March 2007

I am sorry if some of you are having trouble accessing this blog today. I was trying to access it over a couple of hours around noon and kept getting “Internal Server Error” messages.

DreamHost is really testing my patience. In the last 4 months, similar things have happened for about 6 or 7 times. I will probably look for a different (more reliable and more expensive) hosting option very soon.

The latest issue of TIME magazine reports that American employers loose an estimated $1.2 billion in productivity during NCAA’s basketball March Madness. MSN Money puts a bigger price tag on the loss of productivity: $3.8 billion dollars (based on 2006 numbers). I am not sure how TIME got it’s numbers, but MSN Money numbers were calculated by a consulting firm Challenger, Gary, and Christmas…and they made the calculations assuming that about 58 million fans will spend 13.5 minutes during their work hours for 16 working days. Interestingly, last year Forbes magazine ran an article titled “The (Overblown) Cost of March Madness” on this subject and it says :

….And many workers would have wasted those 13.5 minutes anyway, playing FreeCell or Googling their ex-girlfriends.

Now it’s time for some interesting posts of the week.

• Financial Education: Are Schools Doing Enough? by JD @ Get Rich Slowly. On the topic of lack of financial education in US, JD asks his readers how they plan to teach money skills to kids. If you have an answer to the question below, you better head over to Get Rich Slowly and make all of us wiser:

but how do you motivate a bright high school student to focus on “how to write a check” when he’d rather be passing notes with girls?

• How Stressed Are You? Rating The Most Stressful Financial Events by SVB @ The Digerati Life. In this post, SVB lists a number of financially stressful events and makes an attempt to find the most stressful ones. There are some interesting things in the list like “Becoming suddenly wealthy, when you need to please everyone ”

• Personal Finance for Sports Fans – Ignore the Analysts & the Hype by Money Smart Life. This post is somewhat in tune with what I have said earlier on this blog through various posts. Hear out the analysts (and other experts), but when it is time to make decisions, you are better off paying attention to your personal situation and figure out what works best for you (not what works best for other people).

• How to Invest in 4-Week T-Bills: The Complete Process by Sun @ The Sun’s Financial Diary. A very useful step-by-step guide showing us how to invest in T-Bills. I will probably get into this stuff sometime in the coming week.

• Our Honeymoon Savings by Lazy @ Lazy Man and Money. Lazy talks about how he plans to save on his honeymoon…which is like 4 months away

• 24 Signs That You Could be in Financial Trouble #6: Lack of Adequately Funding a Retirement Account by Jeremy @ Generation X Finance. Jeremy reminds us to save *sufficiently* towards our retirements. According to him, here is why:

Sure, maybe you are 30 years old right now and you don’t think you need to save for retirement because after 60 you’re going to continue to work part-time or start your own business. That sounds fine on paper but you have no way of knowing what will happen tomorrow let alone 30 years from now.

• Little People, Big Money by Matt @ Binary Dollar. Some words of respect for little men who made a ton of money.

• Why I Don’t Judge People By Their Car by Super Saver @ My Wealth Builder. Read about how people make assumptions about certain drivers based on what car they drive.

• Wild Uses for Paper Clips: Tip Tuesday Report by Sharon @ The Frugal Duchess. The title of the article says it all.

Also, this week (again) I have been consistently lazy and did not mention some carnivals on time. Here are the links:

• Carnival of Personal Finance #91 was hosted by Sun @ The Sun’s Financial Diary.
• Festival of Frugality #65 was hosted at it’s home at the Festival of Frugality website.

We were discussing some of our childhood friends today morning over breakfast; appreciating how some of them earned their education in spite of extreme financial hardships. Back in my junior high school (grades 7 ~ 9) days, we had a large spread between the rich and the poor guys in my class. Some kids came from very affluent backgrounds and enjoyed huge houses and expensive vehicles, while some could barely afford to buy backpacks, text books, and other school supplies. Over the years, most of the kids studied hard and almost everyone has managed some kind of a degree/diploma in their field of choice. From the point of view of my current perception of *rich* and *poor*, almost all of them are doing very well. The average financial well-being at present is at a much higher level than the average financial well-being back in our junior high class. Generally, I have observed the largest visible difference occurred with the financial situation of the poorer kids (of course, there are exceptions to this). The graph below might convey my thoughts in a better way. It’s a very crude graph (like, not all kids ended up with the same level of education), but it does reflect reality to some extent.

I also think that education was largely responsible for the reduction in the spread of the *financial well-being* that you see in the graph above. Though we came from different financial backgrounds, education provided us with almost equal opportunities when we later started thinking in terms of becoming financially independent. It sort of raised us all to a common level without discriminating between the rich and the poor. In other words, it sort of acted as a leveler. Have you observed something similar? Do you know of any other economic levelers that might be in play…but something that we may have never *observed*? Just some food for thought on a lazy Saturday afternoon.

Learn about Finance & Economics degrees from Walden University, Capella University, and Baker College

OK, this has nothing to do with personal finance (hey wait!…there is money in the photograph), but it’s interesting nevertheless. Since the last couple of days, we have been observing giant sized *mosquitoes* (or at least what we thought are giant sized mosquitoes) around our apartment. I had this incredible urge of documenting the size of these insects (before I smashed them thinking they were mosquitoes)…and clicked this photograph:

To incorporate some kind of a scale in the image, my wife stuck a penny near the *mosquito* (using an adhesive tape) while I tinkered with the camera.

I just couldn’t digest the fact that we have mosquitoes of this size hovering in/around our house. So, I did some research online and finally found out (to our relief) that these insects are not mosquitoes (hopefully I am right). They are called as “crane flies” and though they are remotely related to mosquitoes, they are harmless to humans (oops!..needlessly killed a dozen of them).

Readers from UK will recognize this as “daddy long-legs”

Btw, the insect is incredibly lazy, it didn’t move at all for like 15 minutes while we worked towards getting a good photograph.

Here is a snippet of a weekly advertisement from Albertson’s. We get this in our mail box very often and each time it’s almost the same stuff. Most of the deals in the pamphlet are advertised as 10 for $10.

Yeah…pretty cheap when converted to 1 for $1, but who’s going to buy 10 ?!! $10 for 10 different things is fine, but what’s with trying to sell 10 pounds of plum for $10 to just one customer? Till date, I have never been able to take advantage of Albertson’s *great deals* because of this. May be, Albertson’s doesn’t want to give *great deals* to people like me, or may be they don’t realize that half the people in this town are students who would never buy 5 gallons of milk just because it’s selling cheap at $2 per gallon (may be 5 students can get together and do their shopping in bulk and then redistribute the stuff…but then that defeats the whole purpose of bunching products in groups of 10 and selling them for cheap).

It’s not just Albertson’s, here is another snippet from a similar 10 for $10 ad pamphlet from Kroger:

Probably, some convenience stores make good use of those offers (however, I am not so sure…I am aware that our neighborhood convenience store owners do their bulk shopping in Sam’s Club). Do you (or anyone you know) buy things in that kind of *bulk* from these stores? Do such *great deals* hold any appeal for you?

Sometimes, I wonder if there is a better strategy to offer *great deals* like these. How about offering a “combo basket” with 10 different things (for example, half gallon milk, one bottle of ketchup, a pound of plum (or any other fruit), one pack of waffles, one pack of ice cream, one toothpaste, one pound of tomatoes, one pack of cookies, one pack of frozen vegetables, and one frozen dinner)? May be, more people will be ready to spend $10 for such a combo than spend $10 on buying 10 pints of ice cream. Better than that, wouldn’t more people be willing to buy milk (as much as they want) in multiples of half-a-gallon, at $1 each, rather than 5 gallons at once at $10?

Update: Apparently, the “10 for $10″ text in the advertisements and my singular experience in Albertson’s led me to believe that I cannot buy individual items at discounted price. Readers have reported in their comments that they have made use of such offers to buy just one or two units. Oh!..now I am wondering how many deals I have missed because of this. Anyways, I will head over the nearest Albertson’s at the first available opportunity and check it out myself.

With this post, I just want to put forward some plain facts about how our credit cards are doing some work for us. It goes without saying that gross generalizations in favor (or against) credit cards based on this information will not hold water.

I just checked my credit card rewards statement on Yodlee, and this is what I saw:

We have 4 Citibank cards between us (2 each) and all of them have been earning ThankYou reward points for us since we started using them. One of those Citi cards have been collecting ThankYou points since about three years ago and the other three earned us 10,000 bonus points each when we applied for them (for example, Citibank cards like this). Also, there have been on and off bonus points offers that have helped the points increase rapidly. At present, between both of us, we have about 60,000 points (it’s not 60,000 yet, but it will cross that mark after this month’s statements). That is worth $600 (depending on how we choose to use the reward points). Roughly, the conversion for Citi’s ThankYou points is like this:

• 3,000 points = $25
• 6,000 points = $50
• 10,000 points = $100 (best value)

We have been earning rewards on our other cards too, namely, Amex (cash back), Chase, and Discover cards; but their value is hardly of any significance as compared to our Citi rewards, so I am not including them. Also, two of those Citi cards and some other cards are carrying 0% APR balances which were transferred to HSBC Direct and are earning 5.05% APY. I will not specify exactly how much these balance transfers were and how much they are making in interest, but let me just put it this way: including the worth of the points, and the interest earned on the credit card arbitrage, we will very easily earn more than $1500 this year just by using credit cards. The only active effort, on my part, is making the payments on time. We don’t go out of the way to earn reward points. We have a very simply scheme: for rent there is check, for laundry there is cash, and for everything else there is MasterCard (earlier, I needed cash for my barber…but by latest barber accepts credit cards).

That’s some passive income isn’t it?

Btw, this is peanuts when compared to some other personal finance bloggers I have seen. You can safely say that I am still a novice in this area.

We haven’t yet decided on how to efficiently use the reward points, but most probably, we would go for the Target gift card offer. That will give us a lot of flexibility with regards to how we wish to spend the gift cards; although I am not sure we will spend all 60,000 points on Target.

Has anyone tried “Your Wish Fulfilled” rewards option from ThankYou network? I will be glad to know how that works. I am guessing that, that option might allow us to order any gift card we want.

Fortunately, we don’t have any student loans to bother us, otherwise, the best option would have been this:

On a side note (just because I am anticipating some comments on this matter), more on philosophical lines, I would like to say that being debt free (or being in debt) has nothing to do with the use of credit cards or cash. It has everything to do with your temperament, attitude, and discipline. People have historically used both the systems to their advantage, so it all depends on how you look at it. Statements like “using credit cards will put you in debt” are as baseless as “cash will make you spend more”. Instead of blaming credit cards or cash for our reckless spending and debt, it will be much more fruitful to focus on some fundamental introspection into our spending habits and start changing things from there. Earlier, I have expressed my aversion towards cash and my $10 per month cash experiment; however, in that case too, the problem isn’t with the cash…it’s with me not handling my cash properly.

All the above links are for information only. I don’t include referral links in posts without specifying that they are *referral* links.

In the last seven months, this blog has come a long way from being a weak, disoriented start-up to attracting it’s first advertising deal and crossing the 50,000 visitors mark not too long ago. This journey would not have been possible without the support of some loyal fellow bloggers, avid readers, critics, and commentators. As a way of appreciating the continued support, I would like to give something back to my readers (you!). If you are a personal finance enthusiast, you will consider this giveaway as your *dividend* for investing your time and efforts in reading, commenting, and providing feedback on this blog, and for encouraging me to strive towards generating better content.

Ideally, I would have liked to give something to everybody who has provided a feedback on this blog; however, I am not yet in the Forbes list of billionaires, and will have to make do with distributing just $100 according to the following scheme:

• Four readers will get *anything* they wish for, up to a maximum of $25 each (shipping must be included).
• *Anything* means - any one thing that is preferably related to personal finance (for e.g. books, magazine subscriptions, piggy bank, money games, gift cards to book shops/online book stores, etc.)

The rules are like this:

• To be eligible, you need to leave a comment on this post in this manner: “I wish for _______”, (don’t put any links here and you cannot ask for cash) and below that you must answer these three questions:
  • In your opinion, what is the best action you have taken to ensure a better financial future for yourself or your family?
  • How do you intend to use the thing you have wished for?
  • What is your favorite post on this blog? (You don’t need to explain why, just give the title)

That’s it ! it’s that simple. Entries will be accepted till Thursday, 29th March.

I will number all the comments and randomly choose 4 winners from them by using something like this. After the 4 winners are selected, orders will be placed for their *wishes*. All other relevant details will be discussed only with the 4 winners.

There are different ways in which you can maximize what you can get from this giveaway. Think over it…do some research.

I was just reading an article at Kiplinger.com titled “50 Ways to Keep More Cash“. A lot of tips, suggested by readers, are bunched together in this article and are arranged in the following categories:

• Budgeting and Saving
• Retirement
• College
• Travel and Cars
• Spending

I read through all the tips and most of them were common sense ways of managing your money well. But, I would still recommend going through all of them….some things are just better understood when you read them over and over again.

One of the tips was a class apart, and I have to admit that I have never heard anything like this before It’s from a person named Kelly Colucci. Here is what Kelly had to say:

When I was in college, I went a little wild with student credit cards. I learned the hard way that I needed some control, so I froze the cards in a large pan of water. If I wanted or needed something badly enough to wait for the cards to thaw out, then it was probably worth purchasing. If not, I saved the dough. My mom still laughs about this, but I saved thousands in forgone impulse purchases.

I was just about to say “this is ridiculous” when I stumbled on this post by Stacy (written more than an year ago) on her blog Birds and Bills. I just cannot resist the temptation of re-posting the photograph and a paragraph from her post here.

I think we should pass a bill requiring Congress to give this a try, as a deficit-reduction measure. And then pass another bill authorizing the construction of a really, really big freezer. I’m thinking we could repurpose West Virgina for the cause.

That’s one effective debt management technique there !

Btw, on a side note, our spring break started today and it’s time for some relaxing; we may be on the road more often, and so I may be on and off through Sunday.

I mentioned in an earlier post that, about six months ago, I involved myself in some 0% APR credit card arbitrage. Here, I will document a few things about my current credit score (as compared to my score before the arbitrage), that may interest some of you. If you don’t know what I am talking about, and/or if you haven’t heard about “0% APR credit card arbitrage” or “0% APR balance transfers” before, you must read this primer: How to Make Money from 0% APR Balance Transfers @ My Money Blog.

Before you start drawing conclusions from the numbers and charts below, here are some background facts about my credit that warrant consideration:

• Ratio of credit card balances to available credit limit (credit utilization) before arbitrage: ~ 2%
• Credit utilization after arbitrage: 23%
• Length of my credit history: 5 years
• Cards used in 0% APR arbitrage: 2
• Number of open credit cards on record: 9 (click here to read about how I manage them)
• Credit score before 0% APR arbitrage: 771 (click here to read more about this). This score was based on 9 open credit card accounts, but the 0% APR balance was not yet reflected in the score…so essentially, it gives a good reference for comparison.

Current credit score

This score may not be reflecting the worst situation after the arbitrage. Right after I availed the 0% APR offers, I was using about 26% of the available credit. The credit score must have been lower at that time. Since then, I have made a few minimum payments towards both the cards, which must have improved my score a bit. Based on the situation, it is fair to say that almost the entire drop in the score can be attributed to the increase in credit utilization (from 2% to 23%). Anyways, 737 is not too bad.

What does this credit score mean to me?

Here is a table that myFICO drew for me.

Obviously, lower FICO scores will mean higher interest rates (in most cases). But, at present, this is OK for me because I am not looking at any big loans in the near future. However, for someone who is looking for a 30 year mortgage, this drop in the credit score may make a huge difference. For example, if you get a 30 year, $200,000 mortgage at 5.99% instead of 5.77% , you will end up paying about $10,000 more (over a period of 30 years) than what you would have paid if your interest rate was 5.77%. So be careful about the timing of your arbitrage if you are looking to borrow large amounts soon. As a rule of thumb, I would suggest a period of at least 2 years of “no credit card balances” before you go in for borrowing something big.

What may have affected my score?

The score report mentions these as negative factors towards my credit score.

The proportion of balances to credit limits (high credit) on your revolving accounts is 23%. The average proportion of balances to credit limits (high credit) on revolving/charge accounts carried by U.S. consumers is around 36%.

According to your credit profile, you have 4 accounts where your balances last reported are greater than $0. On average, U.S consumers carry balances on approximately 4 of their credit accounts at a given time.

Of the 4 accounts, 2 were carrying the 0% APR balances and the other 2 carried a purchase balance at the instant of time that my credit report was pulled up for score calculation. Eventually, as I keep paying off the borrowed *free money*, both these factors will change for good and improve my score.

What does this score mean to lenders?

For lenders, here is how the FICO score relates to the risk of lending money to me.

Seems like I am not that bad after all, although I have jumped from a 2% risk level to a 5% risk level in the process of utilizing the 0% APR balance transfer offers.

The mathematically curious/observant/astute will appreciate the fact that this chart almost follows a sigmoid function (I used this function earlier in this post). For others, it will be sufficient to say that if your credit score is very high or very low, a change in your credit score will have smaller effects on how lenders perceive the risks associated with your credit. When I say “smaller”, I am comparing it with a situation in which you credit score is *medium* (say between 500 and 700). People with credit scores around this range should be extremely cautious of things (including 0% APR credit card arbitrages) that may damage their scores. For example, I might be digging a ditch for myself if I indulge in another big 0% APR arbitrage transaction at this point of time - when my score is 737 (most likely that will throw me in the 14% risk group)

So that’s about it. In conclusion, I am pretty much OK with the changes that the 0% APR arbitrage has caused to my credit (as compared to the free money that I am earning with the borrowed amounts). This sort of encourages me to do something similar this year too. Although, I would wait till my score bumps up a little bit (comes near 770 again).

Before I conclude this post, I would like to offer a word of caution here if you try to compare your situation with some of the data presented in this post. The numbers above give a fair idea of what’s happening to one’s credit situation, and yet they are just a little more than *handwaving*. Mortgage rates (or any other loan rates) depend on a lot of other factors, in addition to credit scores, so keep that in your mind before jumping to conclusions.

Feel free to drop a line or two about any interesting observations or perceptions (either from the above writeup or from anywhere else) that you may have about 0% APR arbitrage issues.