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Will The U.S. Default On Its Debt? Don’t Bet On It

August 25th, 2010 No comments

A Morgan Stanley executive director was quoted in this article saying that it is inevitable that the U.S will default on its debts. No doubt the debt is big, has exploded recently, and at least in the short term going forward will only get bigger. Notes this Congressman from Colorado:

Regarding spending during his time in office he said, “We have managed to acquire $13 trillion of debt on our balance sheet” and, “in my view we have nothing to show for it.” Speaking of the debt, he said our debt almost equals the economy.

At least now we have the unlikely combination of exploding debt but very low interest rates. If markets really thought that the debt was a problem, they would demand higher interest rates to match their concern. If anything, investors can’t get enough of U.S government debt. So from this point of view, the debt may not be a problem.

Another point that the author offers is that we may end up as ‘another Greece’ or name your favorite European country here, given their current debt problems. However, we have an advantage that Greece doesn’t: we issue debt in our own currency. Greece can’t get out from under its debts because they unfortunately were issued in Euros, not a local currency. So they can’t inflate their way out of debt the way the U.S Government can, they have to face up to their debts (or seek relieve from the European Union central bank).

So, the U.S can simply roll the printing presses to pay off its debt. We’ve done it before (1970s against Japanese bond holders), and we can certainly do it again. As long as we can print money, we never have to default.

Categories: Economy Tags: , , ,

Your Saving Money…What To Do Next With The Cash?

July 14th, 2010 No comments

People go through different stages in their financial lives, hopefully improving as time goes on. At some point you will likely reach a stage that can be called Accumulation Phase, or Phase 3 in this good article from Moolanomy about financial health. In summary, you are no longer spending more each month; that is, you have enough money to pay your bills with some money leftover for savings and investment.

I think that this is the most difficult step to tackle. You might not know what to do next with the money you are saving. From my own experience, I’ve never had problems with debt but I have stumbled investing, it took a while to learn enough about it to make intelligent decisions. I’m still learning.

This post is not about what you should do specifically with your savings, but I talk about 4 concepts that are important to understand about how to manage your stash. Even if you do invest your cash later on, you very likely will still maintain some level of cash reserves. Here’s some things you need to know.

1) Maintain Liquidity

If you read personal finance articles a lot, very common advice given is to keep 3-6 months in emergency savings to handle unexpected bills, unemployment, etc. This advice is good, it’s an example of liquidity. This simply means the ability to get access to cash quickly with limited or no loss of principal. A savings account at a bank is very liquid, you can withdraw cash in minutes at an ATM or a cashier. Your home is not liquid, it takes weeks or months to convert to cash; though, it could happen quicker if you are willing to sacrifice principal (sell it at below market value). Another example – cashing in a 6 month Certificate of Deposit (CD) early will usually result in a loss of earned interest.

So, cash is good because it enables you to plan for future expenses as well as handle any unexpected ones (new water heater, e.g.). After all you want to be able to pay for expenses without credit card or other debt if possible. Here are some examples of places to put your money that have high liquidity:

  • Savings/Checking Accounts
  • Money Market Accounts
  • Short Term U.S. Treasury Notes

2) Inflation Effects

In this article I talk about what cash is and why it’s not a good investment. Cash is good for the short term, but over the long term it loses value due to inflation. Inflation is caused by the general increase in money supply as well as the rising prices of goods and services over time.

Here’s an example of inflation:

As an avid coffee drinker over the years, I can recall how much coffee has increased in price over the years. In 1998, I could buy a large cup of coffee for about $1.25, today the same cup costs $2.20. That’s an increase of over 75%. If you saved money in a cash savings or money market account over the 12 years, you very likely would be able to buy the same cup of coffee today, and no more. You didn’t gain an additional return by saving, however, this is still way better than saving nothing.

3) Risk

Short of putting cash under your mattress, there is some level of risk of loss wherever you choose to put your cash.  But, typical places that people put their money can be virtually risk free, while others can be just a bit more risky. During the 2008 Credit Crisis, it became very clear about what things are safe and what are not. Here’s an example of a product marketed as ‘safe and liquid, equivalent to cash’, but during the crisis was neither: auction rate securities.

When viewing risk, also add in liquidity into the equation. On paper, the FDIC/NCUA (the federal agencies that insures bank/credit union deposits) guarantees your deposits, and I don’t question it. However, if your bank fails, what is the process and how long will it take to get your money back? After all, if you need the money quickly and can’t get it, that’s almost equivalent to losing it.

Here are some places to put your cash and their risk level:

  • U.S Treasury Notes – virtually risk free, very high liquidity. Backed by the U.S Government.
  • Savings/Checking Deposits – very low risk, high liquidity. Risk of liquidity loss due to bank failure. FDIC/NCUA insured.
  • Money Market Accounts – very low risk, good liquidity. FDIC/NCUA insured. Risk of liquidity loss due to bank failure.
  • Money Market Funds – low risk, good liquidity. NOT FDIC/NCUA insured. Principal loss is unlikely but possible.
  • Certificate of Deposit (CD) – very low risk, low liquidity. FDIC/NCUA insured.

4) Return On Investment

Cash investments don’t typically earn as much money or interest as other fancier options out there (particularly over the long term), such as stocks, bonds, and other investments. But, this doesn’t mean that you should ignore returns because doing a little bit of moving around can significantly increase the interest you earn on your cash. Here’s what affects your return on cash:

  • Liquidity – lower liquidity (6 month CD versus checking account) will increase your return.
  • FDIC/NCUA insurance – Accounts with these government insurance policies will earn lower returns than accounts that do not offer insurance – e.g., money market funds, municipal bonds.
  • Service Level – Accounts that offer fewer services/limited access have higher interest rates. For example, money market accounts have a Federal restriction which prevents more than 6 transactions per month.

The easiest way to earn more money with your cash is to go to your bank/credit union and ask about opening accounts that earn more interest. These accounts are typically money market accounts or Certificates of Deposit (CD).

Categories: Personal Finance Tags:

The Best Investment You’ve Never Heard Of

July 10th, 2010 No comments

When it comes to investing, most of the time thoughts of stocks and bonds come to mind. Investing though can be almost anything because making money is easy to explain, but hard to do in practice.

There are some investments that are relatively unknown but have unique characteristics that make them good candidates for making money. The fact that they are unknown helps because anonymity can limit the number of “competitors” you will face when you buy.

MLPs – Master Limited Partnerships

Today, I want to introduce you to investments that are in a class called Master Limited Partnerships (MLPs).

I was watching a segment on the Nightly Business Report covering how to invest in energy during different stage in your life. [ By the way, NBR is an otherwise excellent source of investing tips and analysis, it’s worth watching ]. What surprised me was when the contributor, Daniel Dicker from thestreet.com makes a statement about MLPs, which I have copied below

DICKER: Yeah. You`re on a fixed income, so you need these distributions coming in. And these (INAUDIBLE) limited partnerships, you can`t really – you can`t shelter tax wise which is OK if you`re in, at retirement years because you don`t need the shelter. You need the money now.

This is not correct. One of the main advantages of MLPs is that they in fact offer tax deferral without using a tax deferred account, such as a 401(k) or IRA. If a “Pro” doesn’t get this right, I can only imagine how many other people don’t understand or know about these investments at all. This is OK, because you can profit as long as you know.

These investments offer the following seeming “too good to be true” advantages:

  • A high level of stable predictable income. The yield on these investments is higher than other types of income investments.
  • The MLPs don’t pay corporate taxes, so the issue of double taxation is mitigated.
  • Since most of the income (distributions) are return of capital (75% or more), the investment offers implicit tax deferral. So, most of the money you earn you don’t pay taxes on until you sell.
  • While these companies are in the energy industry, they generally don’t have a lot of commodity exposure. So, they make money transporting natural gas, but not on the commodity itself.  They are like energy “toll booths”.

The main reason why these are different is that their structure is different: they are setup as partnerships which gives them characteristics that are unique. For example:

  • For publicly traded partnerships, you are a “unit holder” and not a stock holder. You effectively become a “partner” in the firm.
  • By law, these have generally been limited to firms that are in energy or other natural resources.
  • Just so that you know, these are more work to handle on your tax return. Not too burdensome, but you will need to know how to do it or have your accountant handle it. If you use an off the shelf tax package, that should be good enough.

In the Income Portfolio, we own (3) different publicly traded MLPs.

ENTERPRISE PRODUCTS PART. EPD
ENERGY TRANSFER PARTNERS, L.P. ETP
UNOCO LOGISTICS PARTNERS L.P. COMMON UN SXL

More Information

Investor Daily Article about MLPs

Wikipedia Article About MLPs (warning – quite technical)

Categories: Investing Tags:

13 Ways to Save $5000 or More at Work

June 22nd, 2010 No comments

There’s money to be found at work and it’s not too far from your desk or place of employment. The key to finding money at your work is to do a little bit of investigation and then taking advantage of the savings if you are able. There are many different types of savings that can be found at work, but they generally fall into these categories:

  • Defined Payroll Benefits – the employer offers benefits at reduced or no cost to help attract/retain employees.
  • Product Service Discounts – reduced prices for products or services that your company offers.
  • Payroll Deductions for Products – buying products through your employer to get tax savings offered by federal or state tax law.
  • Marketing Programs – the employer using its employees as an audience to negotiate special deals with third parties.
  • In Kind Products/Services – the employer provides items to you that you probably would otherwise buy elsewhere.

If you are not sure where to start, go to your HR department. They will have all of this information available, very likely it will be online where you can enroll or find out more information. Here’s the list!

  1. Health Care Insurance – This is likely the largest benefit in dollar terms that an employer offers (I know it is for me). When you buy health insurance through your employer you will save money on taxes because the premiums are exempt from Federal/State income taxes. If you have a spouse, try to ‘opt out’ of one of your plans and use one or the other medical plan (if your spouse works). By declining one plan you will save some money.
  2. Commuter Expense Reimbursement – As I write this in 2010, you can currently spend $230/month on commuting expenses and $230/month on car parking expenses, which are both exempt from Federal income taxes. This covers public transit systems, the only reimbursement for cars is the parking. I recommend that you try to obtain a commuter reimbursement credit card that offers the ability to charge your expenses at will (instead of buying specific transit services through the account directly).
  3. Health Care Expense Reimbursement – Deduct up to $3,500 per year exempt from Federal taxes to pay for medical/dental/vision expenses. You can pay the deductibles/co-pays for services that were covered by insurance and you can pay for these services fully even if your payroll deductions don’t yet cover the expenses. The downside is that you must determine once per year how much you want to spend – if you don’t spend the money that year you lose it.
  4. Daycare Reimbursement – Deduct up to $5,000 per year exempt from Federal taxes to pay for child care services for your dependents.
  5. Retirement Saving Account – Deduct up to $22,000 per year from Federal/State taxes when you put away retirement money in a 401(k), 403(b) account. These are a great way to save for retirement and you get immediate tax benefits in your paycheck, whereas with regular IRAs you get the benefit when you file your tax return at the end of the year.
  6. Personal Cell Phone Discounts – The major cell phone operators will offer discounts of 20% or more to many employers, right now I get a 22% discount from Verizon Wireless. You don’t need to buy a new phone or sign a new contract, you can get a discount for the plan you have right now. This may be offered as part of your corporate perks program (see below).
  7. Auto Insurance Discounts – I currently buy my car insurance through a mutual insurance company that is non-profit and owned by it’s policyholders. In order to buy the policy, your employer needs to be a member company. When I compare the policy to other competitors on the open market, the policy is much less expensive.
  8. Dental/Eye Care Insurance – For many people, these policies are optional. You will get the same deal as with health insurance policies (deduct your premiums from Federal tax bill). Note that if you also enroll in the Health Care Reimbursement program, you can pay for these out of pocket instead of the buying the insurance policy. Consider your expenses and policy costs before deciding. I personally do buy the Dental Insurance, but I decline the Eye Care policy.
  9. Free Drinks – Most employers will offer filtered water and various drinks to use at work. It’s a good deal for the employer because they know that if you leave the premises for drinks, productivity will likely be lower.
  10. Company Freebies – Employers can offer all sorts of freebies, usually the same products and services that they offer as a business. Personally, I’ve gotten weekend use of cars (corvettes as well as the more pedestrian vehicles), free doctors (paid by the company – not by your health insurance). I know some colleagues who were offered unlimited M&Ms (Mars company), and another company even provided free lunches!
  11. Company Product Discounts – Some employers offer their own products as a discount to their employees. When I worked for a pharmaceutical company, they offered reduced cost health/wellness products. When I worked for an automobile manufacturer, they offered their own vehicles are reduced cost.
  12. Corporate Perks Program –  Using the power of their employee base, the company gets discounts for its employees to hundreds of stores through a corporate perks program. The company I work for now provides these discounts using corporateperks.com. I’ve personally used this program to get discounts at BlueNile.com , BrooksBrothers.com and Target.com.
  13. Employer Sponsorships – A company may sponsor events or third party charitable or non-profit entities such as museums, sports/entertainment events, and trade shows. All you would need to take advantage of these programs is your employee badge. I have found that these benefits require some research to find at your company; e.g., I had to contact my HR department to find out which museums in NYC they support.

The list above just covers stuff that I know about with my own employer. There may be others in your own experience, all you need to do is to keep an eye out.

Categories: Personal Finance Tags:

How To Buy Certified Diamonds

June 14th, 2010 No comments

In this previous article, I talked about when you would want to buy certified diamonds and when you wouldn’t. Today, I talk about what’s important in a certified diamond and how to get the most bang for your buck. First, here’s a recap of the 4Cs of buying certified diamonds. The certification process measures a lot of stuff, but these are the basic criteria (4Cs) that are the most important.

  • Cut – how well the diamond reflects light.
  • Clarity – how clear the diamond is, the inclusions (flaws) it has.
  • Carat – the diamond weight.
  • Color – the degree of color in the stone.

By far the most important characteristic you should key on is the Clarity. When you look at the diamond you want it to appear clear and shiny. Diamonds have different types of imperfections, such as inclusions or blemishes. Almost all diamonds have imperfections, but only some will be prominent enough that you can see them. So, the question is how can you buy diamonds such that you can be certain that they will look clear and shiny?

The easy answer is to go to the lowest certified level where inclusions will not be visible. Based upon my own research as well as the buying habits of others, that level is VS2. Here’s a summary of diamond clarity:


BlueNile has a useful tool that summarizes what most people buy. For demonstration purposes, I have listed stones in the 1-2 carat range, which is a typical size for a solitaire setting. By far the most popular clarity is VS2.


If you buy at that clarity you are virtually certain to get a clear diamond, even if you buy it sight unseen online.

This is the easy way out, you don’t need to spend any more money to get better clarity. If you want to save more money, you can go down to the S1/S2 clarity and still get a great diamond but you need to do a bit more work.

Based upon my research, this is the likelihood of getting a clear diamond, without any visible inclusions at each of these clarity settings:

  1. VS2 – virtually 100%.
  2. S1 – 70%.
  3. S2 – 30%.

Here’s how to buy diamonds in S1/S2 clarity. Keep in mind the percentages above and be prepared to consider different stones to get one that has good clarity. You may need to try multiple times to get a good one.

  1. Go to the diamond store and inspect it for yourself. Does it look clear?
  2. If you are buying online and the diamond size is less than 1/2 carat, try going for S2 and ask the retailer to confirm whether or not the diamond is ‘eye clear’. It’s harder to see inclusions in smaller diamonds.
  3. If you are buying online and the diamond size is greater than 1/2 carat, try going for S1 and ask the retailer to confirm whether or not the diamond is ‘eye clear’.

All images courtesy of BlueNile.com

Categories: Lifestyle Tags: