A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Saturday, July 30, 2005

The Future of AllThingsFinancial

I took the first step towards setting up AllThingsFinancial on its own. I registered (it's not an active address yet) for 5 years. Now I'm looking for a host, which is both confusing and intimidating.

I have heard of Dreamhost and TypePad. Jim at Bargaineering uses Dreamhost and has told me that he is happy with it. My main questions are:

1. How much space is enough? Is 2400 megabytes large enough? What does that mean?

2. What about bandwidth? What does that mean? I have ambitions to make AllThingsFinancial grow but I want to be realistic. I don't want to buy a bunch of extra storage and bandwidth if I won't need it.

3. Anyone using TypePad or Dreamhost?

4. Is MoveableType or WordPress better? Is there another programming language that I'm not thinking of?

What other issues should I think about?
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Friday, July 29, 2005

Wilmington Trust Has an Account Offering 3.35%

NOTE: This is not a recommendation. I just saw this information on the web and thought I'd pass it along. I also am not getting paid to promote this.

Wilminton Trust has a savings account similar to ING Orange and Emigrant Direct's American Dream Savings Account. Savers might want to check it out.

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OT: A Little Friday Afternoon Humor

My father-in-law sent this to me today. I'm calling this the Dynamic Impact of Aging:

Jacob, age 92, and Rebecca, age 89, living in Florida, are all excited about their decision to get married. They go for a stroll to discuss the wedding, and on the way they pass a drugstore. Jacob suggests they go in.

Jacob addresses the man behind the counter: "Are you the owner?"

The pharmacist answers, "Yes."

Jacob: "We're about to get married. Do you sell heart medication?"

Pharmacist: "Of course we do."

Jacob: "How about medicine for circulation?"

Pharmacist: "All kinds."

Jacob: "Medicine for rheumatism and scoliosis?"

Pharmacist: "Definitely."

Jacob: "How about Viagra?"

Pharmacist: "Of course."

Jacob: "Medicine for memory problems, arthritis, jaundice?"

Pharmacist: "Yes, a large variety. The works."

Jacob: "What about vitamins, sleeping pills, Geritol, antidotes for Parkinson's disease?"

Pharmacist: "Absolutely."

Jacob: "You sell wheelchairs and walkers?"

Pharmacist: "All speeds and sizes."

Jacob: "We'd like to use this store as our Bridal Registry."
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Money 101

The CNN/Money website has a really good series called Money 101. I have listed the entire series below and added links to posts from AllThingsFinancial that are related to the subject.

Here we go:



Setting priorities

Here's help for the first -- and often the hardest -- step in achieving your financial goals: deciding which goals to pursue.



Making a budget

How to bring your spending under control, so that you get the most out of every dollar.



Basics of banking and saving

Here's how to get the best banking services at the best price, either online or off.



Basics of investing

An introduction to making money in stocks, bonds and mutual funds.

Related posts on AllThingsFinancial:

Understanding the Time Value of Money
How to Calculate the Present Value of an Annuity
How to Calculate Annualized Rate of Return



Investing in stocks

The market can be a great place to turn savings into wealth -- or to lose your shirt. Here are some fundamentals of investing wisely.

Related posts on AllThingsFinancial:

A Look Back at Index Returns
The Importance of Understanding Objectives When Investing



Investing in mutual funds

It's a mutual-fund jungle out there. Here's how to create a simple portfolio that works.

Related posts on AllThingsFinancial:

What's a Wrap Account
Understanding Mutual Fund Fees
Questions to Ask Your Broker
Questions to Ask Your Broker Before You Buy a Load Fund
How Does an A-Share Mutual Fund Work?



Investing in bonds

Bonds can provide a steady and reasonably secure income, while adding ballast to your portfolio--but only if you really understand what you're buying.



Buying a home

Owning your home is part of the American Dream, but if you’re not prepared, buying it can be a nightmare. Here are some fundamentals for buyers and sellers.

Related posts on AllThingsFinancial:

The True Cost of an Interest-Only Mortgage
Comparing 15, 30, and 40-Year Mortgages
Beware of Interest-Only Mortgages



Controlling debt

You've got to know when to hold debt--and when to fold it. This lesson shows you how to accomplish your financial goals by making debt work for you.



Employee stock options

More companies are handing out stock options, and to a much broader group of employees. This lesson gives you vital information on how to handle ESO's.



Saving for college

It's not rocket science, just common sense. By starting early and investing regularly, your children may have a wider choice of colleges, and paying the bill won't hurt as much.



Kids and money

Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This lesson will help you put your children on the road to handling money responsibly.

Related posts on AllThingsFinancial:

Great Resources for Kids
Roth IRAs for Kids
Teaching Kids About Business and Investing



Planning for retirement

Achieving a comfortable retirement in the 21st Century requires a new approach to retirement planning.

Related posts on AllThingsFinancial:

How Much do You Need During Retirement?
What is a Safe Withdrawal Rate From Retirement Savings?
Taking Money Out of Your Retirement



Asset allocation

The single most important thing an investor can do is practice asset allocation. Here's how.

Related posts on AllThingsFinancial:

What the Heck is Asset Allocation?



Hiring financial help

What to keep in mind when when seeking professionals to handle your financial planning, stock trading, insurance coverage and tax returns.

Related posts on AllThingsFinancial:

Questions to Ask Your Broker
What is Fee-Only Financial Planning?



Health insurance

Whether your employer provides you with a group medical plan or you need to buy coverage on the individual market, understanding how health insurance works is the best way to get your money's worth.



Buying a car

Buying a car is like no other shopping experience. The choices seem to be endless. This lesson helps you sort through your options.




Among the long list of necessary evils we must encounter throughout our lives, perhaps the most constant -- taxes -- is also the least understood. But the whole process isn't nearly as baffling as you may think.



Home insurance

Homeowners' insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you have to use it. Here, you'll learn how to purchase peace of mind now and later.



Life insurance

Life insurance is critical to financial planning. It's a necessity for anyone with dependents who would be affected financially by your demise. Yet life insurance is one of the hardest financial products to understand and it's sold by agents who are sometimes more concerned with their commissions than your needs. This Money 101 lesson is all about a better way to buy life insurance.

Related posts on AllThingsFinancial:

How Much Life Insurance do You Need?



Estate planning

Americans are in the midst of one of greatest inter-generational transfers of wealth in history, yet few of us have done any planning for it. Here's how to start.

Related posts on AllThingsFinancial:

The Beauty of a Stretch IRA - An Example
Stretching an IRA
Trusts & IRAs - Part 2
Trusts & IRAs
Make Sure Your IRA Can be Stretched
Stretch a Small Roth IRA



Auto insurance

Auto insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you need it. Here's how to purchase peace of mind now and later.




It's the most important tool you've got for retirement. Here's how to make the most of it.

Related posts on AllThingsFinancial:

Don't forget to Rebalance Your 401(k)
Trusts & IRAs - Part 2
IRS Publication 590
Trusts & IRAs
Make Sure Your IRA Can be Stretched
Stretch a Small Roth IRA
Facts About the Roth IRA
Should You Leave Your 401(k) With Your Company?
The Beauty of a Stretch IRA - An Example
Stretching an IRA

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Thursday, July 28, 2005

Something to Save For!

Okay, this is sort of related to personal finance.

I'm a car nut - always have been, probably always will be. I saw this today and thought I would share it. Porsche is going to build a "sedan" called the Panamera. From the looks of the sketch, it looks like it is going to be pretty cool looking.

It probably won't be available until 2009 so I have plenty of time to save for it's $75,000+ price. If I start saving $1,386 per month now at 6%, I'll have $75,000 by the summer of 2009! Of course, it might be smarter to just put that money towards a better goal like retirement.

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Try on a Pair of Gap Jeans and Get a Free Song From iTunes

Here's something for my frugal music-loving readers:

From August 8 to 31, each customer who tries on any pair of Gap's new jean fits -- three new fits for women and one for men -- will get a complimentary song from Apple's iTunes music store.

Here's a link if you want to read more about it.

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Watch Out for PayPal Scams

I know this is nothing new but I still wanted to let those of you who may not be aware of the PayPal scams. Today I received the following email:


You have added as a new email address for your
PayPal account.

If you did not authorize this change or if you need assistance with
your account, please copy and paste this link into your webbrowser

Thank you for using PayPal!
The PayPal Team

Please do not reply to this e-mail. Mail sent to this address cannot be
answered. For assistance, log in to your PayPal account and choose the
"Help" link in the header of any page.


NEVER give your password to anyone and ONLY log in at . Protect yourself against fraudulent websites
by opening a new web browser (e.g. Internet Explorer or Netscape) and typing
in the PayPal URL every time you log in to your account.


PayPal Email ID PP007


It looks like an authentic email. It's NOT! One thing you have to look out for is the links that they put in the email. Although they look legit, if you hover your pointer over them, you will see the real address pop up. DON'T CLICK ON THE LINKS!

If you ever get an email that is supposedly from PayPal, go directly to the PayPal website through eBay. If PayPal has a message that is important, they will have it on their website.

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Wednesday, July 27, 2005

Characteristics of Empowering Mission Statements

I just posted a bit about the Characteristics of Empowering Mission Statements on Man on a Mission. It might inspire you to write your own mission statement. A clear sense of purpose has everything to do with personal finance.
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Tom Peters Has Been Blogging a Year

I was just over on the Tom Peters blog and noticed that today marks his one year blogging anniversary. If you haven't ever checked out his blog, give it a try. I am a big Tom Peters fan but have been disappointed with his last couple of books. They were just too busy for my tastes. I think I would get a headache if I tried to read them. In my opinion, his best books were (in order of my preference):

1. A Passion for Excellence
2. In Search of Excellence
3. Thriving on Chaos

Happy Birthday

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The Power of Dividends

I like dividends. I suppose that's why I like TheDividendGuy, a blog written by a guy who also like dividends. Go check out his blog and while you are there, check out this post. I like the way he keeps track of his dividends. Maybe his spreadsheet can help you set up your own tracking system.

One other guy who likes dividends is Jeremy Siegel. His book, The Future for Investors, stresses the importance of reinvesting dividends in a portfolio. He states:

"The power of the basic principle of investor return is magnified when the stock pays a dividend.

Consider this. If earnings are better than expected, that means that the stock is underpriced and purchsing more shares through dividend reinvestment will enhance your returns even more.

Dividends count!

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The Deal That's Not Really a Deal

This is kind of humorous. My wife received a magazine subscription offer from Better Homes and Gardens. It was for a two-year subscription for "only" $14.97, which isn't a bad deal. But, upon further reading, I found out it was $14.97 PLUS $6.00 postage and handling. It's kind of like saying, "Sure, you can subscribe to the magazine for $14.97 but if you want it delivered, you have to pay $6.00 more."

What do companies expect to accomplish with this kind of stuff? I don't know about you, but it ticks me off when I think the price of something is one thing and then find out later that there was some sort of hidden fee. Just tell me the WHOLE price upfront and allow me to make an educated decision as to whether or not I want to buy it.

I'm curious as to what you guys think about this.

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Monday, July 25, 2005

Carnival of Personal Finance - Week 6

Week 6 of the Carnival of Personal Finance is up at FreeMoneyFinance. Stop by and give it a look. I'll add it to the Carnival list on the sidebar.
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Sunday, July 24, 2005

Carnival of the Capitalists is up

Political Calculations is hosting this week's Carnival of the Capitalists. Lot's of interesting links to check out. Have fun.
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Friday, July 22, 2005

Prudent Portfolio Updated

The PrudentPortfolio has had another good week. The portfolio was up 1.95% for the week and 6.67% since its June 13th inception. Meanwhile, the S&P 500 Index was up .47% for the week and 2.97% since June 13th. Both Phelps Dodge and Cummins were up over 10% this week alone. If you want to see the portfolio, just click on the link above.
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Emigrant Direct Has Raised the Yield Again

The Emigrant Direct American Dream Savings Account is now paying 3.50%, which is up .25% from the 3.25% rate.
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Exchange Rates - A Really Simple Example

I am not an exchange rate authority. My goal with this post is to simply show you how exchange rates work and their impact on trade.

We all hear talk about exchange rates and international trade. Most recently, talk has been heating up about China's currency, the Yuan, and the fact that it is pegged to the US Dollar. What that means is that whichever direction the US Dollar moves, the Chinese Yuan follows.

As of yesterday, each US Dollar could buy 8.11 Yuan. Another way to state that is that each Yuan could buy .1233 US Dollars (or each Yuan is worth about 12 cents to us). Here's a simple example of what this means for trade:

Let's say you own a US company and you make rolls of tape that you sell for $1 each here in the US. Now lets say you ship 100,000 rolls of tape over to China to sell there. To get the point across in a simple way, we will assume there are no transaction costs to shipping the tape to China. Once your tape gets to China, they pay you $811,000 Yuan for it. They then charge the Chinese citizen $8.11 Yuan for each roll of tape.

Now let's switch it around and say that the Chinese ship 100,000 rolls of tape to the US that will cost $100,000 Yuan. Since each Yuan is worth 12.33 cents, the 100,000 rolls of tape will cost the US $12,330 (100,000 X .1233 = $12,330), which they then sell to US customers for $.13 each. So, the rolls of tape that were manufactured in the US cost $1.00 each, while the imported rolls of tape from China only cost 13 cents each! That's quite a difference.

Say the Yuan Appreciates 20% Against the Dollar

Suppose the Yuan were to appreciate 20% against the dollar. That would mean that each Yuan would buy .1480 US Dollars (and each US Dollar would buy 6.76 Yuan). Using the same examples as above, the rolls of tape would cost the Chinese 6.76 Yuan instead of $8.11 Yuan (a 16.7% decrease). Meanwhile the rolls of tape would cost the American consumers $.15 each (a 20% increase).

In my opinion the 2 cent increase in price for the American consumer isn't going to hurt us as much as the 16.7% decrease is going to help the Chinese.

Hopefully you have gotten the idea of how exchange rates work. If you have any questions or comments, please leave them.

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Chinese Yuan Revaluation

I was going to write a post today about the Chinese Yuan Revaluation, but I saw this post on SeekingAlpha and decided that I don't need to write anything. David has done an awesome job of putting up links to important articles regarding the revaluation. I think it would be smart for everyone to get a handle on what this means for the US economy.

I'll add any articles that I find throughout the day.
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Thursday, July 21, 2005

The Kinds of Businesses Warren Buffett Avoids

Warren Buffett doesn't like businesses that are price-competitive. These businesses are easy to spot because they usually sell a product of service whose price is the single most important motivating factor int he consumer's decision to buy. Here's a list of some of those businesses:

  • Internet portal companies

  • Internet service providers

  • Memory-chip manufacturers

  • Airlines

  • Producers of raw foodstuffs such as corn and rice

  • Steel producers

  • Gas and oil companies

  • The lumber industry

  • Paper manufacturers

  • Automobile manufacturers

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How to Determine if You're Wealthy - Part 2

Wealthy, as it is defined in the The Millionaire Next Door, is determined by one's net worth. The authors define the threshold level of being wealthy as having a net worth of $1,000,000 or more.
(NOTE: This book was published in 1997, therefore, $1,000,000 today isn't worth what $1,000,000 was worth back in 1997.)

Another way the authors defined wealthy is based on one's expected level of net worth. I referenced this definition in Part 1. People who exceed this number are considered Prodigious Accumulators of Wealth (PAW). People who have a net worth less than expected are called Under Accumulators of Wealth (UAW). Those who fall in the middle are, you guessed it, Average Accumulators of Wealth (AAW).

If you haven't read The Millionaire Next Door, I urge you to do so. Also, if you know young people who are just starting out in life and haven't yet made serious mistakes with their money, GIVE THEM A COPY OF THIS BOOK!

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How to Compete Against the Big Boys

Tom Peters has a list of 16 Musts for competing and succeeding against the Wal Marts and Starbucks of the world. It's an interesting list and one that most people should already know.

I can't remember the last time I had a pleasant experience at Wal Mart. I don't necessarily have bad experiences at Wal Mart, I just don't have any positive ones that stand out and make me say to myself, "man, I really like Wal Mart."
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Brain Damaged People Make Better Investors

I bet that title got your attention. There was a study done recently by a team of researchers from Carnegie Mellon University, the Stanford Graduate School of Business and the University of Iowa. They studied 15 brain-damaged people with normal IQs and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had lesions in the region of the brain that controls emotions.

It makes perfect sense to me. We all know that if you allow your emotions to dictate your investment decisions, you will most likely make poor decisions. Take emotions out of the equation and you become a better investor. Now we know what to look for in portfolio managers!

For those interested, you can read the article(free) in today's Wall Street Journal.

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Wednesday, July 20, 2005

Unocal Says no to Cnooc

Just saw this on the Drudge Report. Apparantly Unocal is going with Chevron.

Oh, and I just figured out that this is my 400th post!
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What Are Your 43 Things?

We all have things we want to accomplish in life. They can be anything from climbing Mt. Everest to reading the classics to saving for retirement. No matter what your things are, there's a really cool website called 43Things that allows readers to share and keep track of their 43 Things. I haven't yet entered any of my 43 Things, but plan to soon. You really ought to go check it out.
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How to Determine if You're Wealthy

Have you ever wondered if you were "wealthy?" There is a rule-of-thumb formula used in The Millionaire Next Door for determining whether or not you are wealthy. For those who are interested, the formula is:

Multiply your age by your income from all sources. Then divide that number by 10 to arrive at what your net worth should be.

So, if you are 35 years old and your household income is 60,000 per year, your networth should be $210,000 [(35 X $60,000)/10 = $210,000] in order for you to be considered wealthy.

If you are 9 years old and you get an allowance of $468 per year, you would be considered wealthy if your net worth was greater than $421.

UPDATE: You can also read a follow-up post to this one.

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Warning Signs of Too Much Debt

I saw this in an article (free registration required) on the Dallas News website.

The American Bankers Association advises consumers to review their finances yearly to make sure they aren't overextended on credit.

Signs of being too deep in debt include:

  • Paying only the minimum payment month after month.

  • Being out of cash constantly.

  • Being late on important payments, such as rent or mortgage.

  • Taking longer and longer to pay off balances.

  • Borrowing from one lender to pay another.

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Tuesday, July 19, 2005

Another Blog to Check Out

I found this blog a while back and meant to tell you about it but forgot about it. Anyway, it is this cool little blog called K's Financial Progress Report. The author, Karen, is keeping track of her financial progress so that we can all see how she is doing. Good luck Karen!
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Clash Action Lawsuit Against Dupont

I saw this on the USA Today website. Two law firms in Florida are bringing a $5 BILLION class action lawsuit on behalf of 14 clients against Dupont over Teflon. Notice the article says that the clients BOUGHT and USED teflon products. It doesn't say anything about them being sick.

I think class action lawsuits are a waste. The ONLY people who benefit from class action lawsuits are the lawyers. That's it! What do you guys think?

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Money Math

Recently, I have been posting about personal finance math. If you haven't had a chance to read the posts, you can check them out here:

How to Calculate the Present Value of an Annuity

Understanding the Time Value of Money

The Unknown Professor over at the FinancialRounds blog has written an excellent follow-up to my posts explaining how to use financial math to answer loan questions. It is a must read.
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Understanding Mutual Funds Fees

With so many mutual funds available and so many different ways to buy them, it is important to understand the different ways fees are charged.

Basically, there are two types of mutual funds: Load and No-Load.

No-Load funds (full-service brokers are notorious for calling them "no-help" funds) are funds that investors buy for themselves either through a discount brokerage or directly through the mutual fund company. There are no up front charges or loads to get into these funds although there may be transaction fees if bought through a broker.

Load funds are funds in which there is a charge associated with investing in the fund. To complicate matters, there are different types of loads (A,B, and C are the most common).

A Shares

An A-share mutual fund charges the load up front. The typcial front-load starts at 5.75% and decreases for larger investments. An investment of $10,000 in an A share mutual fund with a front-load of 5.75%, will result in a $575 load. That means only $9,425 goes to work right away. In addition, there are annual management fees, which I will talk about later.

B Shares

B-share mutual funds are quite controversial. A B-share mutual fund does not charge an up front load. Instead, there are contingent deferred sales charges that will be deducted from the account if the investor decides to sell the mutual fund before a certain number of years (usually around 6 years) has passed. In addition to the deferred sales charges, the mutual fund will charge additional management fees of around 1% per year during the deferred period to recoup the broker's commissions.

The reason B-shares are controversial is that some brokers were telling people that B-Share mutual funds were no-load mutual funds. There have also been instances in which the broker used B-shares in order to avoid breakpoints associated with A-shares. I have a hunch that we will see B-shares outlawed.

C Shares

The third most popular type of load is the C-Share. C-Share mutual funds do not charge front-loads but instead charge a higher management fee (usually 1%) each year. This 1% fee goes to the broker in charge of the account. Although in the long-run C-Shares are more expensive than A-shares, the broker's and the client's interests are more aligned since the broker has an interest in the client's success.

Management Expenses

All load and no-load funds have management fees. A common misconception is that no-load funds are cheaper than load funds. This may not always be the case. American Funds is a load fund family that has rock bottom management fees. Over the long-run, their funds would be cheaper to own than a lot of no-load mutual funds.

Management fees are usually broken down into the following categories:
  • Management fees

  • Distribution or Marketing (12b-1) fees

  • Other fees
The other category includes custodial, legal, transfer and other fees.

I hope that helps explain the different types of fees. In a future post I will talk about how to compare fees of different mutual funds.

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Monday, July 18, 2005

A Look Back at Index Returns

Way back in February, Murray over at the CapitalIdeas blog made reference to The Callan Periodic Table of Investment Returns, which lists the returns from 1985 - 2004 for the following indexes:

  • S&P 500 Index

  • S&P 500/BARRA Growth Index

  • S&P 500/BARRA Value Index

  • Russell 2000 Index

  • Russell 2000 Growth Index

  • Russell 2000 Value Index

  • MSCI EAFE Index (International Index)

  • Lehman Brothers Aggregate Bond Index
I spent most of yesterday afternoon analyzing the returns of those indexes. Out of all those indexes, the best performer was the Russell 2000 Value Index, which turned in an average annual rate of return (also known as the Geometric Average) of 13.50%. The worst performing index was the Russell 2000 Growth Index, which had an average annual rate of return of 8.59% over the 20-year period. Here's a look at how all eight indexes performed. (Keep in mind that these are not average rates of return but average annual rates of return.)


S&P 500 Index


S&P 500/BARRA Growth Index


S&P 500/BARRA Value Index


Russell 2000 Index


Russell 2000 Growth Index


Russell 2000 Value Index




Lehman Brothers Aggregate Bond Index


Here is a table showing the performance of a portfolio of $10,000 invested equally in each of the indexes (rebalanced annually) over the last 20 years:


S&P 500 Index


S&P 500/BARRA Growth Index


S&P 500/BARRA Value Index


Russell 2000 Index


Russell 2000 Growth Index


Russell 2000 Value Index




Lehman Brothers Aggregate Bond Index


Portfolio Total


Average Annual ROR for the Portfolio


Not too shabby, if you ask me. But, you could have done even better if you had simply put 1/3 into each of the S&P 500, Russell 2000, and MSCI EAFE. Doing so, would have given you a total ending value of $105,975 for an average annual rate of return of 12.53%. Of course these numbers do not reflect brokerage commissions and management expenses. But, even considering commissions, you still could have built a pretty nice portfolio over the last 20 years simply by indexing.

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Carnival of the Capitalists is up

You can read the latest Carnival of the Capitalists at The Club for Growth. There's a lot of good stuff there!
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Personal Finance Roundup - July 18, 2005

Good morning! Here's a little of what's going on in the world of personal finance:

Carnival of Personal Finance - Week 5

It is hard to believe we are already in the 5th week of the Carnival of Personal Finance. Week 5 of the Carnival of Personal Finance will be hosted by I Will Teach You to be Rich. You can also read previous Carnivals:

Week 4 - SmartMoneyDaily
Week 3 - AllThingsFinancial
Week 2 - Blueprint
Week 1 - Consumerism Commentary

Financial Myths

Michelle Singletary of the Washington Post is Getting to the Bottom of Myths on Money. Michelle also has a weekly personal finance newsletter that you can check out. Both of these links require free registration.


Amy Baldwin of the Charlotte Observer writes about whether or not retirees should be tapping their retirement savings. Since the oldest of the Baby Boomers turn 59 1/2 this month, this is the beginning of what is going to be a hot topic. Speaking of retirees, Michelle Melendez of the Newhouse News Service has an article on the Houston Chronicles website about how retirees are selling their wares.


Would you leave a high-paying job just to be happy? Dave Carpenter talks about several people who did just that in this column in the Houston Chronicle. Personally, I think it is important for people to find balance in their lives. Of course, that's easier said than done.

Buying a Home

Did you realize that there are eleven stages to buying a home for first time home buyers? According to this article by Steve Kerch, who writes the Resident Authoriy column for Marketwatch, there are.

Those are a few personal finance articles I thought were worth checking out. Enjoy!

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Sunday, July 17, 2005

Understanding the Time Value of Money

On Friday, I showed you how to calculate the present value of an annuity. Today, I hope to show you how to make choices regarding your money by showing you two deals.

Someone offers you $100 today or $105 a year from now, which one would you choose?

The correct answer is, "It depends." It depends on what the current interest rate environment is. Let's say for this example that the only available way for you to utilize the $100 is in a bank account that pays 5% per year. If that were the case, you could take the $100 now or $105 a year from now and it wouldn't make a difference to you.

Someone offers you $100 today or $105 a year from now, but you know that you can get 6% interest on your money at another bank. Which one would you choose?

This example can best be explained using this formula:

Present Value = Future Value X [1/(1 + i)N]

We are solving for the present value. We know the future value is $105. We know the interest rate (i)at the other bank is 6% (.06 as a decimal). N is the number of years, which for this example is 1. X is the multiplication sign. So, the formula looks like this:

Present Value = $105 X [1/(1 + .06)1]

Present Value = $105 X [1/(1.06)1]

Present Value = $105 X [1/1.06]

Present Value = $105 X .9433962

Present Value = $99.06

So, based on an interest rate of 6%, $105 a year from now is only worth $99.06 today. (If you want to double check the math, multiply 99.06 by 1.06 and see what the answer is. It should be really close to 105.) For this example, you would do better to take the $100 now and invest it at 6% so that you had $106 a year from now.

We are faced with financial choices everyday. Hopefully this post will help you make more informed choices. I welcome any comments or questions.

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Saturday, July 16, 2005

How to Become a Millionaire

I saw this on the MS Money website today. It is nine stories on how various people from varoius backgrounds became millionaires:

Pretty interesting mix of stories here. Of course for those who don't have a million-dollar idea, there's always another way to become a millionaire:
  • 1. Spend less than you earn.

  • 2. Invest the difference in a stock index fund>

  • 3. Repeat steps 1 and 2 until you become a millionaire.
How's that for simple?

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Friday, July 15, 2005

Prudent Portfolio Update

I updated the PrudentPortfolio to reflect today's closing prices. So far, the portfolio is up 4.62% since its June 13th inception, while the S&P 500 index is up 2.49% for the same time period. To read more about it, go to PrudentPortfolio.
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How to Calculate the Present Value of an Annuity

It is amazing how the math we all thought was useless back in high school is really pretty useful today. Understanding mathematical concepts is very important in understanding personal finance. It is also very liberating to be able to do different "complex" calculations with the aid of a spreadsheet.

Today I want to show you how to calculate the present value of an annuity stream. Huh? Well, before you zone out or click away from this post, let me start with a question: Say you want to live on $50,000 per year from your investments once you retire. Let's say you are going to retire at age 60 and expect to need the money for 25 years. We will also say that you expect to get a 5% return on your money. Now, how much money do you need at age 60 to be able to meet your goal?

Well, if you were to put all your money under your mattress where it got zero return, you would need $1,250,000 ($50,000 X 25 years = $1,250,000). You would stick $1,250,000 under your mattress and each year take out $50,000 to spend. At the end of 20 years, you would have nothing left.

However, if you are like most people, you probably want to get some sort of return on your money. This makes the calculation more difficult but not impossible. As we said earlier, let's say you expect to get 5% per year on your money. To do this calculation, we have to use the following formula:

(1/i) - [1/(i X (1 + i)n)]

The "i" stands for expected interest rate, which is 5% (.05). The "n" stands for the number of periods, which is 25 years. The "X" is the multiplication sign. So, using real numbers, the equation would look like this:

(1/.05) - [1/(.05 X (1 + .05)25)]

20 - [1/(.05 X 3.3863549]

20 - [1/.1693177]

20 - 5.9060554


14.0939446 is our "factor." To get the amount of money we need at age 60 to fund this income stream, you multiply $50,000 by the factor (14.0939446). So, for this example, we need $704,697 in the bank at age 60 in order to fund an annual income of $50,000 for 25 years. IMPORTANT NOTE: At the end of 25 years, the money will be gone!

Was this helpful? Let me know by leaving any questions or comments. In a future post, I'll show you how to do this same calculation with a spreadsheet.

UPDATE: Here's a link to a follow-up post to this one.

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Thursday, July 14, 2005

I Love a Bargain

I took the kids to the library today. Our library has a little room with a few shelves of books for sale for $1.00 each for hardbacks and $.50 for paperbacks. I always go in there just to see what they have. Well, today I found a copy of David Swensen's Pioneering Portfolio Management, a book I had been wanting to order for quite a while but just couldn't bring myself to do it.

I also found a copy of Optimal Investing by Scott P. Frush. This is a book I had never heard of before today. But, since it was only $1.00 I figured I'd give it a shot. The best part is, both of these books look brand new. Based on their retail prices, I saved $60.95.

It was a good day!
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World's Greatest Investors

The August issue of Smart Money magazine profiles The World's Greatest Investors: Warren Buffett, Bill Miller, Peter Lynch, Sir John Templeton, and Bill Gross. They also list some of what these gurus are buying (or could be buying based on their philosophies). Here's the picks:

Buffett-Worthy Picks

Miller Picks
Lynch-Worthy Picks (These picks were made using a value screen)
Templeton-Worthy Picks (Based on an American Association of Individual Investors screen)
Gross Portfolio
Interesting mix of stocks and funds. It will be interesting to see how these perform in the future.

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Personal Finance Roundup

There's a lot going on in the world of personal finance. These are some of the interesting things I found today:


The Wall Street Journal Online has a nifty little feature called Go Figure (click on the link and scroll down to the Go Figure section). Today's Go Figure is about the hottest starting salaries for various college graduates. Chemical Engineering is tops at $53,813.

Housing Bubble

Kiplinger's has an interesting article on the 13 Riskiest Housing Markets. Boston's housing market has been deemed the riskiest. As a side, Kiplinger's is running a contest for the best idea of what to do with $1,000, which is based on their August issue cover story "What $1,000 Can Do" (link to follow later).

Fortune asks the question Is it Time to Cash Out of Your Home?

For more on the housing bubble, stop by Ben's Housing Bubble blog. Ben has been tracking the housing bubble for a while now and has gotten really good at finding links to news stories about the housing market.

Exchange-Traded Funds

Exchange-traded funds (ETF) are big right now. Once again, we stop by Kiplinger's for ETF Spells Opportunity. They also have a chart listing over 175 ETFs that is helpful. Smart Money has a whole section dedicated to ETFs. Be sure and check out their ETF Education Center - lots of excellent stuff there. I really like their Model Portfolios.

In the blog world, don't forget about David Jackson's ETFInvestor, which is loaded with lots of useful information and ETF-related links.


Jeff Brown at Knight Ridder explains that the oldest Baby Boomers have turned 59 1/2, which means they can now tap their retirement savings without penalty. Question is: should they? Matthew Keenan at Bloomberg News reviews a study that says automatic 401(k)s may help workers save.

Martha's Rules

Finally, Martha Stewarat is writing a book about the rules of business. I wonder if it will include a rule about not lying?
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What's a Wrap Account?

Basically, a wrap account is an account that can hold mutual funds from different mutual fund families. Full-service brokerage firms like wrap accounts because they can offer their clients different fund families without having the hassles of setting up individual accounts with each fund family. Because the wrap account has it's own fee attached to it, sales charges (commissions) and 12b-1 fees are usually waived.


Average cost of a wrap account nationally is about 1.17% of assets per year. Keep in mind that that 1.17% is in ADDITION to regular mutual fund expenses (minus 12b-1 fees). For example, say you wanted to set up a wrap account and you wanted to invest in American Funds' Growth Fund of America, which usually has a 5.75% sales charge and .76% annual expense ratio. Under a wrap account, American Funds would agree to waive the 5.75% sales charge and also reduce the annual expense ratio by the 12b-1 fee of .25%. So, you would be paying a total of 1.68% per year (1.17% + (.76% - .25%) = 1.68%) for this particular wrap account.

Now, how does that compare with going the regular route of simply paying the sales charge and regular expenses? We'll do a five-year comparison, assuming a $25,000 investment at an 8% annual return reduced by the annual expenses of 1.68% for the wrap account and .76% for the non-wrap account.

To Wrap

You put $25,000 into the wrap account and it immediately goes to work for you. At the end of the first year you have $26,580 (25,000 X (1 + .0623) = $26,580). At the end of five years the balance in the wrap account would be $33,964 ($25,000 X (1 + .0632)5 = $33,964).

To NOT Wrap

If you decided not to go the wrap route, you would pay an upfront sales charge of 5.25%. So, you're $25,000 would be reduced to $23,562 after you paid a front load of $1,438. At the end of the first year, you're balance would be $25,264 ($23,562 X (1 + .0724) = $25,264). At the end of five years, the balance would be $33,419 ($23,562 X (1 + .0724)5 = $33,419).

So, for this example you gain over $500 by going the wrap route. But, there are a couple of things to think about:

  • 1. The more money you have to invest, the more likely you are to qualify for reduced front loads on mutual funds. This can be significant.

  • 2. Even based on this example, with all things being equal, eventually the load account would outperform the wrap account. By my estimation, that would happen about the end of the 9th year.

  • 3. Under the wrap account, the broker has an incentive to work for you since his compensation is paid annually and not in one lump sum at the beginning of the relationship.

  • 4. Additional deposits change everything. I don't have enough time to go into detail here, but you need to consider whether or not you will be making additional deposits into the account. This will affect the outcome.

Final Thoughts

I think wrap accounts can be a good thing. But, you need to really consider all fees associated with the wrap account before you commit your money to it. I hope this post was helpful. I welcome any questions or comments.

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Questions to Ask Your Broker

Information is key to making sound decisions. Too often, people make investment decisions with too little information. Why? Because they don't know the right questions to ask. Below are some excellent questions to ask your broker BEFORE you make an investment:

  • How do you get paid for giving me advice?

  • Are you registered as an investment advisor and do you have a fiduciary duty to me?

  • Are you giving this particular advice to me in your capacity as a broker or as my investment adviser?

  • Do you or the firm you work for receive any payments from mutual fund firms to sell their funds?

  • What are your credentials in financial planning?
Before you talk with any advisor you should at the very least understand the different kinds of mutual funds and the different ways to buy them. I'll discuss that next.

NOTE: I found this information somewhere but do not remember where. I always try to give credit where credit is due.

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Are You Part of the Herd?

By "herd" I'm referring to the herd mentality that exists in the stock market (or it can also be seen in any bubble situation). According the wonderful book Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich, there are warning signs as to whether or not you are a herd-follower:

You may be prone to following the herd if...
  • you make investment decisions frequently.

  • you invest in "hot" stocks or other popular investments.

  • you sell investments because they're suddenly out of favor, not because your opinion of them has changed.

  • you're likely to buy when stock prices are rising and sell when they ar falling.

  • ou make spending and investment decisions based solely on the opinions of friends, colleagues, or financial advisers.

  • your spending decisions are heavily influenced by which products, restaurants, or vacation sports are "in."

If you live by the herd, you die by the herd.

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Wednesday, July 13, 2005

States are Raising Estate Taxes

Federal estate tax gets all the attention. As President Bush tries to do away with the federal estate tax states are in the process of raising estate taxes. According to this article(free) in the Wall Street Journal, a lot of states had orginally tied their estate tax amount to the federal credit for state "death" taxes, which disappeared this year. Many staes have separated their estate-tax system from the federal system.

The article does a good job of explaining the situation.

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Tuesday, July 12, 2005

Some of the Crazy Mail I Receive

This was in my inbox (I have actually received several of this sort of email) this morning. Obviously, it is some sort of shady operation. But, I thought I would share it with the rest of you. Here is the email:

I am contacting you to partner with me in respect of transfer of certain funds, which is being held in a floating account in my organization, Fountain Securities , in Madrid Spain. I am privileged to have full knowledge of the availability of this fund due to my function and position in the organization at present. I have to contact you because it is imperative for me have the cooperation of a foreigner to be able to transfer the fund out of my country.

This fund, was deposited by Mr. George Martins, who died in 1994 without leaving any information of any next of kin to inherit the fund. The account therefore has not been operated since his death.

The total amount involved is Fifteen Million American Dollars. My name is ####### ######. I would give the details of the transfer process if I receive your response and am convinced that you are willing and dependable to carry out the transaction with me in absolute confidentiality. We have to establish mutual trust such that it will be glaring to both parties that we could work with open mind. On transfer of the fund into your account, your share would be 35% of the total sum while the rest part would be for me and I intend to invest the major part of my share in your country with your assistance.

I would appreciate if you could respond to me on my more private mail: Kindly state your telephone number so that I could call you too.
I await your response.

######## ########.

Oh yeah, this has legitimate written all over it!
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Monday, July 11, 2005

OT: 2007 Hyundai Sante Fe

I'm a car nut. I love seeing what's coming out and who's doing what. I just came across a some pictures of the 2007 Hyundai Sante Fe. I have to say, it's a much better-looking vehicle than the current model. Personally, I think the current Sante Fe is clumpy-looking. I hate it. I can't see how they sold as many of them as they have, but you see them all over the place. Anyway, I'm looking forward to seeing the 2007 model around town.

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Carnival of Personal Finance - Week 4 is up!

Go over to SmartMoneyDaily and check out this week's Carnival of Personal Finance. I hosted Week 3 last week, which you can read here.

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Sunday, July 10, 2005

Smart Money Interview with eBay CEO Meg Whitman

SPECIAL WARNING: This is a bit of a rant.

Although I have bought some things off eBay in the past, I'm not really a big fan of the company. I don't like the fact that they have moved away from pure auctions and more into being a mall for sellers. I hate the "buy it now" feature because it seems like it is getting harder to find bargains on eBay.

Anyway, there is an interview with Meg Whitman in the August (can it be August already?) issue of Smart Money magazine. The interviewer asks the following question:

What have you learned at eBay that could be applied at other companies?

Here was her response:

"Many companies operate from more of a command-and-control environment - they decide what's going to happen at headquarters and have the organization execute. That doesn't work here because it's the community of users who really have control.

"So we enable, not direct. We think of our customers as people, not wallets. And that has implications for how we run the company. We partner with our customers and let them take the company where they think it's best utilized."

Hmmm...Ms. Whitman seems to be detached from how things really are. What about the fee increases that eBay pushed through earlier this year? Did they have a bunch of users saying "you know what,... we aren't paying enough in fees. Why don't you significantly raise our fees so we can be happier?"

This is an example of how CEOs think what they want to think and ignore the rest.

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Saturday, July 09, 2005

Worthwhile is Worthwhile

I found a pretty cool website/blog called Worthwhile, which is a team-run blog about balancing work and life. I even put a copy of their mission statement up on Man on a Mission. They put up a lot of short readable posts about various topics. It's worthwhile to give Worthwhile a look (sorry for the terrible play-on-words).
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Friday, July 08, 2005

A Review of FOLIOfn

If you are like most people you probably haven't heard of FOLIOfn. For the right kind of investor, FOLIOfn can be an awesome tool. FOLIOfn is an online brokerage firm that allows investors to construct portfolios (called "folios") of stocks and exchange-traded funds. When constructing the folio, you pick the allocation for each security.

For example, say you wanted to invest an equal amount in each of the Fortune 40 I talked about in my last post. You would simply give each security a 2.5% allocation. Once the folio is set up, FOLIOfn makes the trades for you in what is called a "window trade," which is a process by which FOLIOfn matches buyers and sellers internally. Windows trades are done at no additional charge. Speaking of charges...

FOLIOfn Fees

FOLIOfn offers four different platforms: Basic (does not allow folios), Bronze, Silver, and Gold. The Bronze and Silver accounts allow one folio. The Gold allows up to three folios. You can view the differences between the accounts by clicking on the link above. Personally, I would like to see FOLIOfn allow more folios. It would make allocation much, much easier and would also make tracking performance against benchmarks much easier.

The different plans have different fees attached to them. The Basic account has $14.95 market trades and $4 window trades. If you don't make at least 4 trades per quarter, there is a $14.95 "account maintenance" fee. The Bronze account also has $14.95 market orders but has 200 free window trades per month, but also charges $19.95 per month or $199 per year. For $29.95 per month (or $299 per year), the Silver account has $3.95 market orders and up to 400 free window trades per month. Finally, for $39.95 per month (or $399 per year), the Gold account gives you 10 free market trades per month and up to 600 window trades per month.

FOLIOfn probably isn't the best choice for small investors. $199 per year on a $10,000 account works out to a 1.99% expense ratio. That's pretty steep. I would only recommend FOLIOfn if the total fee is less than 1% per year. At the Bronze level, you would need around $20,000 ($199/.01 = $19,900) to keep the fees to less than 1% of the portfolio's value.

Final Thoughts

Overall, I think FOLIOfn is a great alternative to the other brokerage firms. I like the folio concept. I just wish they allowed up to 10 folios instead of just the one (or 3 if you opt for the Gold account).

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2005 Fortune 40

NOTE:None of the stocks in the portfolios is a recommendation by AllThingsFinancial and cannot be held responsible. If you decide to buy any of the stocks listed, you assume the risk.

Fortune has just released the Fortune 40 for 2005. According to the article in the July 11th magazine, they revamped their screening system for this year's list. The 40 stocks are divided up into 5 portfolios of 8 stocks. The categories are:The Fortune 40 from 2004 returned 9.7% compared to the S&P 500's 9.2% return. Keep in mind that those returns do not reflect commissions.

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Thursday, July 07, 2005

Payback Time for Wronged "Investors"

The front page of today's Wall Street Journal has an article on the settlement with the companies and mutual funds that were guilty of fraud. They opened with a story about a woman who sold her house and put HALF of her money in Worldcom stock. Well, we all know what happened to Worldcom. That lady's $43,000 went up in smoke. Granted, it doesn't take a genius to figure out that it is stupid (I hate to be harsh but there really is no other word for it) to put that much money in ONE stock.

Anyway, it is finally payback time for that lady and the millions of people who owned shares in the companies and mutual funds that were guilty of fraud. Here are a couple of links for those who are affected:

If you owned share in a company or mutual fund that settled with the SEC, you can see if a payback fund has been established by clicking here.

Also, there is a separate settlement with a number of major brokerage firms that includes more than $400 million for those affected. To find out more, go here.

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Wednesday, July 06, 2005

Imagine Winning "Free" Tickets That Cost You $19,000

There's an article in today's Wall Street Journal about a man who won 12 round-trip airline tickets for him and his wife (12 for each of them so 24 tickets in all) from American Airlines. He decided not to take the tickets. Why?

Well, American Airlines valued each ticket at $2,200 for a total prize worth $52,800 (24 X $2,200 = $52,800). If you are familiar with prizes, you'll know that they are taxed as income. This guy lived in New York City and figured that when it was all said and done, his tax bill for the prize would be over $19,000 or $794 per ticket.

To make matters worse, the tickets had to be used within 12 months and also were not transferable and could not be redeemed for cash. I think I would turn them down too!

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Monday, July 04, 2005

Carnival of Personal Finance - Week 3

NOTE: Week 4 of the Carnival of Personal Finance can be seen at SmartMoneyDaily.

AllThingsFinancial is proud to host Week 3 of the Carnival of Personal Finance.

First stop is Dawn's FrugalforLife blog for her Tuesday's Tips for saving money and simplifying your life. Lots of good stuff there.

Jim at BluePrint is in a giving mood. Check out this post in which he gives Tips for Deducting Donations from your taxes.

Flexo at Consumerism Commentary talks about whether or not GM's Employee Discount Program is a good deal.

FMF at FreeMoneyFinance discusses how you can save money by buying Energy Star appliances.

Nicole, aka "TheBudgetingBabe," tells us that Goal Setting Really Works. That's good to hear.

Where would blogging be without talk about Social Security? F.D. over at Modblog offers his opinion on Social Security in a post called Victory with Social Security. Based on how political this issue is, I'm sure his post will ruffle some feathers.

My friend, Arbee, from Canada discusses Tax Freedom Day. I like the sound of that!

THC at TheHappyCapitalist offers up an excellent post called Alphabet Soup that explains all the different professional designations in the financial field.

Jon at SmartMoneyDaily offers advice on Creating a Business Plan That Always Works. Good advice for anyone thinking about starting a business.

Protecting Yourself from Identity Theft

Identity theft is also a hot issue right now. It seems like everybody is at risk to have their identity stolen. There are lots of credit protection programs popping up. FrugalGirl talks about Credit Protector - The Good, Bad and Ugly.

Nickel at FiveCentNickel talks about the dangers of writing checks with this post titled Think Before You Write That Check.

Housing Bubble

Talk about the housing bubble has really been heating up lately. Smarty at the GrowingMoney blog offers his take on the housing situation in New York City in a post called Real Estate Bubble?.

Ben at the HousingBubble2 has been writing about the bubble for a while now. Here's one his latest posts titled Housing Bubbles Everywhere, Not Just Here.

Personal Finance Basics

Ironman at PoliticalCalculations offers a calculator to help figure out how much you should be Saving for College.

Finally, in what I call the basics of financial planning, I show you how to calculate annualized rate of return, which is something I think everyone should know how to do.

That's it for this week. Thanks to all who contributed to this week's carnival. Also, thanks to everyone who linked to this carnival. Next week's Carnival will be hosted by SmartMoneyDaily. For a schedule of future Carnivals and to read previous Carnivals, see this post on the Consumerism Commentary blog.
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