Mmmmmm...Chocolate

When I go to the grocery, I rarely buy anything more than essential food, occasional toiletries and cleaning supplies. In other words, I almost never buy any dessert/candy or drinks (except for some cheap wine here and there). However, the other night I had a big craving for some chocolate. I really didn't want to have to make a trip to the grocery just for chocolate (my natural reactions against unhealthy food, wasting gas and wasting money on unnecessary food were kicking in pretty well). After several hours of contemplation, I finally decided to go and I ended up not feeling too badly about it. At least I got my chocolate on special.

I often find myself (at least trying) to make financial/food decisions as rationally as possible and I sometimes have a hard time relating to people who act clearly against their own self-interest in financial matters. I recognize that a lot of the personal finance blog world is built around bloggers supporting other bloggers as they decide to live frugally, invest and otherwise make healthy financial decisions; though again, it is hard for me personally to get into the "cheerleading" spirit. I generally believe that with enough good information available, people can and will make the right decisions for themselves, which is where I see the value of many PF blogs. However, like everybody else, I recognize that I'm only human and that it is OK to make irrational decisions sometimes.

Everyone loves indexing, right?

I have started reading a few books on the advantages of using index mutual funds (or exchange-traded funds, which are like mutual funds but trade like stocks) over actively managed funds. Malkiel's "A Random Walk Down Wall Street" and my current read, Ellis' "Winning the Loser's Game" both lay out a pretty convincing argument: Most mutual fund managers perform worse than the "average" (especially after fees and expenses); it is next to impossible to predict or time the market effectively and consistently over the long term, so picking a good mutual fund manager (like picking good stocks) almost comes down to a guessing game with the odds against you; the top mutual fund performers of any one period tend to perform among the worst during the next period; indexing allows for "lazy" investing, where investors can stick with a basic mix of funds instead of constantly switching stocks or managers; since it is next to impossible to predict equity returns over a given period, the one thing investors can know is the expenses and fees they are paying and index funds carry lower fees than actively-managed funds; index funds tend to be more tax-efficient since they are not constantly buying and selling stocks.

Investing in index funds is such a good idea that professionals like Warren Buffett, David Swensen (who manages Yale's $22 billion endowment) and even crazy CNBC stock picker Jim Cramer recommend it for most investors. I personally favor exchange-traded funds, since they tend to operate even more efficiently than index mutual funds, but I will leave that argument for another day. Basically, index mutual funds are the way to go for most average investors.

I was not surprised, however, when I ran across this article from Kiplinger's online titled Indexing in Question. In it, author Steven Goldberg notes how popular S&P 500 index funds have essentially remained flat from January 2000 through the first quarter of 2008. Goldberg, who admits he personally does not favor passive funds, saying "I think I can pick funds that will beat the market indexes over time. But it's hard as the dickens, and I know I will often fail," warns that good investing is not as simple as putting all of one's money in an S&P 500 fund or even a Wilshire 5000 fund. I completely agree with him on this, though apparently we disagree that index fund investors have some deficiency that causes them to only invest in a single fund.

Of nearly all the information I've read advocating index funds (and there is plenty I have not yet read), I have found no pro-index author who only recommends investing in a single fund, even if it does diversify across a broad range of stocks (like 5000 of them). Instead, most experts I've read have recommended a portfolio suitable to one's age and risk-tolerance, composed of index funds properly diversified among small, medium and large capitalization growth and value stocks, as well as bonds, foreign stocks and (often) real estate.

My feeling (and hope) is that people who research the value of indexing also recognize the value of proper diversification, which is key to any portfolio of actively-managed funds as well.

And the Rates go Down...

The Federal Reserve cut a key short term interest rate again yesterday by 1/4 point, marking the seventh cut in the last 8 months or so. The decision dropped the federal funds rate to 2.0% from 5.25% last September, and interest rates in most people's checking, savings and money market accounts have plummeted with the key rate. Two popular options for finding a decent savings rate include the ING Direct Orange Savings Account and E*Trade Complete Savings Account, both currently paying around 3%. This rate is several times larger than the average savings rate from a "brick and mortar" bank, which may currently pay .5-1%. I've tried both the ING and E*Trade accounts, and both seem to offer a good alternative to low rates at local banks. It is usually easy (and free) to transfer money between these accounts and your regular checking or savings account, making this a great option for an emergency savings fund.

However, I'd like to recommend another option I think people often overlook- credit unions. Credit unions are basically member-owned, non-profit banks. Because of this, they don't pay taxes and pay higher interest rates to their member-owners. Credit unions are generally set up to serve a specific group of people, so there are some requirements (such as being a government employee, living in a certain area, working in a certain field, etc.) to join one. However, most people would find they are eligible to join one near them if they did a little looking.

I’ve been a member of a credit union for about 5 years and have always been happy with it. While others are currently earning .5-1% interest or less, my money market account with the credit union is currently paying 3.25%, down from about 4.5% before the Fed started cutting rates. In other words, I get a better rate from my convenient “brick and mortar” bank, with access to ATMs, than I could get from many of the highest-yielding online banks.

To find a credit union near you, check out Credit Union National Association .

Credit Line Increase

These days especially, credit cards get a bad rap. Some personal finance "experts" like Dave Ramsey have gone so far as to encourage no one to use a credit card. I can understand some of the hatred. Many people used credit cards, for whatever reason, to spend money they did not have at the time. They then went into debt, at often ridiculous interest rates of 12%, 16%, 22%, 30%, etc., not to mention incurring a number of fees. Many personal finance blogs were started to track the progress of the blogger's paying down of their credit card debt, sometimes in the tens of thousands of dollars. Such efforts should be commended.

But a credit card themselves are not really that bad, nor is the concept of credit. While I can appreciate some people's ambivalence toward the plastic cards (and there is something to be said for the fact that people generally have an easier time spending money on plastic than cash), I think all the negative press really distorts the benefits of credit cards. Credit cards are generally safer to carry than cash, allow for better organization and tracking of one's spending, help users build a credit history and many offer rewards. I am still amazed at the ease with which I can travel internationally and quickly, easily and safely use my credit card or ATM card operating on the Visa network to pay for goods and services.

I recently requested and automatically received a credit line increase on one of my cards. As a young adult trying to establish a credit history with the hopes of buying a home in the next 5-10 years, I was pleased to see the increase. After my request, I noticed I was still given the option to decline the increase. Some "experts" might suggest that an increase would just encourage me to put more money on the card, fulfilling the card company's dubious plan. I see it more as recognition by the company that I have been decently trustworthy with their money, so they are now giving me the option to borrow more of it. It also represents a small step on the path to a positive credit history and financial freedom. Today, I, for one, am thankful to the credit card company.

Fake (or misleading) checks

If you have one or several credit cards, you likely have received a check in the mail and had the same reaction I did- FREE MONEY (well, not quite). Most of the “checks” I receive from my credit card companies I can spot pretty quickly as just being cash-advance devices. In other words, cash the check and you have immediately consented to a cash-advance on your card, which is likely racking up interest at around 12-20%. This means the cash you just received is immediately losing value and losing it quickly. So, cash-advance checks= bad.

However, I was almost fooled by another “check” I received from a different source. When I was booking a flight one time, I had heard of Priceline (with the William Shatner commercials on tv), and decided to try their “Name Your Own Price” service to save some money (this experience- and I don’t recommend it- will be discussed in a later posting). As I was finishing the transaction for my flight, I was told I could save an additional 15% by signing up for the classic free 30-day trial of some service. Trying to get the most bang out of my ticket price, I signed up for the discount club service, called Great Fun, noting that I could opt out within 30 days of signing up, never pay a thing, and keep my 15% off my airfare. Though I’m sure the company was hoping I would just forget about opting out, I did so within the next 2 weeks, never paid for the service, and received my rebate check a few weeks later (which was about a month ago now). Recently, I received another check from Great Fun and on first glance, I had almost forgotten about my first rebate check or perhaps just thought this was rebate check #2. In fact, after I read the fine print, I learned that if I cashed the $9.25 check, I would automatically be enrolled in a new discount program (with the usual 30-day free trial of course). If I didn’t opt out by the end of the 30 days, I read, I would be charged around $190 for one year’s annual membership.

Again here, I find myself in a similar position as I found myself purchasing my plane ticket. This company hopes I cash their check, then either forget to opt out or love their service so much that I stay with it. Personally, I have little doubt that I would remember to opt out of the service if I did cash the check- I tend to obsess over these things. Looking at this from a strictly financial point of view, I could continue a cycle of cashing these types of checks (not the cash advance type described previously), always opting out within the 30-day free trial and have a little more money in the bank (and every little bit helps a college student without a regular job). However, there is always the slim chance I could forget to cancel the service or have one of these companies write such crafty fine print that my best efforts at escaping with their money would be thwarted. I took the check to the bank along with some others I had to deposit, but ended up not depositing it.

So it begins...

Hello- I am a 21-year-old college student in North Carolina with an interest in finance and personal finance. After learning a lot not only about personal finance, but also people’s real experiences with it on other personal finance blogs, I thought I would add to the dialogue, trying to learn something in the process. As I enter my adult life, I realize the value of quality PF planning and knowledge, and so I use this medium as a way to share, but more importantly to learn. I know from experience that a lot of what I say and do I later realize were ill-advised, so if you know any more about a particular subject than I (and chances are that you do), please share it with me. Thanks for reading and I hope you can gain just a little from what you see here.