Friday, July 27, 2007

Bottled Water is Really Tap Water

Apparently the news that Aquafina is going to start writing "P.W.S" on its bottles in order to indicate that the water in the bottle comes from a "public water source" ( is big news to some people.

Um yes, they take in water from what amounts to a giant tap, filter it, and bottle it. You then pay a dollar or so a bottle. That's how much it costs to get a drink when you're out and about. I wouldn't care if they took the water from a dirty lake and then filtered it (as long as it is as pure as the stuff they have now), I still prefer it to soda. Yes I think it should be cheaper, especially at the movies where a bottle costs you about $2.50 in NYC, but it doesn't shock me. The alternative is unfiltered tap water, which i often get at restaurants anyway, but tastes pretty horrible sometimes. Have you tasted water out of some of these public water fountains lately?

Besides a little bit of syrup in every can, coke works the same way. Its mostly filtered (i assume) water. Would people be shocked to see a news story stating that coke is 95% public water? Sadly, they probably would.

What did you think Aquafina and Dasani were? Spring water?

Wednesday, July 25, 2007

Bill Gross of Pimco on The Markets

I guess he has been writing these for a while, but I've only recently started reading Bill Gross's monthly investment outlook at

In this month's post, Bill spoke about a few issues near and dear to my heart, the first one being the gap between rich and poor, which I have written about before. He rails against this gap, saying that he's firmly in Warren Buffett's camp and thinks it's a travesty for the richest people in America to be paying 15% tax rates on average, while the middle class (their secretaries and assistants) end up paying almost 30%. He says this is one of the prime reasons why there is such a huge gap between the rich and the poor, where 5% of the national income goes to .01% of the families in the US. You read that right, "point zero-one" or "one basis point" take in 5% of the national income.

That whole discussion was spurred by a recent issue that has gotten a lot of attention in the financial press. Basically, the rich managers of private equity funds, whose annual income is measured in hundred millions or billions, have their income treated as capital gains, so it gets taxed at the much lower 15% rate instead of the 35% rate us mortals pay. This New York Times article does a good job of summing up the issue.

I agree with Buffett and Gross. If you made $100 million last year, you should be paying $35 million in taxes, not $15 million. This leaves you with $65 million for yourself. Meanwhile, your secretary (lets assume she's an executive secretary) made $100 thousand last year, and paid her full $35 thousand share. This left her with $65 thousand for herself. Why should she be paying a higher rate than you? If anything, she should be the one paying the lower rate. In fact, it could potentially change her life to have $15k extra in her pocket every year. What's an extra $15 million to someone who already has a billion in the bank?

Gross also spoke about the markets some more, in particular, talking about increasing credit spreads. He basically repeated the theme that easy money is drying up for the LBO funds and PE folks who have been using it for buyouts. In particular, he pointed to a financing that's in the works right now that may not be going so well...

"Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week. That more than anything else may wake them, shake them, and tell them that their world has suddenly changed."

Well according to some press coverage I've been reading, it turns out the lenders haven't been able to accept ANY terms to lend money to Chrysler finance, and the banks and the companies involved are going to fund the buyout themselves.

For those of you who don't follow the credit markets very closely, I'll try to sum up what has been going on (in my opinion). Over the past few years, buyout funds have been able to borrow large sums of money at very low rates and use that money to acquire companies. The lower the price they paid on the borrowed funds, the more money they could make off of these companies they bought. Think of it this way: if you can borrow a million dollars at 3%, you are paying $30,000 a year in interest to use that million dollars. If you use the million to buy a business that returns you 12%, the business will be throwing you $120,000 a year. Subtract out your interest payments, and you're getting $90,000 a year in profit for yourself. Not bad! You'll easily be able to make your interest payments, and in fact you'll probably go out looking for more of these great deals. That's exactly what buyout funds have been trying to do, except they have been buying businesses for much more than $1 million.

The credit markets were giddy with all of these deals. Lenders were willing to charge lower and lower interest rates, somehow believing that there was not much risk involved, even with companies on the shaky end of the spectrum. Credit spreads (basically the additional amount lenders charge for people with shakier credit, just as banks charge people with lower credit scores higher mortgage interest rates because they are more risky) got very narrow. This meant that even a shaky business (one with a low credit rating) could get a loan and pay a rate not much higher than an extremely solid business (one with a high credit rating). There was a small "spread" between the interest rates they were charged. This is referred to as "tight credit spreads" or "narrow credit spreads."

What Gross is saying is that this is now changing. With subprime borrowers defaulting on their mortgages in large numbers, the market got sort of a slap in the face that said "wake up! you've been ignoring some risks here! you need to charge higher interest rates, especially for buyout firms that are using money to buy companies with low credit ratings because these loans are a lot riskier than you used to think! In addition, the credit rating agencies (Standard and Poor's and Moody's, primarily) have been asleep at the wheel too and they aren't giving low ratings to companies that deserve them!"

In the past few weeks, companies with low credit ratings have had to pay higher interest rates to borrow money than they have in the recent past. Things are getting back to normal, but as they make their way back there, there could be a whole lot of pain for the lenders.

Friday, July 20, 2007

To Get Rich... Do Nothing?

I came across this article on Yahoo finance today, courtesy of The link was yet another list of things to do to make yourself rich. The link I clicked on was entitled "Twelve Ways to Motivate Yourself For Wealth," which is a headline tailor made for today's personal finance-minded Internet audience.

As I went through the list, I found myself thinking how if a person wanted to make a lot of money and did a few Internet searches for how to do so, he or she would find probably 99% crap that will waste his or her time, and 1% interesting information.

The law of diminishing returns kicks in over time as you go through these lists and do all of these largely administrative things. Yes, set up your 401K right. Allthough, I'm sorry to say it's not going to make you rich if you only make $30k a year for the rest of your life. And spending an hour debating whether you should have 5% or 10% international stocks in your portfolio isn't going to make you rich either.

I think about a wealthy investment banker I know, and I try to imagine him keeping a daily financial journal, as's #5 way to stay financially motivated suggests. If this guy wasted his time keeping a journal, he wouldn't be out there studying new financial instruments, accounting pronouncements and marketplace trends that create opportunities for him to sell his services to deep-pocketed corporate clients. The scant free time he has is too precious to waste on a financial journal or playing credit card cash advance arbitrage.

Anyway, what I'm trying to say is to look at your job, your business, or whatever your income sources may be. Those are the things that are going to make you rich. Spend an hour getting to know your company's business better. Look at how the financials work, even if you aren't involved in the finance side of the business. Look at how you can do things better. Make yourself more valuable to your employer (or to yourself if you're self-employed). I admit this is easier said than done, but the amount of time poor and middle class people spend reading about these fluffy "wealth" topics is a huge waste for them.

I am guilty of sometimes passing these tips along, but I hope you know not to focus on these things too much while neglecting the most important part of your financial future, which is your income or your business.

Thursday, July 12, 2007

Stocks Killed Today

The market reached all time highs today. Most people cite strong retail sales.

I got to work at 7:15 am this morning. I got home at 8:30 pm. One of those days when it feels like all the salary in the world isn't worth it.

Postscript: by "killed" I mean they did well or "killed it." :)

Wednesday, July 11, 2007

An Idea for Locking in a good Mortgage Interest Rate

I've been floating this idea around in my head on and off for a while now, and the recent slight dip in treasury yields (which form the basis for mortgage rates) pushed it back up to the front of my mind. It's not perfect, there's a chance it has been done already, and it may not even work in practice, but here goes...

So I want to buy a house. I am going to need (for example) $200,000 in addition to my cash on hand, which I will have to mortgage. Treasury yields have fallen a bit lately, so let's say that even though I dont have a house, I plan to buy one in the next couple of years, and I want to borrow my $200,000 at 6% now because I think rates are going up.

I envision a product sold by a financial institution that would let me borrow the $200k at 6% provided I invest the $200k, plus my $100k down payment, in a portfolio of high-grade bonds, for example AA corporates, until I take it out and use it to purchase a house. As of today, corporate bonds that mature in 2 years yield approximately 5.28%.

The quality of a diversified, highly-rated bond portfolio should be enough security for the bank to offer me the money at mortgage rates, especially given my high credit score. So anyway, I have my $300k locked away in a separate account where the yield on the bonds pays me a taxable $15,840 a year (.0528 x $300,000). The interest on the mortgage is $12,000 a year, which the bank can take comfort in the fact that I have $300k in assets earmarked in a separate account to generate that kind of income. Depending on how regulators and the IRS treat this $12,000, I would argue that it deserves tax-deductible treatment like any other mortgage. The excess between the $12,000 and the $15,840 would add to the account value.

When the time comes to purchase the house, I liquidate the portfolio and pay the cash to the seller.

Of course there's plenty of hair on this dog, but that's the bones of the idea.

I have no idea if this has already been done, or if there's something I'm missing. Just throwing that out there. Feel free to pick it apart, internet dwellers!

Monday, July 9, 2007

How Long Should I Keep My Bank Statements?

I keep all of my files in labeled folders in one of those file box contraptions. If you have a job, you're in school, or you have some credit cards or similar accounts, I recommend getting yourself one of these to keep everything straight. I've had something like this for years now and i put all of my important papers in there. Right now I have folders for my car (title, bill of sale, maintenance records etc...), my wife's car, my auto insurance, my renter's insurance, my school records (transcripts etc...), a big file on my current job info, a smaller file with my previous job info (pay stubs, offer letters etc...), my last seven tax returns, my phone bill, my cable bill, my gas and electric bill, my wife's employment records, my retirement accounts, my bank accounts, and my investment account. Plus a few "misc" folders for random things. I also keep a big fat manilla envelope stuffed with reciepts for higher priced merchandise and manuals/warranty info.

I went to take the box out from under my desk the other day and realized that I could barely lift it. I realized that I needed to take two drastic steps. First, work out more, and second, clean out that box. I haven't been very good at getting rid of old stuff, so I reviewed's list of what financial records to keep, and how long to keep them. I realized that I could shred a bunch of my old bank statements, phone bills, expired auto insurance policies and things like that, so I fired up one of my favorite machines, the Fellowes PowerShred I bought a few months ago and reviewed here.

By the way, this shredder is still cranking through papers like it's nobody's business. There are few things in life as satisfying as dropping a credit card offer (complete with immitation credit card inside) directly into the shredder without even bothering to open it.

So anyway, I spent a good half hour going through everything, and I ended up filling the entire seven gallon container with the shredded remains of my ageing and useless statements and financial records. February 2004 was a great period in my life, but I will never need my Chase WorkPlace Savings Account statement from back then ever again.

Yes it is good to keep records, but at a certain point it becomes overkill, and your March 2003 phone bill, while interesting, only makes it more difficult to get to the records you really need.

Keep those file boxes clean!

Wednesday, July 4, 2007

How I Got Through Graduate School Debt-Free

I graduated from college with a BS in Business at the tender age of 20 years old. I'd taken advanced courses in highschool and that allowed me to lop a year off of the end of my undergrad experience. It wasn't an easy decision- I gave up on another year of fun living away from home with a bunch of friends (including my future wife), but I had a longer-term view in mind.

I remember my first year on my first job. It was a pretty big adjustment, and I was the youngest person in the office. I wasn't even old enough to legally drink at my first company Christmas party. However, I was also one of the most interested in what I did, interested in improving how I did my work, and my salary went from $33,000 to $50,000 in about a year and a half.

Did I buy a flashy car? Did I buy fancy clothes and go out drinking every night? No. I socked most of this money away. I had my fun every now and then, but I ate peanut butter and jelly sandwiches almost every day.

I really wanted to do more than my entry level job, so as soon as I got settled, I started planning for my MBA. I got as much information as I could on starting salaries, tuition and board costs, GMAT scores needed, attributes the admissions folks looked for, school rankings etc...

My commute home from work was about an hour, and I remember entire train rides spent looking at my savings balances, forecasting when I would have enough cash to be able to support myself through school, and determining how much I would need to save out of each paycheck to make it happen. I filled legal pads with plans and ideas.

I got really lucky in a few ways. My job was pretty well suited to my abilities, and it was something I was interested in, so I stood out as one of the better performers. I was able to live in my parents house, paying low rent. Most of my friends were still away in college for that first year, so I didn't have as many offers to go away for the weekend, or do other things like that. In short, I was able to focus, probably more than I ever have in my life.

My savings grew little by little. I discovered high-yielding online banks. I remember my first CD had a 7% yield. I opened a small "play money" Ameritrade account (it was Datek back then). I learned all I could about business and finance. I read books, I got to work early, I volunteered to do extra projects, and before I knew it, I had a pretty healthy amount in my savings account.

Then the company I worked for folded. It was a very difficult time for me in many respects but after some time, I regained my focus and I was still ahead of the game. I used my extra free time to study for the GMAT. I put a sign above my desk that said "1290690 or burst." I scored exactly 1290 690 on the exam. I wrote my admissions essays, I got recommendations from former professors and coworkers, and I sent in my applications. I took a paycut, but found a new job where I worked for six months, at the end of which I found out I was accepted into graduate school. I had about $40,000 in my bank account at that point.

I went to a state school, I worked as a graduate assistant to earn some extra cash, as well as a reduced tuition rate. I lived in a modest apartment. I brought peanut butter and jelly sandwiches for lunch. I worked a paid internship during the summer between my first and second years of school. When I graduated, my savings account had just about $1,000 left in it. However, I had an MBA, and the starting salary at my next job was much higher than it was at my previous job. I think I came out ahead.

That was how I did it.

It seems like many people have resigned themselves to the mountains of debt they think they need to incur to go to graduate school. If you plan ahead and discipline yourself to do it, you can save enough money to either avoid debt alltogether, or at least keep it to a minimum.

I was inspired to write this after reading a Think Like the Rich post about about another strategy for avoiding debt in graduate school. A graduate degree is starting to seem like a prerequisite for getting some of the more interesting, higher-paying jobs out there right now. There are many approaches to getting one without going into a ton of debt.

Sunday, July 1, 2007

Mid Year Review

I like to sit back and reassess my savings and investment goals every now and then. Today being the first of July, I did my mid-year review of my house savings, retirement accounts etc...

Looking back at my year end review - the markets had extremely solid returns in 2006 (the S&P returned about 15.8% last year) and these returns have slowed just a little in 2007, although the year isn't over yet. The bulk of my retirement assets are in an S&P Index fund, which is up just a bit more than 9.3% on the year. Amazingly, my emerging markets fund is up 22% so far this year. This compares with a 30% return last year. If I had put all of my money in this fund (instead of only 5%), I would be a very happy man today. However, I stuck to what I consider to be a more prudent long-term allocation scheme, and I'm sitting around the same percentages as I was at year end.

Some people have asked me for some specific numbers...I do track them, but I don't publish them very regularly. I now have $50,000 in my 401(k) account, and I contribute 15% out of every paycheck (pretax) into the account.

I have also been saving for a home down payment, and that has been progressing nicely. Since we live off my wife's paycheck, I have been fortunate to be able to deposit my entire paycheck into a separate account we have earmarked for a home purchase. Currently we have about $125,000 in that account, which puts us very near our goal of $150,000. We plan on purchasing a home for $300-$400k, and in addition to a down payment, I want to have a good cash safety net, as well as some extra cash for incidentals such as furnishing and repair.

The news on the housing front has been very positive for me lately. Sales are down, foreclosures are up, and hopefully this will lead to a more meaningful price correction. Bad news for homeowners and sellers is usually good news for potential buyers. However, interest rates have been climbing lately, which almost cancels out price declines. I wrote a post about this recently.

I work in finance and I consider myself to be pretty good with numbers. If conditions don't seem favorable to me (home prices and mortgage interest rates), I am happy to sit on the sidelines until some normalcy returns to the market. I think this is beginning to happen, but I am not convinced yet.

My home savings are now in an ING Direct Electric Orange checking account earning 5.25% APY, or about $440 a month in interest. You might recall a previous article where I decided against opening up an electric orange account. However, given the favorable rate of 5.25% for balances above $100k, and the fact that I have been able to get my balance above $100k, I decided it was too good (and too liquid) to pass up. My previous objections mainly centered around a suspicion that the rates were just "teasers" that would go away quickly, however they have remained high for a while. Also, even though I have been trying to keep fewer accounts outstanding, the electric orange account integrates nicely into my ING Direct accounts page, so it is not much work to keep track of it. Finally, I'm only using my Electric Orange account as a savings account so I am keeping my Chase accounts to make bill payments and write checks out of.

So to sum it all up, I've been able to add about $15k to my down payment fund in the first six months of 2007, and $10k to my retirement accounts (these figures include both mine and my wife's accounts). I hope to be able to top this and add $20k and $15k over the remaining six months of the year. We had some large expenses in the first half of the year, including a large charitable donation, car repairs, a hefty tax bill and some generally wasteful spending. I hope to be able to cut down on these things over the rest of the year!