I am always a bit curious when I read a cover story headline like the one on Kiplinger Magazine this month. It says 18 Ways To Earn 5% or More On Your Money.
A lot of readers will make an assumption that goes along with that headline that they are talking about low-risk investments or no-risk savings products. After all, it doesn’t take a degree in advanced personal finance to know that there are literally thousands of ways to earn 5% or more on your money. Of course, most of those also come with a way to lose 5% or more on your money too.
That is not what the article is about. Instead, this particular article, whose article title inside the magazine is, “Great Rates In A Low-Yield World” manages to give a better clue. The article is NOT about where to open a savings account to earn 5% or more. It is about how to get 5% YIELD on your investment. That is, 5+ percent as income, and not counting losses on invested capital.
Real Earnings Are About More Than Dividends and Interest
Unfortunately, while the article does indeed uncover available investments earning a 5% or higher yield, it ignores the potential change in value of those investments. If you are holding bonds to maturity, of course, this factor is moot, but if your personal finance needs change or you don’t plan on holding those munis for a couple of decades, then price volatility is a very real factor in whether or not you earn that five percent target interest rate.
The first way to earn more than 5% on your money on the list is taxable municipal bonds. Specifically, they talk about Build America Bonds (BAB) which in addition to having taxable interest, have a portion of their bond insurance paid for by the Federal Government. Long-term BAB are paying 6 percent or higher in many cases.
Of course, you better be planning to hold on to those long-term bonds for a long-term investment.
As any educated investor knows, bond prices fall when interest rates rise. This is true for Build America Bonds muni bonds too. So, the $1,000 you shell out to get the 6.6% 25-year Illinois bonds the article references will soon be worth much less.
While economists are predicting the Fed won’t raise interest rates until 2012, that still means that for the next 23 years, those bonds will be trading at a discount. That is not a pretty outlook for bonds.
If rates rise far enough and you end up selling those bonds for whatever reason, your capital losses will make your actual rate of return on the bonds far less than the 5% you were trying to earn more than in the first place.
Other money earning strategies on the list potentially have the same issue. The list includes some REITS, preferred stocks, and some exchange traded limited partnerships.
Nothing drives home this point more than the inclusion of British Petroleum on the list of ways to earn more than 5% on that money. Since magazines go to print months before they hit the newsstand, the article was written before the BP oil spill in the Gulf of Mexico occurred. So, on page 39, under “Juicy Dividend Payers” is British oil giant BP (with a listed stock price of $59) and its 5.7% dividend.
Unless you have been living under a rock, you know that this is one suggestion you do not want to take. Suggestions that BP eliminate or sharply reduce its dividend payment in order to retain enough cash to pay out mounting compensation and penalties are growing louder. Furthermore, the stock’s price has been crushed, closing under $34 per share on Friday. If you bought BP at $59 hoping for a nice juicy dividend, not only is that dividend likely to be much lower (if not zero), but you have also lost 40% of your original investment!
The point is not that this one suggestion turned out very bad, but rather that any one of the suggestions in that same article could have something happen to them as well. It wouldn’t take the world’s largest oil spill to turn a 6% dividend into a 3% yield, while at the same time wiping out 5% of your original investment.
Looking for ways to earn more interest on your savings is good. Knowing the distinction between savings and investments is even better. Don’t run down to your broker’s office with your savings account because a financial magazine or money management website touts higher returns. First investigate the risks and make sure you are putting the right dollars in the right financial asset strategy buckets.
Warren Buffet Wrong About Moody’s
CommentsWarren Buffet testified before Congress that Moody’s rating agency should not be blamed for its enormous role in the financial collapse that occurred following the blow up in the real estate market and the subsequent implosion of collateral mortgage options, or CMOs. These securities eventually became the so-called toxic securities that continue to weigh down the balance sheets of many financial companies.
Buffet is not dumb nor is he being led to say certain things by Berkshire Hathaway’s large stock holding in Moody’s. Rather, Buffet is saying that Moody’s and the other rating agencies including Standard and Poors and Fitch can’t be held responsible since what they missed is the same thing that everyone else missed. In other words, they weren’t any worse than anyone else.
The problem with this line of thought is that the whole point of Moody’s business is that it knows MORE THAN EVERYONE ELSE. Otherwise, what is the point of paying them to rate securities. If Moody’s role in the securities industry is nothing more than the corroboration of information that others have already figured out, then what is the point of what they do exactly?
Don’t forget that numerous investment concerns including pension plans, government investment operations, and numerous trusts and endowments are prohibited by law or by internal rules from investing in securities unless they get a high enough rating from at least one of the three major rating agencies. In other words, the multi-billion dollar investments run by top notch professionals around the country must bow to the ratings issued by Moody’s and others precisely because those agencies hold themselves out to be experts who fully and completely analyze the investments they rate and then rank them based upon their potential risk.
Frankly, I cannot understand why there has not been a major class action lawsuit filed against all three ratings agencies for their complicity in the shell game that mortgage investments have been revealed to be. Not once did these so-called experts smell a rat in one of the numerous packages of mortgages that they supposedly diligently looked into. Not once did they question the pool of mortgages used or the structure of the security. Not once did any mathematical model predict even the slightest of blips for these investments. The vast majority of these now toxic investments were given the highest Triple-A rating by Moody’s. If these firms had been doing anything other than rubber stamping what Wall Street put in front of them, there would have been at least a few blips along the way.
Just statistically speaking, any remotely valid mathematical model would have eventually kicked out the small amount of risk necessary to rate an investment Double-A, but that didn’t happen here. The ratings firms were either incompetent, or they were in on it the whole time. Either way, they shoulder a large amount of blame for creating and fueling the bubble, as well as tricking a lot of big investors into investing in it.
If I had my druthers, all three firms would be severally fined, sanctioned, and strictly regulated until such time as the world could feel that the faith place in these agencies was in any way justified.
Existing Capital One MasterCard holders may or may not be getting the same deals, but new credit card offers from Capital One are arriving in the mail to new credit card users. These are not reserved for highly qualified borrowers with high credit scores either.
How do I know?
One good piece of financial advice that I frequently give is to use phony names when signing up for certain things, especially promotional offers and magazine subscriptions. The reason is that these companies like to turn around and sell your name and address to other companies that then send you plenty of junk mail. These mailing lists can be more profitable than the actual business of writing a magazine or newsletter!
Nothing helps sort out a real “Urgent! Response Required,” mailing from a phony one like seeing one of the fake names that you used to sign up for something in the past. Just like the one that appears on my no annual fee Capital One No Hassle Rewards World MasterCard offer that came to my house under a name used for magazine subscriptions. Since that isn’t even a real person, let alone someone with a high credit score, we know that these offers are either going out blind, or people with low credit scores can qualify for these credit cards.
Capital One Miles Rewards
This particularly Capital One MasterCard looks like it comes with the standard NoHassle miles reward chart and earning points follows the basic Capital One miles rewards earning plan. You get 1 mile for each $1 you spend. The miles do not expire and there is no limit to the number of miles you can earn with the credit card.
A bonus rewards points offer comes in the form of 30,000 bonus rewards miles comes with plenty of fine print. You actually get a 10,000 mile bonus reward with your first purchase. Then, if you spend at least $3,000 per year on the card, you get another 10,000 NoHassle miles reward bonus on your first anniversary and then 10,000 more No Hassle bonus miles on the second anniversary. So it might be a while before you want to use that Capital One Rewards Catalog to pick your free reward.
Also, there is no annual fee and this is a credit card with 0% interest rate APR on purchases until February 2011. After that, the regular interest rate is 17.99%, but that is not a fixed interest rate. Instead, this MasterCard from Capital One comes with a variable APR. The variable interest rate is calculated as PRIME + 14.74%. OUCH!
Folks, pay attention to these rates from banks on your credit card offers. 17.99% is not a low interest rate by any stretch of the imagination, but when the PRIME rate climbs to a measly 5%, which is still very low, by the way, this card will have an interest rate of 19.74%. That’s 20% interest on a credit card. No amount of miles is worth that.
Now that the April 15th deadline is behind us, the best personal finance advice you can take is to start planning for your 2010 Income Taxes now. That way, you will be ready to take advantage of all the 2010 tax tricks, tips and deductions you can.
Sure, last minute tax advice and finding those hidden tax deductions during crunch time is great, but to really save money on taxes, you have to plan all year long. Start watching now for expenses that you can deduct from your taxes and start keeping records and receipts for all of those possible tax deductions that might be usable to lower your taxes if you meet certain requirements or minimum thresholds. Most importantly, start keeping your contemporaneous records of important deductible expenses like business mileage, unreimbursed expenses, training and education expenses, and medical expenses.
IRS 2010 Standard Mileage Deduction Rate
The standard mileage rate for 2010 is 50 cents per mile for business reasons. The 2010 standard mileage rate for miles driven for charitable purposes is 14 cents per mile.
You can deduct all unreimbursed mileage driven for business reasons and most charitable reasons as long as you have written documentation of the miles driven. These records must be "contemporaneous," which basically means that you need to create the record as it happens. In other words, you need to be recording your mileage in a little mileage log book every time you drive somewhere. Creating a log at the end of the year won’t cut it.
There is no need to buy a mileage log specifically, however, many people find it useful to have the format for recording their business trips in place. It can also make filling in the data easier. Most importantly, by completely filling out one of the mileage logs that you get at an office supply store like Office Depot or Staples is that you can be sure that you are writing down all the information that is required to take the standard business mileage rate for 2010 deduction from your taxes. Otherwise, any notebook will do. Write down your starting and ending mileage (use the main odometer reading, not just the trip odometer) and the total miles. Be sure to note whether that is one-way or round trip. Also note what the business reason was for making the trip.
Everyone is worried about if and when the Federal Reserve will raise interest rates, even though the Fed itself continues to say that it is not considering doing so. The personal finance strategy Catch-22 here is that as soon as the Fed drops the language in its statement saying that they plan to leave interest rates unchanged for the near future, markets will react as if the Fed actually raised rates. That is what happens when interest rates are so low (basically just above zero) that everyone knows the only way they can go is up.
Recent inflation data about the Consumer Price Index, or CPI was released suggesting that inflation remains calm if not non-existent.
Consumer prices in the U.S. fell 0.1% on a seasonally adjusted basis in April as energy, housing, auto and apparel prices declined. The core CPI — which excludes food and energy prices — was unchanged in April, lowering the year-over-year increase in core inflation to 0.9%, the lowest rate since January 1966. – MarketWatch
What is Core Inflation or Core CPI
I find it ironic that with every news story published about the CPI there comes an in text explanation of what the "Core CPI" is. The single liner typically says, as above, that the Core CPI excludes food and energy prices. The irony is that the same news story makes no effort to explain what the Consumer Price Index is in the first place, so how much sense does it make to explain what is excluded from it to derive the Core CPI?
In other words, do you what price categories are included in the CPI? How much help is it then to know that the Core CPI does not include two of the categories from the original list that you don’t have? I’m just saying.
The Bureau of Labor Statistics calculates and releases numerous price indexes. The one that the media constantly refer to as The consumer price index or CPI is actually the All Items Consumer Price Index for All Urban Consumers for the U.S. Cities Average, 1982-84=100. This is abbreviated CPI-U. As you can see, there is actually a lot that goes into the number reported as CPI.
Components of Consumer Price Index CPI
The basket of goods measured by the BLS to compute CPI is actually very large. The main categories, as reported by the BLS, are:
- FOOD AND BEVERAGES
- HOUSING
- APPAREL
- TRANSPORTATION
- MEDICAL CARE
- RECREATION
- EDUCATION AND COMMUNICATION
- OTHER GOODS AND SERVICES
As you can see, the CPI measures a lot more than just your average everyday expenses. Some categories, such as Medical Care and Education affect certain people a lot more than others.
Check out the latest on Thank You Network Citibank
The Core CPI that the media likes to report about is officially known as All items less food and energy. You can tell from its title what the BLS thinks about this particular statistic. Nonetheless, the idea is that Food and Energy prices are particularly volatile and by excluding them one gets a better idea of what the "real" inflation is. Whether that is true or not depends in large part to what extent the increase in food or energy prices are part of a long-term trend versus short-term adjustments, much like day-to-day stock market prices.
Raw CPI data is virtually worthless, which is why the Fed takes into account many more factors to put the CPI index into context when making its rate setting decisions. In other words, it is best not to get caught up in the hoopla surrounding individual CPI numbers. However, keeping an eye over time on the statistic provides a thumbnail sketch of whether prices are rising or falling.
For now, the concern is not the CPI and the CPI will not be an important factor in the Federal Reserve’s interest rate policy in the near future. Right now, the Fed’s only concern is how to withdraw the extra stimulus it has provided to the economy through its unprecedented steps in 2008 and 2009 without causing the fragile recovery to collapse. Everything else is just background noise.
