Lazy Man and Money

Goodbye Bank of America, Hello USAA

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If the title wasn’t exactly clear, I’m changing my banks. This post is actually quite a bit overdue. I had been gradually doing it for a couple of years now. I would have written about it earlier, but I didn’t realize it until recently. That’s how gradual the change has been.

It’s not that Bank of America has done anything in particular to lose me as a customer. I know many were upset by their announcement to charging fees on debit card purchases (though Bank of America changed its mind on the fees). I wouldn’t have been affected by it since I rarely use my card as a debit card. It comes down to the fact that USAA is a better fit for me and my family.

What sets USAA Apart

The first thing that comes to mind is customer service. I know everyone has their favorite companies when it comes to customer service, but in almost every case it seems anecdotal. I could show you ten bloggers and each of them would have a favorite web hosting service – and a lot what they’d talk about would be the customer service. With USAA, it close to unanimous that their customer service is the best. What I like the most is that when I call I get the person’s direct extension in case I need to call back or follow up.

The other thing that sets USAA apart is that they actually give you money back at the end of the year if they have any left over. I know that sounds odd. I don’t have the full explanation unless it is this Wikipedia entry, but my wife has multiple times gotten a check back at the end of the year. (Since she is the sponsor of the account, more on this later, I don’t have the full details of what they sent for the both of us. When it’s money in my favor, I tend not to ask too many questions.)

It’s taken me a little while to embrace USAA. When I first looked into it, I was curious about the brokerage accounts. I compared them to Zecco who had been offering free trades at the time. I didn’t see their rates as being competitive. However, Zecco has since started to charge for most (if not all) trades now. The gap has closed to where the customer service and the ability to have my savings, checking, insurance, brokerage, and IRAs in one place far outweighs a couple of dollars a year I pay in putting my Roth IRA money to work in an ETF.

Recently, I was able to consolidate the 401ks from three old jobs into one Rollover IRA. I can’t tell you how much simpler it is to be able to log into one web site and see it all.

Why I may keep Bank of America

While USAA is great for any number of reasons, I still see a need for my Bank of America account. It’s not that I have any allegiance to Bank of America, but that I feel the need to have a bank in the real world – one with branches and people who I can talk to face-to-face. There are a couple times where this has come handy – usually when I need to have a certified check of some sort.

In some ways my banking has become a little microcosm of my business. It is 90% done through the Internet, but 10% done in the real world. I don’t see that changing any time soon. USAA gives me a bank that has the online tools that match my business.

So Bank of America, this isn’t really good bye like I said in the title. We can still be friends. I am just looking for more out of my banking relationship.

(Though it might seem that USAA sponsored this post. They have not. I just really like them and I think you will too. That is if you meet the eligibility requirements which typically require some military connection.)

Money’s 7 New Rules of Financial Security (Part 2)

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I’m reviewing Money Magazine’s 7 New Rules of Financial Security. You can read Part 1 here.

Rule No. 4: Borrowing

Old thinking: Borrowing sensibly is a good way to build wealth.
New rule: Borrow cautiously. You have to worry about the other guy’s debt too.

Money Summary: Credit was cheap and plentiful like food at Sizzler. Americans acted as expected and ate as much as they could. Now there’s lots of vomiting going on. Next time don’t eat so much. (Sorry, that might not have been Money’s exact point, but I couldn’t avoid the analogy.) Side point, you may be exposed to more leverage than you think. People paying you money may have been leveraged… their leverage becomes your problem when they can’t pay you.

Lazy Man’s Take: Sounds like money is saying that moderation is the key. Hmmm, I remain unconvinced that’s a new rule. I do like the side point though. It’s something that I hadn’t thought about. I had done a lot of investing with Prosper and have found the returns not very good (though my Lending Club returns have been great). Perhaps everyone else’s leverage became my leverage.

Rule No. 5: Housing

Old thinking: You can expect your house to appreciate handsomely over the long run.
New rule: Your home won’t make you rich. But it is an important savings tool.

Money Summary: Except for two decades where real estate had skyrocketed real estate has been in line with inflation. Real estate also has other issues when it comes to investing in it: maintenance costs, insurance, taxes, remodeling costs that rarely pay for themselves, and steep buying and selling costs. Still owning a home is a great “‘commitment device,’ or a tool that forces you to save.”

Lazy Man’s Take: There’s a great chart with the article. It’s well worth clicking over to. I’ll be here when you back. Done? Good. Back in May of 2007, I suggested the housing run up may be due to more people having dual incomes. Maybe I was wrong and it was government subsidies in the 1940s and easy credit and low interest in the 2000s. If that’s true, there’s going to be a lot of disappointed real estate investors.

As far a commitment device goes, it’s pretty easy to set up an account and automatically funnel money into it. You can invest your money in things with returns that not just in line with inflation, but actually exceed inflation.

Rule No. 6: Diversification

Old thinking: A diversified portfolio lowers your risk.
New rule: Diversification won’t always save you – and you need more of it than you think.

Money Summary: Diversify even more. Get an international bond fund. Use Morningstar’s Internet X-Ray tool.

Lazy Man’s Take: I feel like I already wrote this rule. I love diversification, but I don’t think this is really new. The old thinking and new rule basically say the same thing to me. A lowered risk implies that it won’t always save you. Otherwise the old thinking would have been “diversification eliminates all risk.” I have been using Morningstar’s X-Ray Tool for years now.

Rule No. 7: Retirement

Old thinking: Retiring early is a prize.
New rule: Retiring early is a problem.

Money Summary: With 401k accounts shrinking the odds of retiring early is much more unlikely than it was in the past… and it wasn’t very likely then. Staying at your job for another year could make a big difference in if your money lasts. Lastly, you have to consider that you might not be able to work if you want to – your health and the job market could push you out as you get older.

Lazy Man’s Take: Once again, all solid information, but I’m not sure it’s a new rule. We’ve known for a long time that working an extra year makes a huge difference in retirement income. It’s a year you aren’t withdrawing and are adding to the next egg.

I’m going to stick to the old thinking… The new rule isn’t very motivational.

Finance 101: Good Debt vs. Bad Debt

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I’m amazed by the number of people who seem to be against debt. Debt has become has a problem in America, but I think too many people clump the good with the bad. To the people that don’t like debt, would you take a million dollar loan at 1% interest? I would. I’d immediately put it in a few interest baring accounts that are FDIC insured (I say a few because FDIC insurance doesn’t cover a whole million). At today’s rates, which are historically pretty low, you can make a guaranteed 3% on that money. That means the debt naysayers would be missing out on 2% of a million dollars, $20,000 a year. I’m pretty Lazy, but for $20,000 I can manage to set up some bank accounts.

Good Debt

When you can make more money than you are paying, that’s an example of good debt. Some people call it leverage. Here are some other examples of good debt:

  • Student Loans – The idea here is that you choose to into a little debt now, so that you can make a lot more money through the rest of your life. That extra income, in theory, should be enough to pay back all that debt and then some. Just remember that if you initially got a bad rate you can refinance student loans and save a lot on interest.
  • Mortgage – This is an area of wide debate – it might even matter where you live. If you had a mortgage in the early 1990’s there’s a good chance that the debt allowed you to own a home that appreciated in value a whole lot. If you bought in some markets in the last couple of years, there’s a good chance you’ve seen no appreciation and if you sold today would have been worse off than if you rented. In many cases, a mortgage is tax deductable and that’s very nice benefit as well.
  • Work Necessities – Many people don’t consider a car loan good debt. However, if you need a car to get to your work, I argue that it’s good debt. For it to quality as good debt, you’d have to treat it as purely transportation between two points, not a status symbol. When an expense is necessary to protect your income stream, it may very fit into the good debt category

Bad Debt

Bad debt is debt that doesn’t have an obvious way helping your finances. There’s a lot of debt that falls into the category of bad debt, which is often where bad debt gets its name. Do you use a credit card to buy CDs and don’t pay it off every month? That’s a prime example of bad debt. Many companies will charge you interest of 20% or more. It’s not long until you are paying twice as much for that CD as you should. This does not benefit your finances?

If you go into debt to afford a vacation, that’s bad debt as well. You might feel more refreshed and ready to earn more money, but you need to get your finances in the positives first.

Three Debt Questions to Ask Yourself

I like to ask myself the following questions before considering taking on any kind of debt:
1. Am I going to pay interest on this purchase? With my credit card purchases, I pay them back, so the answer is usually no.
2. Does this purchase preserve or grow my current earning potential? If yes, then it has potential to be good debt. I say potential because it’s not worth going a million in debt to earn a couple of extra thousand dollars a year. It’s also not worth protecting a $20,000 a year job.
3. Am I buying this because I feel “I deserve it?” This is often a danger sign.

It’s not always easy and straight-forward, but understanding the difference can be important.

Celtics and Oprah (and some weekend links)

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This is an interesting weekend for me. I’m very excited about two events tomorrow. In the morning, I get to watch one of my wife’s friends get her doctorate from Stanford… followed by a graduation speech from Oprah. It’s kind of sad that I’m not really interested in her for any reason other than she’s Oprah. I’m not exactly a fan.

After I’m done with Oprah, I have to hop on the Celtics’ bandwagon and root with some friends at a bar. I didn’t think I’d find basketball interesting ever again, but between Pierce coming back from the injury last week and the 24 point road comeback… wow, they have me captivated.

Lastly, I’d like to wish my own dad a Happy Father’s Day. I wish we could have shared the day with you.