,999 17%
$300,000 - $399,999 12%
$400,000 - $499,999 10%
$500,000 - $699,999 10%
$700,000 - $899,999 2%
>$900,000 15%

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Birth of a new search engine

It's got a cool logo. It's got an interesting angle - country–specific search. Megaglobe is a new international search engine "coming soon". It will be available in 45 langagues and will represent the whole world. (I'm having to take their word for this at this stage.)

Well, that's the buzz.

The reality is that at the moment when you go to Megaglobe - International Search Engine all you see is a submit field where you can enter the web address of a website that you want to be spidered.

Despite a press release dated 23 June which said "Megaglobe will be launched in August" there's not (as yet) any search function. You'd think that a search function would be top of the "to do" list if you're lauching a new search engine... anyhow, the logo looks cool. I said that already, didn't I?

Perhaps, they meant August 2007.



A Word a Day: "Margin Lending"

The use of borrowed funds to purchase securities. It magnifies returns (losses or gains) by reducing the amount of capital an investor must contribute to the investment.

Tuesday, 14 November 2006

My Long Term Net Worth Progress

Inspired by MyMoneyBlog's post of his Net Worth progress since his College days, I decided to dig out some old quarterly Net Worth figures I had sitting around from the mid '90s and plot them out. I also remember that I had saved approx. $10,000 working part-time during Uni Vacations (which was spent on a telescope and accessories), so I know that my Net Worth when I started working after graduation in '84 was around $10K.



The striking thing about this plot is how well an exponential trend line fits the data so far - the R^2 ("goodness of fit") value is 0.9956 (an R^2 value of 1.00 would indicate a perfect fit). Extrapolating the trend out to age 70 I would end up with around $100m - worth around $48m in today's AU$. I think this overestimates the end result by a factor of 10 or so - a previous model I'd done based on my expected future savings rate and overall ROI (using the expected ROI of each asset class in my portfolio and my planned use of gearing) ended up with around $4m (in today's AU$) at age 65. I think the main reason for the discrepancy is that up to now my overall rate of increase was significantly boosted by my savings. From now on my annual savings will become insignificant compared to the annual return on my existing portfolio. This will happen to most people as their portfolio experiences compound growth, whereas salary cannot keep going up exponentially.

This is one reason I think Frank the Financially Savvy Atheist's current plan to achieve his targeted Net Worth ($4.5m in 23 years) still needs more work - an assumption of 8% annual pay rises is OK for a new graduate starting out, but I think salary is unlikely to keep increasing at 7% pa by age 46. I think the long term rate of salary rises later in a career is more likely to be around 4%. Perhaps he has some stats specific to his industry/qualifications that support this assumption.

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Xmas Gift Idea: Personalised USB Thumb Drive

I use my USB thumb drive a lot - it's great for backing up your files, transferring files from work to home, or uni to home. These days you there is a large selection of thumb drives with storage capacity of 0.5GB up to 4GB available quite cheaply.

One great idea I've seen is to get one with laser engraving of your name on it in case it gets lost. At the moment Pexagontech.com has 1GB Thumb Drives (in any one of five cool colours) for $20.99 with FREE laser engraving, & 2GB Thumb Drives (any color) for $38.99 with FREE laser engraving. They also offer a service called “myDrive LOST-N-FOUND” where they will engrave your drive with a unique product identification number and store your contact information on their secure database. If your drive gets lost their website has a short form where the finder can enter the unique product identification number, be entitled to a reward and Pexagontech.com will arrange to have the drive returned to you, free of charge!




An Very Interesting FREE Home-Study Personal Finance Course

"Investing for your future" is a basic investing home-study course available online. The 11-unit home study course was developed by the Cooperative Extension system for beginning investors with small dollar amounts to invest. It is aimed at those who may be investing for the first time or selecting investment products, such as a stock index fund or unit investment trust, that they have not purchased previously.

It has some valuable information and some cute graphics, such as the "investment pyramid" (reminiscent of the "food pyramid"):

And it also has some exotic terminology that I haven't come across before, such as "loanership"!

All in all, a good read for a cold winter's night in front of the PC with a cup of hot chocolate.

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He Who Laughs Last

I had an interesting phone call to my "non advisory" financial planner today. The company doesn't actually do any planning for me, I just use them to lodge mutual fund applications as they rebate 100% of the upfront fee (which is generally paid by the mutual fund to their distributors to get them to push product). They profit by getting the trailing fees on the investments (usually around 0.5%)

I'd bought a $50,000 hedge fund investment (Macquarie Equinox Select Opportunities Fund) back in June (using a 100% gearing loan) and prepaid the coming 12 months interest on the loan (so that it was deductible that tax year). As I'd only come across this investment a couple of weeks before the end of the Australian tax year (June 30), I decided to apply directly to the fund manager online, rather than print out the prospectus and mail it in via the "non advisory" financial planner. I thought I'd still be OK to get the entry fee (4%) rebated as the online form asked for your planner's details and what % fee they were to be paid.

However, I hadn't received any rebate yet, so when I sent in the application for my new son's "child super" account to the planner last week (to get the entry fee rebate, and, hopefully a rebate of the trailing commisions) I enquired about the missing rebate from June.

A couple of interesting things turned up - firstly, the fund manager claimed that they had no record of the planner's details from my online application, but that they were happy to send the planner the fee if I emailed them to that effect (I'd then be able to get 80% of the fee rebated back to me, so this was very good).

The second thing, and this is the funny bit, is that after confirming that I could get an 80% rebate of the 4% entry fee on my $50,000 investment made last June (which meant the "non advisory" planner was pocketing $400 for a couple of minutes paperwork, PLUS would get ongoing trailing fees of about $250 pa for doing nothing) he also confirmed that my son's super account application had been forwarded with the entry fee rebate approved (ie 4% of $1000) BUT they hadn't approved the rebate of the trailing commision (around 0.6% per year). I said that a few year's earlier they HAD approved a rebate of the trailing fees on my first son's super account, and as the amount was going to be trivial (around $6 per year!) I didn't think it was a big issue. The "planner" then commented that the trailing fee would just about pay for the express postage they'd paid for my son's paper work to be forwarded to the superannuation fund. At this point I just gave up - why argue about a $6 annual fee when they're going to be pocketing hundreds of dollars each year in trailing fees for my other investments placed via them?

On the bright side, there's another discount broker service that will rebate 50% of the next year's trailing fees if I fill in a form notifying the investment fund that I'm changing to them as my "advisor" - this would mean my current "non-advisory" planner would lose out on any further trailing commisions from my existing investments placed via them (probably worth about $400 a year to them) - all for the sake of not OKing a rebate worth $6 a year. So there!

A Tale of Two Telescopes

A PayPerPost opportunity to blog about telescopes was too good to pass up. I've been an astronomy buff since I was a little kid. I can still remember being taken out of school on the day of the Apollo 11 moon landing to watch it on our black and white TV, and I still get a thrill of space exploration and astronomy.

Back when I was in primary school (about 10) my father had a telescope which I was allowed to use. One windy day I lugged it outside to observe sun spots (using solar projection technique) when it fell over and broke. I then saved up for several years (doing various unpleasant tasks in a market garden, such as "rebagging" rotten potatoes and weeding flower beds or picking green beans in the midday sun, all for 60c and hour) so I could buy myself a Tasco reflecting telescope. It looked a bit like this:

This 'scope lasted me all through high-school, and I loved watching the moons of Jupiter and the rings of Saturn on a clear winter's night. My efforts at astrophotography were never very successful, but I had a ball.

My next 'scope was the "big one" - a 10" Meade SCT. I saved all through my undergraduate uni years doing factory work in the summer vacations to buy that beauty, and I still have it today. One of the good things about a telescope is that one with good optics and mounting will give years of service. I've started showing the heavens to my six year old son with this telescope, and it will probably still be in good working order when he has kids of his own. These days I've traded up from a Pentax MX SLR camera to a Pentax *ist DL digital SLR camera for my astrophotography, but the telescope is still just as good as the day I bought it 20 years ago.

If anyone has a budding astronomer in the familiy, I can't think of a better Christmas gift.

Optics Planet has a huge selection - thousands of optical products in stock from cheap toys to the best top of the line products on sale. Free UPS Shipping for orders over $29.95. Check them out online for Meade, Celestron, Bushnell Telescopes and more.



Monday, 13 November 2006

Carnival of Personal Finance #74

The Carnival of Personal Finance #74 is now available for your reading pleasure at A Geek’s World. Out of the 71 posts in this week's Carnival, my contribution was a post about The Benefits of Compulsory Personal Retirement Accounts.

US Shares - "Little Book" Portfolio Update: Nov 06

My "Little Book that Beats the Market" Portfolio has progressed nicely this past month, with the gains by ASEI more than offsetting the drop in MOT. I was tempted to sell my Motorola shares when they'd gone up so rapidly and appeared to be dropping back - but my version of the "Little Book" strategy is to hold each stock for 18 months after purchase, then sell and replace with a new pick (unless its still in the short list).

BOUGHT: 150 shares in PW EAGLE, INC. [PWEI] on 13 Oct @ $33.29 - total cost $5,024.29 [AUD $6,758.18] including $65 brokerage.

SOLD: No sale this month (portfolio is in accumulation phase - US$5,000 purchase each month for 18 months)

When selecting which stock to buy I've been keeping clear of commodity (mining & oil) stocks as I think the "e" in their p/e rations may start declining within the next 18 months if commodity prices moderate as production increases meet demand.

PORTFOLIO PERFORMANCE:

I'm currently ahead by 10.62% ($2,642.21) after deducting $65 for selling costs per stock. After deducting approx. $349.00 for interest paid on the loan to date (this portfolio is 100% geared) my total return is currently $2,293.21.



nb. The average gain reported above is spurious as each stock has a different holding period. I'll start tracking net gain (capital gain + dividends - selling costs - interest) once I'm fully invested after 18 months.

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Sunday, 12 November 2006

Try This Investment Risk Tolerance Quiz

Want to improve your personal finances? You risk tolerance is one of the fundamental issues to consider when planning your investment strategy. Start by taking this quiz from Kansas State University. Choose the response that best describes you - there are no "right" or "wrong" answers. Just have fun!

Take the Quiz

ps. I scored 33 - "a high tolerance for risk", which is what I expected. The score ranges are:

Score Risk Tolerance Level
0-18 Low tolerance for risk
19-22 Below-average tolerance for risk
23-28 Average/moderate tolerance for risk
29-32 Above-average tolerance for risk
33-47 High tolerance for risk


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Carni-Festivals My Posts were in This Past Week

What's better than pfblogs.org? Why, the Carnivals and Festivals each week - get all the best posts and none of rest! Enjoy:

How to Make an Extra Million for Your Retirement in three easy steps

1. Start when you are 20

2. Earn an extra $3 each and every day

3. Invest it via a regular savings plan with 100% gearing ($100 borrowed for every $100 invested) into the following asset mix:

40% Australian Shares
20% International Shares
20% US Shares
10% Property Securities
10% Australian Bonds

Based on the historic returns for the past 20 years, and typical margin loan borrowing costs of 3% above the cash rate, this would result in $3,687,250 by age 65 - or $975,000 in today's money (assuming inflation averages 3% pa).

OK, this may not work out exactly as planned, but finding an extra $3 a day should not be too hard for anyone. And, as this is "extra" money, there shouldn't be any problem using a geared savings plan and a high-growth, high-risk asset allocation. For those that are risk-averse, just close your eyes and don't check the balance on your annual statement until you turn 65. In practice you may have to save up the $21 a week into an online savings account until you have enough to start such a geared savings plan - probably an initial amount of $1000 and then regular contributions of around $100 each month. Also, if you don't live in the "lucky country" you should probably change to asset mix to include your local shares and bonds instead of the Aussie versions, and switch the others as needed eg. from US shares to Asian for US readers who would be including US shares as their "local" share component.

There may be some tax due when you cash in a 65, but there shouldn't be much tax impact along the way, as the interest on the gearing loan will consume all your dividend income (more or less).

A Word a Day: "Risk"

The chance (probability) that an investment's value or return will differ from its expected value or return.

Saturday, 11 November 2006

Frugal living: Free business plan info and tools

The business plan consulting service GrowThink.com has some useful information available as .pdf guidebooks, plus some good calculators - all available for free on their website. The guidebooks include a business plan guide and a report on the top business plan mistakes. The Help Center provides free reports, calculators, sample plans, directories and other tools to help entrepreneurs and growing businesses develop their business plans and/or raise capital. This is all good stuff to help you when writing the perfect business plan.

The free online calculators include the following:
Start-Up Cost Calculator
Cash Flow Calculator
Investor Offering Calculator
Discounted Cash Flow Calculator
Break Even Calculator
Financial Plan (in Excel)
Slide Presentation Software

There are also some other useful resources and links for anyone wanting to do a business plan for their company. Including one to a good course on Starting or Growing Your Business from MyOwnBusiness.com covering the following topics:

Session 1: Deciding on a Business
Session 2: The Business Plan
Session 3: Computer Tools
Session 4: Business Organization
Session 5: Licenses & Permits (New!)
Session 6: Business Insurance
Session 7: Location and Leasing
Session 8: Accounting and Cash Flow
Session 9: How to Finance Your Business
Session 10: E-Commerce Business
Session 11: Buying a Business or Franchise
Session 12: Opening and Marketing
Session 13: Expanding and Problems
Session 14: International Trade

It's Never Too Early to Plan for Your Retirement

Our most recent addition to the family is now 7 weeks old - plenty old enough to start planning for his retirement ;)

I had a look through the current superannuation (retirement) account offerings on the web, and found one (ING OneAnswer) that seemed to fit all my requirements - low initial amount ($1,000), low regular savings plan additions ($100 per fund) available monthly or quarterly, and a suitable mix of investement options (as the investment has a 65 year time horizon before it gets rolled over into a pension I'm going for high-growth asset mix with some gearing).

It will be a "child superannuation account" (so friends or family can make contributions into the account on my son's behalf), which means the maximum that can be contributed is $1000 per year (actually, it's $3000 every three years per account, and you could set up more than one account if you wanted to contribute more than $1000 per year per child). I made the minimum initial contribution ($1000) via direct debit from my bank account and set up an automatic direct debit from my bank account to contribute another $200 every quarter, starting from next June. This will mean I don't exceed the $3000 cap within the first three years of opening the account.
The asset mix I selected for the initial $1000 is as follows:

Geared Australian Share Fund 30% ($300)
Australian Shares Index Fund 20% ($200)
International Shares Index Fund 20% ($200)
Global Small Company Fund 10% ($100)
Global Emerging Markets Fund 10% ($100)
Property Securities Fund 10% ($100)

The regular savings plan contributions will be split:

Australian Shares Index Fund 50% ($100)
International Shares Index Fund 50% ($100)

At the end of three years this will mean the asset mix only contains around 3% Property and 3% emerging markets, so I'll probably top up the savings plan contributions after year three with an additional $100 into the Property Fund and $100 into Emerging Markets Fund each year to reach the $1000pa contribution cap. I won't bother rebalancing as the buy-sell spread is still an unnecessary cost, even if switching is free. I'll just change the weighting of the savings plan contributions to keep things roughly 50% AU shares, 30% Int shares, 10% Emerging market shares and 10% Property Securities.

The account will automatically come under my son's control when he turns 18 - but as he can't withdraw the funds until he reaches retirement age (60) it will be a good tool to teach him a bit about investment management.

I lodged the application via a financial planner who will rebate 100% of the initial application fee (which is around 4% for the front-load option) as additional units. Hopefully, he will also OK the rebate of the on-going trailing commision (0.6%) - he did this when I set up a child superannuation account for my first son five years ago. [As he has processed several of my other investment applications (on a non-advisory basis) he earns enough trailing commision from me to make it worthwhile processing the odd "freebie".]

The trailing commision rebate will add quite a lot to the account's performance over 60+ years - if it earned 10% pa on average (after fees), the trailing commision rebate would add another 0.6% to this - a boost in performance of 6%! This will basically mean an extra 6% in the final value of my son's retirement account (maybe $20,000 in today's money) - just by processing the initial application in the best possible way.

Of course all this planning is highly speculative - who knows what changes to superannuation rules will be made over the next 60 years. Also, I'm being optimistic and assuming my sons will both be around to enjoy their retirement. Although there will be some benefits to them much earlier on - when they start work they won't have to worry about making extra contributions to their retirement account (probably just the 9% SGL minimum will suffice), so they can concentrate their savings on buying a home etc. Also, having a significant balance in their retirement account will mean they won't need as much life insurance.

Friday, 10 November 2006

A Word a Day: "Security"

Investments that provide evidence of a debt or of ownership of an asset, or the legal right to acquire or sell an ownership interest. Hence a "direct investment" is where an investor directly (personally) acquires a claim on a property or security. An "indirect investment" is where the investment has been made via third party portfolio eg. a managed fund or property trust.

A Review of ReviewMe.com

Sponsored Post*:

Your mission, Jim, should you choose to accept it, is to review "review me" - yet another "get paid to blog about something" facilitator. This review will self-destruct in 48 hours...

Well, based on a tip-off from Blueprint for Financial Prosperity, I surfed over to ReviewMe.com and signed up. Signing up was a breeze, taking all of 2 minutes, and I was very relieved to find that they accept non-US addresses and will pay via PayPal, not just US cheques. The sign-up acceptance is instantaneous (I didn't even have to go check my email), and I could straight away enter the details of this blog. One difference from, say, PayPerPost that was immediately obvious was that ReviewMe only allows a maximum of SIX (6) blogs per membership. I can't imagine that this would be a real problem for any legit bloggers as you'd have trouble writing original content for that many blogs on a regular basis.

The only review opportunity at present appears to do a review of ReviewMe itself (hence this post). They price how much a review by your blog will cost, based on estimates of readership, topic etc. I'm priced at $40 per review, of which I'll get paid 50%. So, theoretically I'll earn $20 for this review. This is 2x - 4x more than a typical PayPerPost "opportunity" so it will be interesting to see how this develops. ReviewMe seems to be a bit more businesslike that PPP, which may or may not win them advertiser marketshare. On the other hand, the required review word count is 200, whereas PPP is often just 50. I wonder how this blog wordrate (around 20c a word) compares to off-line rates? I vaguely remember print articles are often paid a word rate of similar magnitude.

You have to log back in and submit the URL of your review within 48 hours of accepting it. I've no idea yet how long after submitting a review URL you get paid - I'll let you know in my next exciting "Blog Monetization" post.

*It's nice that ReviewMe insists that you tag sponsored posts as such, they even give you suggested tags to use!

My Property Portfolio Update: Nov 06

Argghhh! POP! There goes the bubble (again).

I knew it was too good to be true when the mean house sale prices for the suburbs where my home and investment property are (in Sydney) went up 3.8% back in July - so I was more or less expecting the -1.3% drop in Aug, and relieved by the more reasonable 0.7% increase in Sep. The bubble appeared to have finished deflating, with prices being fairly stable since Jan '05, and a small rate on increase (3%) seemed quite likely for the next couple of years, followed by a pick up again to the long term average of around 6% (for Sydney since the 1930s) as lack of new construction pushed up rents and made property investment returns more appealing again...

Not so! The Oct price estimate for my properties (based on the Sep sales median prices) is down -2.6%, and the long term graph looks more like prices are bumping along the bottom, than any sort of modest recovery. Yet another 0.25% interest rate rise was announced last Wednesday, so things are looking decidedly grim for Sydney real estate at the moment, with buyers expecting another 0.25% increase early next year. It's just as well that we don't intend to sell our investment property until the next peak in the property cycle at the earliest - maybe 5-7 years away.

Looks like I won't be hitting NW A$1m this month, or soon, but the culprit seems to be "Mr Property Market" rather than his more manic relation "Mr Stock Market".


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A Word a Day: "Market Capitalisation"

The current value of a listed company, as measured by the number of issued shares in the company multiplied by the current market price for a share.

Thursday, 9 November 2006

How to waste time trying to make money on the 'net

I decided to give the Mechanical Turk (run by amazon.com) a go the other day. The concept is good - people with some free time and/or skills can take up offered "piece work" via the internet. An article about it gave an example of an software engineer who had made $1,400 in his spare time in front of the TV.

Unfortunately, when I had a look at the site, most of the work listed was either worthless (1c to create a link to a site), or a rip-off (a few cents to "test a script" - which turns out to be clicking on some and registering for some information, which obviously will earn the "test script" writer more than he/she is paying you, and is basically click-fraud). The few legit tasks seemed to be transcription of audio files.

A simple enough task I thought - just download a 5 minute sound bite and type the conversation into word... So I "took" the job, thinking that the 60 mins allowed should be plenty of time, after all the task only paid $2.00. The audio file download took 5 mins (I have a cable connection) and I had no trouble playing the file. So far, so good. However, after a few minutes of listening to a few words, hitting pause, tabbing to Word, typing in the words, tabbing back to the audio player, rewinding and checking I'd typed the correct transcription - it became obvious that this would be a s-l-o-w process.

TWO HOURS LATER -- after dealing with background interruptions (baby crying etc), and some parts of the audio where the two people on the tape were talking over the top of each other, I finally finished page and a half transcription of the 5 min soundbite. Then, when I tabbed back to the Mechanical Turk page open on my browser - the task had expired! All that time and effort for NOTHING.

Ah, well. Lesson learned. Being a Mechanical Turk might be a suitable job for an off-duty call centre worker in India, but it just isn't worth my time. No matter how much I like to earn a few bucks in my "spare time".

Wednesday, 8 November 2006

A Word a Day: "Gearing"

Gearing refers to the use of borrowings against equity to invest. It is calculated by dividing the total liabilities by the total assets.

I had a recent comment asking what level of gearing I thought was appropriate, especially for a 30 year old. Just to reiterate, I'm not a financial planner, so my thoughts are worth what you pay for them - nothing! And you should either make up your own mind after sufficient research, or go get some professional advice.

Having said that, many people have no qualms about borrowing 80% to buy a new home (gearing of 80/20 = 400%!), yet will be totally against any borrowing to invest in other assets such as shares. My views are
1. Gearing can be good to "convert" taxable income into tax-deferred capital gains when the tax-deductible interest you are paying on the loan is more than the investment income (eg. dividends) and IF it is deductible against other income (eg. wages), which is the case in Australia. Also, in case of Australia, capital gains get taxed at half your normal marginal tax rate if held more than 12 months.
2. Gearing should be against a diversified portfolio, NOT one or two "hot" stocks.
3. You must have a sufficient and secure income to cover the interest costs - don't just rely on dividends to meet the repayments (although if you only gear up to 50% or so your dividends may cover the interest costs - this is called "neutral gearing")
4. You should gear conservatively - for example if a share portfolio can be geared up to 70% LVR (about 225% gearing), you shouldn't gear up to the maximum. Generally I only gear up to 100% (a 50% LVR), so the market would have to drop considerably before I'd be worried about getting a margin call.
5. Have other assets and savings that you could use to meet a margin call. Ideally you should be in a position to buy more shares in the bottom of a bear market, not have to sell off your portfolio to avoid a margin call.
6. If you have lots of equity in your house you might consider borrowing against it to invest in a diversified share portfolio or, say, index share fund. This would be a viable alternative to using your real estate equity to borrow and buy a rental property (which many people do). I aim to balance my property assets (house and rental property) with my stock investments (direct stock portfolio, mutual funds and my retirement account investments).

This all assumes you have a high risk-tolerance like me. You really have to know your own risk tolerance before you can even consider gearing as an investment strategy. I'd suggest investing just your own capital to start with, and wait and see how you react to the first real bear market (-25% to -40% or more) before thinking about gearing. For many people gearing is TOTALLY INAPPROPRIATE as it doesn't match their personality, experience, knowledge, requirements or situation.

PPP - Referrals

If anyone is interested in joining PayPerPost please quote my email enoughwealth@yahoo.com as a referral when you join up.

In case you've been on a desert island for the past few months, PayPerPost provides sponsored "opportunities" to post about products and services. I've found out about several items of interest while browsing the PPP opportunities listing. Where I can honestly endorse or at least provide a neutral review, and it seems relevant to the theme of this blog, I've done a post about it (clearly tagged as PPP) and should get paid for it - my first payment is due in a week or so.

ps. Extra Special Disclaimer: This is a blantant grab for cash as I'll get $5 for any referral - just remember to use my email as referrer when you sign up! ;)


Net Worth - PF Bloggers progress for OCT '06

It's interesting to see how the various PF bloggers who post Net Worth each month are progressing. Here's a summary of all ones I found.

Leave a comment if I've missed yours out!

Monthly Net Worth of PF Bloggers for OCT 2006:

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x $40,409.46 $2,284.37 6.0%
Consumerism Commentary 30 $63,922.06 $4,808.43 8.1%
Enough Wealth 44 $991,006.00 $43,435.00 4.6%
Financial Freedom 30 no Oct data no Oct data N/A
It's Just Money 32 $150,515.49 $2,101.65 1.4%
Make love, not debt ?? -$76,811.85 $2,201.65 N/A
Making Our Way 37 $608,465.24 $8,575.47 1.4%
Map Girl 32 $34,523.00 $701.00 2.1%
Money and Values 24 no Oct data no Oct data N/A
My Money Blog 28 $113,984.00 $4,123.00 3.8%
My Money Path 29 $100,260.00 $7,816.00 8.5%
My Open Wallet 37 $305,058.00 $7,058.00 2.4%
New Age Personal Finance 31 $133,184.27 $8,337.58 6.7%
Savvy Saver 27 $213,319.00 $4,507.00 2.2%
nb. Some ages have been adjusted as follows:
exact age provided = listed as given
"20's" = listed as 2x
"early 20's" = listed as 22
"mid-late 20's" = listed as 27
and so on.

Doing business on the 'net

For a micro-business startup the internet can be one of the hardest places to do business - compare selling a handful of homemade jams on a stall at the weekend market to selling them online via a website or ebay. Payment and delivery raise can become a major task. Also, selling online you can have difficulty getting "seen" by potential customers - on the other hand, a weekend stall may supply a thousand potential customers, whereas the internet provides millions of potential customers.

One of the best features of doing business on the 'net is low start-up costs. Provided you spend the time, it quite possible to setup a complete micro-business (create your own website, register a domain, use a service such as KAGI or PayPal to process online payments and deliver virtual products online such as eBooks, software etc.) for less than the cost of renting a stall at a market for one weekend.

Once you get a bit bigger, it may be worthwhile to process payments using a online processor such as Advantage Processors. There are many different ways to process credit card payments.

It's probably best to start on a small scale to "test the waters" before spending too much money. If you're able, I'd suggest starting out with a virtual product (such as a small, useful software application or an eBook) that can sell for a few dollars and practice getting all the components of an on-line business put together for as little cash as possible:
1. Develop your product
2. Register an available domain name for $15 or so with Dotster.com or similar
3. Create a website with a free host such as 0catch.com - design the site with basic SEO techniques in mind
4. Create an account with KAGI and/or PayPal so you can process payments
5. Setup up ordering and delivery (eg. via email of a password to a secure download page)
6. Setup Sitemeter and Google publisher tools (Analytics and Sitemap) to track hits and performance of your site design
7. Throw in a little bit of affiliate marketing, AdSense, link exchange etc. to assist in promotion and revenue

This first attempt might be a flop - poor traffic and no sales, but it will be an invaluable learning experience for very little outlay of money (it will take a fair bit of your time however).

Once you've learned the basics you're ready to move up to a paid host, improved website design, and, if your sales start to take off, a more economical solution for processing credit card payments via Advantage Processors rather than KAGI or PayPal. Good luck!

You Call That a Small Amount! THIS is a small amount...

Consumerism commentary had a post today about getting a student loan refund cheque for $1.57 in the post. I can do better than that - for the past SIX MONTHS I've been getting a monthly bill from our Telecom company for $0.06 owing (This wasn't even due to a payment error - the charge was actually $0.06 for a particular service!). It also has a printed message that, due to the small amount, I don't have to pay it this month - but they keep sending a bill each month! As they don't charge any interest on such small amounts (well, maybe they do, but what is 6%pa of 6c each month?), I haven't bothered paying the bill. I could make the payment electronically via B-Pay, so it wouldn't cost me anything more than $0.06, but I haven't got around to it.

As a shareholder of this particular Telecom, I should ring them up and tell them what a stupid idea it is to mail out bills for less than $1 - especially ones that say they don't have to be paid! But I think I'll wait a few more weeks until after the T3 float goes through - at the moment the Telecom is still 51% owned by the Australian government, so I probably wouldn't get anywhere appealing to common sense.

Has anyone got a cheque, or bill, in the mail for less than six cents? (Bills that show a previous payment don't count).

Rental Property Blues (cont.)

A couple of month after our last tenant moved out, and we're getting a bit desperate - with the wife on unpaid maternity leave, getting no rent will mean the mortgage payments eat through the extra that we'd paid off our mortgage at an alarming rate. Finally, the estate agent called today to advise that she has someone wanting to rent - but only on a short (4 month) lease with an option to then continue on a month-by-month basis at the end of the lease, while their new home is being built. She'd already rung the wife, but just wanted my OK to lease the property for this term.

With Christmas soon upon us (and hardly anyone moves house over the holidays), if we didn't take this tenant the rental property could be empty till the end of January. So, better to take a short lease and hope that the building takes longer than expected and they stay a while, than hold out for an "ideal" tenant.

Anyhow, the worst* that can happen is that we are looking for a new tenant again in four months time, and have to pay another week's rent to the agent to find us another tenant.

*OK, the worst is actually that we have a "tenant from hell", who trashes the place and then moves out without notice owing some back-rent, and disappears interstate. (I've had this happen before...)

Tuesday, 7 November 2006

A Word* a Day: "Dividend Yield"

The rate of income generated by an investment is calculated by dividing the total dividend per share paid during the past one year period by the current share price, and expressing it as a percentage. Make sure you use the same unit for both dividend and share price (ie. cents and cents, or dollars and dollars).

*OK, this is actually two words ;)

Set for Life: Children's Retirement Accounts

There is much to be said for starting an investment portfolio as soon as possible - compound interest works it's magic over long periods, and you can set your asset allocation to a much more aggressive "high-growth" mix if you have a very long time horizon. So, starting an investment portfolio for your kids is one of the best possible strategies, and is even more so with the proposed changes to superannuation tax in Australia - ie. that there will be no tax on superannuation withdrawals made during retirement.

This means that if you set up a child superannuation account into which you (or any relatives or friends of the child) can contribute up to $1000 each year. (There is a cap of $3,000 every three years PER ACCOUNT - if you wanted to save more than $10 per week you just setup several accounts for your child). There will be no tax due on deposits (as they are made as undeducted contributions), no tax on pension or lump sum payments over 65 years of age, and a maximum 15% tax rate on earnings (likely to be reduced below 15% due to the benefit of franking credits on share dividends).

For example, if you contribute around $10 each week ($250 per quarter) into a child superannuation account from birth until 18 years of age, and then no additional contribtions are made, at retirement age (65) the account would be worth $2,218,843 (or $317,898 in today's dollars) - assuming an average return of 10% pa for a high-growth asset mix (shares (preferably geared), some bonds and some property), and an average inflation rate of 3% pa.

For a total contribution of $18,000 your child's retirement fund will have added $300,000 (in today's dollars) by the time they retire - with no further contributions required after they turn 18. This will let your child concentrate on paying off a mortgage or investing outside of super when they start working.

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Monday, 6 November 2006

A Word a Day: "Derivative"

Derivative: A financial contract whose value is based on, or derived from, another financial instrument (such as a bond or share) or a market index (such as the ASX100 index, or Nasdaq Index QQQQ)

Frugal living: Recycling Calendars and Diaries

Often you can buy "old" calendars and diaries for almost nothing when the year is half over - stores don't want to hold onto stock and there's little chance of selling a calendar that only has a few months of useful life left.

If there were no leap years, then every calendar would be recycled on a 7-year cycle, the first day of the year moving forward by one each year (because there's an extra weekday each year: 365 mod 7 = 1). Due to leap years making non-leap year calendars incompatiable with leap-year calendars that start on the same day, the calculation of reusable calendars is a bit complicated - usually a calendar can be reused 6 or 11 years later. I've listed the reusability years for the next 10 years worth of calendars below.

Therefore, if you find you have an unused calendar at the end of the year, and you have some spare storage space, just put it aside and you can probably reuse it in 5 years time. If you're really frugal you could wait for the chance to buy calendars for 80% off, and put them aside for 5 (or more) years until you can use them. Although you'd miss out on interest on the money paid for the calendar, the price of printed items tends to go up faster than the general inflation rate, so it's a pretty good hedge against inflation. Of course you have to be prepared for some odd looks when you use a calendar that appears to be half a decade out of date ;)

Calendar Re-use 1-JAN 1-MAR
Year Year is a is a
2006 2017 SUN WED
2007 2018 MON THU
2008 2036 TUE SAT - it's probably not worth keeping this one! ;)
2009 2015 THU SUN
2010 2021 FRI MON
2011 2022 SAT TUE
2012 2040 SUN THU - and you can toss this one out too ;)
2013 2019 TUE FRI
2014 2025 WED SAT
2015 2026 THU SUN

Sunday, 5 November 2006

The Eight Best and Worst Money Moves You Can Make

Here is a list of the eight best and eight worst money moves you can make, and why:

Eight Best Moves:
1. Pay Yourself First - no matter how much you earn, you should put aside a fixed percentage of your income as savings each pay day. This will develop good savings habits. You can start off with a small and painless percentage and build up slowly to a significant amount, for example when you get a pay rise.
2. Cut up your credit cards and pay cash for everything. This will ensure you never run up credit card debt.
3. Borrow against your home equity. You can borrow at very competitive interest rates and invest this money in high-growth assets, boosting your returns using gearing. Home equity loans also have an advantage over margin loans because they aren't subject to margin calls.
4. Invest in index funds. The market is reasonably efficient, and studies have shown that very few professional fund managers can "beat the market", after allowing for the higher fees compared to index funds.
5. Invest in managed funds. Some managers (Buffet, Lynch) have consistently produced superior returns, so it is worth seeking them out.
6. Diversify to reduce risk without reducing your returns. Your portfolio asset mix should be on the efficient frontier.
7. Put all of your eggs in one basket and watch the basket carefully. You should spend enough time and effort to identify a few excellent companies and buy them at the right price for the long term. This is what Warren Buffet does.
8. Borrow to invest. Also known as "gearing" this will boost your returns and can provide tax benefits if the interest on the loan is tax deductible and long-term capital gains are taxed at a lower rate than current income (dividends).

Eight Worst Moves:
1. Pay Yourself First - if you have any "bad" debt (loans for non-investment items such as clothes, toys, cars, holidays etc.) you should pay this off before you even consider a savings plan.
2. Cut up your credit cards and pay cash for everything. Several reasons you should keep your credit cards and learn to use them responsibly
- they can act as your "emergency fund" so you can be fully invested without having to keep an "emergency fund" in a low-interest cash account.
- they are much safer than carrying wads of cash around, and are especially convenient overseas.
- by paying off the balance in full each month you can get up to 55 days interest free credit on your day-to-day purchases, so you can keep an extra month worth of expenditure invested.
3. Borrow against your home equity. People who borrow against their home equity or against the 401K to pay of credit cards often run up the credit card debt again. Others use HELOC to spend more than they earn on things like cars, holidays and lifestyle. You can end up still having a mortgage when you retire, or, in the worst case could put your home at risk.
4. Invest in index funds.You are condemning yourself to mediocre (average) investment returns. Some managers (Buffet, Lynch) have consistently produced superior returns, so it is worth seeking them out.
5. Invest in managed funds. Although some managers (Buffet, Lynch) have consistently produced superior returns, you have Buckley's chance of picking who are the superior managers - last year's (or five year's) performance is no guide to next year's winners (but everyone can identify them in hindsight).
6. Diversifying your portfolio (also known as "di-worse-ification") will drag your investment returns towards back down to the average.
7. Put all of your eggs in one basket. If you make one or two bad calls you'll put your portfolio in the toilet. Do you really think you're the next Warren Buffet?
8. Borrow to invest. Gearing will magnify any gains or losses, but, if the market tanks you can get a margin call and be totally wiped out, so you never get to benefit from the magnified gains when the market recovers.

Confused? Well, it just goes to show that there are no "one size fits all" answers in personal finance. Some would argue that this is why you need to get help from a financial planner. My view is that you need to learn enough about yourself, your position, and available options to form an educated financial plan. The fees you'd pay a financial planner are high enough to eat into your investment returns, and, at the same time are too low to buy enough time and effort from a professional financial planner to really get to know you and your situation well enough to give an optimum plan customised for you. The best you'll get is a fairly vanilla plan that is "reasonable" for your situation.

OK, these probably aren't the top eight anyhow - I just wanted to make the point that in personal finance there are many shades of gray. If you read about technical analysis and want to try day trading, first read all the evidence supporting the weak version of efficient market theory, and, remember, in day trading it's a zero-sum game, so you have to be smarter than more than 50% of other traders (allow for trading costs) to hope to make a profit. If you like fundamental analysis, remember that companies makes honest mistakes in their reports, they sometimes obfuscate (or downright lie), and, even if the figures are correct, they are historic, so are a pretty poor guide to the future.

I spent a lot of time for my first decade of investing learning everything I could, and trying to find out the "truth" about investing - what is the "correct" way to invest, and the "best" strategy. What I've come to realise is that no-one knows - especially not what is best for YOU. So, just keep learning all the time, and remember, it's always just going to be your "best guess", so always evaluate and manage your investment risk.

At the end of the day, you've really got no-one to blame for your investment performance but yourself. On the bright side, at the end of the day, we're all dead, so it doesn't really matter anyhow ;)

A Shocking Way to Make Money

Way back in the middle ages, thieves used to risk life and limb climbing onto church roofs to steal lead plate. It seems the recent commodities boom has brought this type of theft back into fashion, with a new shocking twist. A worldwide spike in metal prices has been blamed for a surge in the theft of copper and other metals, with copper fetching up to $10 a kilogram and brass about $4.50. Homes, building sites, scrapyards and even schoolground water bubblers have been targeted by gangs.

What's next, stealing gold fillings from people's mouths?

You can read the full story at SMH.

Saturday, 4 November 2006

Baby Boomer Retirement Crisis

Yet another article about the abyss facing baby boomers in retirement - there won't be enough tax payers to fund pension payments for everyone, and baby boomers haven't been saving nearly enough to have a "self-funded" retirement.

An article in the Sydney Morning Herald lays out the problem very clearly. Some of the points are universal, applying equally to baby boomers in the US, UK and Australia:

"To give you some idea of the challenge, to retire on 45 per cent of your pre-retirement income you need to have contributed 12 per cent of your salary every year for 40 years."

"With the male retirement age averaging 58 years, drawing on retirement savings at 60 per cent of salary will see the money run out at age 72. But, if retirement is postponed for only two years (until 60), the money would last until 79. Working an extra two years funds a further seven years of retirement."


An interesting read, though everybody should be thoroughly familiar with all this by now, and have an action plan in place to look after themselves in retirement.

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Net Worth Update: Nov 06

The past month was very good for my finances:
* Average property prices increased a little bit, boosting my property equity $5,198 or 0.71%,
* Both Australian and International stock prices moving sharply higher during October (so much for the theory of typically "up" months and "down" months). My stock portfolio equity went up an incredible $24,700 (8.85%) and my retirement account also increased by $13,077 to $301,646 (4.53%).

My Networth as at 31 Oct now totals $991,006 (AUD), an overall increase of 4.58%. Just for fun you can annualise this to 55% pa and say I'm the "Sage of Sydney" - at least for this month ;)

It will be interesting to see if I manage to break through A$1,000,000 this month - although I suspect it may be a short-lived visit to the "millionaires" club, depending on how "mr market" is feeling.

I don't whether my next short-term goal should be a NW of AUD $1 million when my home is excluded, a total NW of US $1 million, or just focus on achieving net worth AUD $2 million...

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