Links to Carnivals

PFStock.com participated in two blog Carnivals this week. Here are links to the Carnivals in which PFStock.com was mentioned for December 7, 2009:

Carnival of Money Stories #31

Festival of Stocks #170

Thanks go to the bloggers who host these carnivals.  Please check out the other interesting articles at these Carnivals.

PFS

Use It or Lose It

I have just completed my company's annual open enrollment. This is where employees have the opportunity to change medical or dental plans, and to opt into making contributions to a flexible spending account (FSA). In general, a flexible spending account allows one to contribute deposit pre-tax dollars into the account to pay for medical expenses, or to pay for dependent care. Note that these are two different types of accounts. The ability to use pre-tax money to pay for expenses is a good benefit that can save a lot of money.

However, one thing to keep in mind is that most flex spending accounts operate on a "use it or lose it" basis. This means that any balance you have in the account at the end of calendar year is forfeited to your employer. Since this is something that I would rather not do, I never leave any money on the table at the end of the year.

But in the current economy, I also want to warn my readers of one more potential hazard with FSAs. Having been downsized twice in the last decade, I can tell you that the "use it or lose it" provision also applies if you are terminated without cause (i.e., laid off). This may seem totally unfair, but that has been my real life experience.

PFS

How Banks Calculate APY

Have you ever wondered how banks calculate the annual percentage yield (APY) of a bank account? Suppose that an account pays 4.88% (nominal rate) compounded daily and yields 5.00% APY. (I know that this interest rate is not a realistic one these days, but it is used only for the purpose of illustrating my point.) The APY is the annual percentage yield, and is the best number to use when comparing rates from different banks. To calculate the APY from the nominal rate, you will need a scientific or financial calculator. A computer spreadsheet could be used instead of a calculator.

Warning: math is involved in the next section. In this example,

1) Enter the interest rate in decimal form: 0.0488
2) Divide the rate by 365 (number of days in a year)
3) Add 1 to the result
4) Then use the y^x key, and type 365 for the number of days.

You should end up with something that says 1.0500069.... The digits after the decimal point represent the APY. In this case, it is 5.00% APY.

Shortcut: In most cases, you can take the nominal interest rate: 0.0488, and hit the e^x key on your calculator to get 1.0500103.... This quickly approximates the APY, assuming that interest is compounded daily.

If you have an account that is compounded monthly, then replace the 365's above with 12 (number of months in a year). In this case, if interest were compounded monthly, then the APY would round off to 4.99% APY.

PFS

San Francisco Hard Assets 2009 Conference

This past weekend, I attended the Hard Assets 2009 Investment Conference in San Francisco. Once or twice a year, I make the trek from Silicon Valley to downtown San Francisco to attend either this conference or the San Francisco Money Show. These investment conferences are held each year at the downtown San Francisco Marriott Hotel.

Usually, the Hard Assets conference has a carnival-like atmosphere with subject matter that generally focuses on precious metals, mining, oil, and gas. Many of the exhibitors in the investment conference are foreign mining companies. These are largely listed on the Canadian stock exchanges, most notably the Toronto Stock Exchange (the TSX). For several years, many of the exhibitors touted penny stocks of questionable quality. There were a lot of dotcom exhibitors, and even mining companies that actually became dotcoms to feed off of the associated hype. This came at a time when the prices for gold, oil, and other commodities were depressed.

One would think that with gold prices near record highs, that the conference would be far more upbeat.  But,  the conference is definitely toned down compared to past years. The world economy in general decline has overshadowed the focus of the conference, and there was little to celebrate among the exhibitors.

Among the speakers at the conference, the flamboyant James Dines stands out among the crowd. Mr Dines has been touting something every year since about the late 1960s, whether it is gold, dotcom stocks, or uranium stocks. Mr. Dines is the publisher of The Dines Letter, and the author of the book Mass Psychology. While his booth is usually rimmed by half a dozen blond, blue-eyed assistant (i.e., bimbos), I counted at most two this time around, and didn't even see Mr. Dines there. So, if James Dines in cutting back, you know times must be tight.

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The Squirrels Club

I remember opening my first bank account when I was about 7 years old. It was at a bank called Glendale Federal Savings, at the corner of 25th Avenue and Geary Boulevard in San Francisco. They offered a special account for children called the Squirrels Club account. The club would send a newsletter every few months and gave me a bank for saving coins in. The newsletters featured squirrels as cartoon characters with the head squirrel named Filbert. The materials included games, puzzles, and tips on such things as saving money. The educational part of the newsletter would explain things like interest compounding. I believe that the Squirrels Club was run by an association of different savings and loans.

I was a Squirrels Club member until I was 12 years old. After that, my account was changed to a regular savings account. Looking back, I think that it is a pity that more banks don't offer this type of club for young savers. The educational material that they offered really formed the foundation of how I think about money today as an adult. Actually, the Squirrels Club still exists in a different incarnation. This was the only information that I could find on the Internet.

As far as Glendale Federal is concerned, it went through different incarnations in its history. I think that they changed the name once to West Coast Federal Savings, and then back to Glendale Federal. In the late 1990s, they advertised that as a small bank, they were able to give superior customer service. This was largely a true statement. That was before things started to change.

Glendale Federal was acquired by California Federal Savings which was for the most part acceptable. Then CalFed was finally bought by Citibank. So, what was to me a small bank with good customer service was replaced with one of the biggest, most impersonal banks in the country.

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Calculating Net Worth

I thought that calculating one's net worth would be pretty simple. Add up the value of your assets and subtract your liabilities (debts) to arrive at your net worth. Having looked through a few blogs, however, I see that the definition is neither simple nor consistent. I've seen one guy who has listed over $50k in automobiles and the value of jewelry as "assets". On the other hand, some people deliberately exclude things such as cars and other depreciable assets from the calculation.

I agree with the latter formula. I don't include what I would call non-financial assets as part of my net worth. I wouldn't consider stamp and coin collections, or jewelry to be financial assets. The reality is that while these items do have value, it is not as if I would be willing to sell any of them, or that I would rely on them for income. Similarly, I don't consider my primary residence an asset for the purpose of calculating net worth. In fact, I've seen a few questionnaires (that brokerage houses use to determine the suitability of certain investments) that specifically ask for net worth excluding one's primary residence.

Getting back to the question of net worth, I suppose that if one would exclude the value of their home from the calculation, then one could also exclude their primary mortgage (but not their second mortgage since that is not usually used to finance the house, but to buy other consumer items instead) from their liabilities. Why do people try to inflate their net worth by including miscellaneous non-financial assets? My guess is that is like the game people play with inflating their resumes when applying for a job. You may be able to fool other people into thinking that your net worth is more than it is, but just be certain you aren't just fooling yourself.

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Wealth According to The Millionaire Next Door

To answer the question of whether one is wealthy, I will take a quote from The Millionaire Next Door, by Thomas Stanley and William Danko, which I read several years ago. I consider this book to be a classic. Here, the authors discuss what one's expected net worth should be at any given point in life.

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

To give an example, suppose one is 45 years old and makes $100,000 per year. Then, by the above formula, one's expected net worth is $450,000. The authors then go on to describe the wealthy (prodigious accumulators of wealth, PAWs) as those who have at least double this expected net worth based on age and income. Conversely, one who has accumulated less than half of their expected net worth is known as an under accumulator of wealth, or UAW. (I have always found it peculiar that this acronym is the same as the one used by the United Auto Workers union, but that is another story.)

In any case, the suggestion by the two authors is a broad rule of thumb. I would caution one against putting too much weight into the usefulness of a rule of thumb. Nevertheless, armed with this knowledge, you can at least have a rough idea of where you stand with regard to what your savings should be at any point in time.

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