Myths On Money

Jan 17
Mythtip: Cut the Cable
icon1 Patrick Payne | icon2 Budgeting, Tips | icon4 01 17th, 2009| icon3No Comments »

The internet is a fantastic resource for anybody looking for the opportunity to shave a few bucks off their monthly budget. Well, actually, it can shave much more than a few bucks. Here is a tip on how to leverage the power of the internet to decrease your expenses and increase your savings!

Cut the Cable

Think about how much your monthly TV bill is. $50? $70? $100? $200!!? While it may not seem like a big deal to you to spend “just” $50 a month on cable, here’s something to think about. If you cut the cable and save even just $50 a month, then, if you invested it in the stock market, you would have $625 in one year, $3,871 in five years, and $113,024 in 30 years. Is your weekly fix of CSI:Miami worth $113,000 to you?

Am I suggesting you cut TV out of your life completely? No. I mean, you can, and that would probably be a good thing overall, but who wants to do that? I don’t. This is where the power of the internet steps in to save the day. There are great resources out there that let you watch your favorite shows online, FOR FREE. The major networks all post the latest episodes of most of their shows on their websites (CBS, ABC,NBC, etc.) Even some of the cable networks have free episodes on their websites (one such is HGTV, my wife’s personal favorite!) While these ‘”official” websites may not have EVERY show and EVERY episode, they are great resources and my family uses them regularly.

If you can’t find what you want to watch on official channel websites, don’t give up. Hulu is a great resource for finding literally millions of television show episodes. It divides the shows up by category, then you can simply browse by category until you find something that you like, or you can search for something specific. Another fantastic resource is Ovguide. This site searched many different video hosting websites for the show or movie you want to watch, then displays the results. A resource that I just recently stumbled upon is called Freetube. While I have not personally used Freetube very much yet, it seems to either feed a channel LIVE to your pc (which is way cool), or, if a live feed is not available, then it stores past footage and presents that to your pc. Just today I watched part of Get Smart on The Movie Channel off of Freetube. (be sure to turn on family friendly browsing when you go to the site; this makes it so that the adult channels do not ever appear as an option). There are many other options out there.

One thing to be wary of is a thing called Zango. Some websites that host video will want you to install Zango before they will allow you to access the content of their website. I would strongly encourage you to LEAVE any website that asks you to do this. Don’t click on anything except the ‘Back’ button on your browser. What Zango purports to do is essentially install a bug on your computer that allows them to track where you go and what you do on the internet. They use this information to present “helpful” and “relevant” advertisements directly to your internet browser window. Now, I am no tech-guru, but I smell a rat. Don’t ever ever do anything like this. There are so many legitimate and safe places to watch video online that there is no need to stay on a website that is even slightly questionable.

Using your TV

I know that computer monitors are generally not was easy to watch a show on as a TV, especially when many people want to watch at the same time. Well, there is a solution for that too. Most laptops have an s-video output that looks like this
You can get an s-video cable that will transfer the image on your computer screen to you TV screen. If your TV does not have an s-video input, then you can get cables that convert an s-video output to an RCA output. Last I saw, Radioshack had such a cable for $40, although I am sure that you can find it much cheaper other places. Cutting the cable not only saves you money, it also lets you watch what you want, when you want, wherever you want, and you can even do it on your existing TV.

Nov 29
MythTip: The Best Deal of All
icon1 Patrick Payne | icon2 Budgeting, Tips | icon4 11 29th, 2008| icon3No Comments »

In This Post:

  • Black Friday!
  • The Method
  • My Philosophy

Black Friday!

It probably comes as no surprise to you that I love a good deal. And what’s the best day of the year to get a great deal? Black Friday of course! I love Black Friday shopping. It’s fun to get out and absorb the eager excitement of the kick-off of the Christmas season.

But I noticed something very frightening in the stores this year, and it wasn’t (just) shopper’s frenzy. It was within myself. The impulse to buy something simply because it was cheap was frighteningly strong. The desire to get a great deal can be very strong. Whenever I face this temptation, I have a method that I follow to help me make sure that I don’t make an unwise purchases of any cost.

The Method

  1. Will I really use this? Sometimes we are tempted to buy something because it is a good deal and we might need it in the future. Do yourself a favor: unless you are absolutely certain that you will need it in the future, don’t buy it. If you don’t use what you buy, then it is too expensive, no matter what the actual cost. Remember, free is better than any discount any retailer may offer (even on Black Friday!). 100% off is the best deal!
  2. How much will I use this? If I determined that I would actually use the item in question, I then consider how much I would use it. Some things I might only use a few times (like a movie that I like but not enough to watch all that much, or a board game that is only fun the first time). If it will have only very little use, then it probably is not worth it.
  3. Is it quality? This question can be hard to answer in-store. If you are shopping online, then you can often find reviews of the product to help you get an idea of the quality of the product. Just remember that you usually get what you pay for. An example: a friend of mine purchased a cheap, $10 mouse for his laptop. It died a month later, so he bought another. This one also died within weeks. So he bought another. Guess what? It didn’t last. Finally, he consented to buy a high quality mouse for $25. It’s been working great for many months now. If he had just purchased a quality item in the first place, it would have been cheaper overall. There are times to buy cheap, and times to buy quality, and you must decide with every purchase whether it ought to be a frugal or a quality purchase.

My Philosophy

My personal philosophy regarding personal finance is that it is all about getting what you really want. The problem is, we decide in the moment what we want, and forget that the decisions of every moment take us either closer or further from our ultimate goals. Budgeting and conservative spending habits are not about denying ourselves what we want, it’s about getting what we want the most out of our money.

A quick example. My wife and I are currently saving for a car. We gave considerable thought to buying a TV this Black Friday because they are so cheap. Eventually, though, we decided not to. Why? Well, our current TV works just fine. An upgrade would be nice, but this one works great for us. Even more importantly, we decided that we would rather have the cash for our future car than the TV. Could we afford the TV? Sure. Was it a good deal? You bet! But do we want it more than we want the car? Nope. So we decided to save the money for what we wanted the most, and not spend it on what we wanted at the moment.

That’s why I write this blog. Because I believe that many people are wasting money without even realizing it. The principles of finance can reveal the unnecessary costs and expenses that we expose ourselves to; they can reveal the path to achieving out greatest financial hopes and dreams. We all have the capacity to be financially successful. We all have enough income. The question is: what do you want the most? Focus on that and avoid frittering away your wealth on impulse purchases and excessive financial drains, and you will one day find yourself with all that you truly want. There may be a price of frugality to pay now, but if you get what you want in the end, is it truly worth it? I believe so.

Nov 21
MythTip: Run the Numbers
icon1 Patrick Payne | icon2 Budgeting, Debt, Tips | icon4 11 21st, 2008| icon3No Comments »

Watch this first

(if you are having trouble viewing the clip, you can try going to the YouTube clip directly)

Personally, I think this video is fantastic. I wholeheartedly endorse the principles discussed here.
The principles that Dave Ramsey teaches in it are fantastic. How does this system work? Easy. No interest is paid. Instead of paying interest, you save that money and put it into your next car. Piece of cake. This is why debt is not your friend. Your monthly payment on the car isn’t really telling you what you are giving up.

What I would like to point out is how this illustration is effective only for the exact terms used. It assumes that you invest a full $464 a month at a constant 12% interest rate. And that’s great. There’s nothing wrong with that assumption. But if you want to run the same system yourself, and only save $200 each month at 4%, you may be surprised to find that you can’t upgrade the quality of your car quite so quickly.

This is why it is important for everyone to understand the basic principles of finance. Every situation is different and will yield different results from any other situation. So, what should you do? You should run this system for sure. You will save hundreds of thousands of dollars in car payments over the course of your working life. But, to minimize the number of surprises you encounter while operating this plan, you should run the numbers for yourself, for your situation. By doing so, you will be sure that your plan will run smoothly.

A Helping Hand

It just so happens that I have created a spreadsheet that you can use to create your own free-car plan. Ready? Then download it now to get started!

Oct 23

This post is a follow-up for MythTip: Recession Part 1. If you are nearing the time when you want to pull out your money from your investments, then bonds might be a good way to take advantage of a down market and lock in good interest rates for the future. This post will take a look at the interest rate gains that bonds can provide, and what to look for in a bond.

What is a Bond?

A bond is kind of like the opposite of a stock. When you buy a stock, you buy a piece of the ownership of the company. When you buy a bond, you are lending money to a company. When you buy a bond, you receive interest on the money that you lend to the company. These payments are typically made on either an annual or semi-annual basis, although other payment arrangements certainly exist. When the bond matures (read below), you get your full purchase price back.

Why Invest in Bonds

The return that bonds provide are dependant on a lot of factors, but many times they will be good investments when stocks are poor investments. Bonds can provide gains both from the interest paid to the bondholder and from potential increases in the price of the bond. This dual gains capacity is what really provides bonds with the ability to provide strong returns in a down market. Consider adding bonds to your portfolio when the stock market is performing poorly.

Bond Language

The words used in describing bonds and the returns they provide can seem like a totally foreign language. Here are the important terms you need to know about bonds. These will help smooth the future discussion.

  • Price: This is the price you pay for the bond. Bonds can sell at face value, a discount, or a premium. More on bond pricing in the next mythtip in this series.
  • Coupon Rate: This is the interest rate that the bond will pay. It is a percentage of the original price of the bond that is paid each year. i.e. a bond that originally sold for $1,000 with a 7% coupon rate will pay $70 per year.
  • Yield to Maturity (YTM): This is the effective interest rate that the bond will pay if you buy it at it’s current price.
  • Callable: A bond that is callable can be recalled by the company any time if interest rates for bonds drop. A callable bond is significantly less preferable than a non-callable bond because the call option makes it so that if you are getting a high return, the company can take that high return away from you an replace it with a lower return.
  • Rating: This is very important. There are several companies that look at all the bonds that are issued and rate the riskiness of the bond based upon the relative strength of the company that issued the bond. Ratings are alphabetical: AAA is the best, then AA, A, BBB, BB, B, etc. Bonds with a rating below BBB are considered junk bonds, and are significantly riskier than bonds with ratings higher than BBB. Bonds with ratings higher than BBB are considered investment grade. It is not recommended for anyone except serious speculators to buy junk bonds.
  • Maturity: This is the time period over which the bond will pay interest. At the end of the maturity period, the company will return the purchase price of the bond.

How They Work

Bonds are very complex. Many finance students struggle to understand the financial calculations and the logic involved with bonds. YTM calculations are among the more difficult calculations in all of finance because the logic behind the calculation can be quite confusing. Fortunately, you do not have to be able to make bond calculations in order to be able to make good bond-purchase decisions. Let’s take a look at an acutal bond today to help you get an understanding of what to look for in a bond.

ALLTEL corporation issued this bond in June of 2002. The original price was $1,000 per bond, the coupon rate is 7.875%, and the maturity date is July 2032. So this bond will pay whomever holds the bond $78.75 each year. Today, the price of the bond is $872.50. This bond is selling at a discount because current coupon rates for a comparable bond today are higher than the coupon rate of this bond (if that didn’t make sense, don’t worry, I’ll address bond pricing in the next post). The bond is rated “A”, so it is of moderate-to-low risk relative to other investment grade bonds. This bond is NOT callable.

Now let’s look at the YTM. The YTM for this bond is 9.816%. This is the important factor. The YTM determines how what interest rate you will actually earn if you buy the bond today. The reason the YTM is higher than the coupon rate is because the bond is selling at a discount. You will only have to invest $872.50 in order to get $72.50 per year. That is a 9.816% return. And this return is guaranteed for as long as the company is in business. In July 2032, you would get the original purchase price ($1,000) back. That is not a bad investment by any stretch of the imagination.

Bond Basics Summary

There are certainly times when bonds are more attractive investments than at other times. Consider bonds at times when the stock market is performing poorly. When stocks are doing poorly, people begin moving their money into bonds. This increases the demand for bonds and forces the interest rates on bonds up. But don’t forget that when stocks are low, it’s also a good time to buy stocks. Either way could be profitable, but bonds are certainly the less volatile way to attempt to cash in on a down market. When looking for a bond, look for a high YTM with a good rating. If you can find a bond that meets both criteria, then look for a non-callable bond. Also keep an eye on the maturity date. Longer maturity dates can be good to lock in your return for a longer period of time, but they also tend to have lower returns, so keep an eye on that as well.

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