Archives For August 2007

Here’s today’s question(s) of the day:

Where do you normally shop for groceries? Why?

We usually buy our groceries at Kroger. I know it’s not nearly as cheap as Wal Mart but I absolutely HATE shopping at Wal Mart. Our Kroger is much more convenient and I like the fact that I can go at normal times during the day and not have to wait in the checkout line for 30 minutes. Our Wal Mart has something like 30 checkstands but usually only 5-10 of them are going.

Now it’s your turn to weigh in.

Today’s Getting Going column by Jonathan Clement’s is titled The Small Ways Wealth Begets Wealth (free). It’s about how saving relatively small amounts of money can help you build wealth.

For instance, by saving just $100 per month, a person can eventually build up a savings account for emergencies so that they don’t have to put unexpected needs on a credit card. Then, as the savings account continues to grow, it will allow people to raise their insurance deductibles, which reduces their insurance rates. See how this little game works?

Of course all of this is much harder to do if a person starts off on the wrong foot. That’s why this information should be taught to students while their young and not yet able to get themselves into financial trouble. Maybe we bloggers should start a financial literacy program.

I was watching Bloomberg TV’s Open Exchange with Pimm Fox this morning. One of Pimm’s guests was Sam Stovall, chief investment strategist at Standard & Poor’s. Today’s topic was the risk in the market and whether or not people are scared or should be scared. Here’s what Sam Stovall said:

“Since 1950 we have had 48 pullbacks – meaning declines of 5 – 10%. We’ve had 18 corrections – meaning 10- 20%, and 8 bear markets. At the worst on average we end up getting back to normal in about 3 1/2 years. But people just don’t want to wait that long and they let fear overtake their emotions.”

This is so true and the point of what I have been trying to say all along. No, there’s no guarantee that the market will move back up anytime soon. However, when your goal is decades away, there’s simply no reason to worry about a decline. If anything, consider the volatility a blessing because it is much easier to build wealth over the long run if you are able to purchase assets (stocks) at attractive prices than it is to build wealth when the market is constantly going up.

Here’s a link to the interview. Watch it! Also, Sam Stovall writes Sam Stovall’s Sector Watch each week in Business Week.

A Special Note to All You Personal Finance Bloggers Out There: This is where the rubber meets the road. Instead of scaring the bejeebers out of your readers, do a little stock market history reading and offer some hope. Pick up a copy of Jeremy Seigel’s Stocks for the Long Run or The Future for Investors (Affliliate Links) and learn about the market. You’ll be glad you did!

The city council in my town is meeting today to decide whether or not to pursue installing cameras at some of the busy intersections to catch people who run red lights. I have to say that I like this idea a lot. I’m sick of people running red lights! It seems like the problem is getting worse. It seems like EVERY light I sit through, I witness at least 2 – 3 people who either turn on a red light or simply speed through an intersection well after the light has turned red.

I think the problem is getting worse because cities are increasing the amount of time that people have to go through a light, which means everyone else has to wait longer if they miss the light. So, knowing this, people are determined NOT to get stuck at a light and that’s why they barrel on through. It’s very stupid but that’s human nature for you.

So, you know my opinion on this. Now I’d like you to share your’s.

Should cities and towns install traffic cameras?

UPDATE: I updated the formula due to an error on my part that was caught by Brad of Analyzing Wealth. Thanks for the catch, Brad!

Did you know that your mortgage may not be as expensive as you think it is? It’s true. If you have a mortgage with a fixed interest rate, which holds your payment constant, your mortgage is cheaper than you think it is.



For example…

Say you take out a 30-year $200,000 mortgage at a fixed rate of 6.5%. Your monthly payment would be $1,264.14. Your total payments over the life of this mortgage would be $455,089 of which $255,089 would go to pay interest. However, that’s not entirely accurate because we aren’t factoring in inflation.

Normally when we talk about inflation, we talk about the gradual decrease in the purchasing power of a dollar. Although inflation works to our disadvantage when it comes to purchasing power, the opposite is true when it comes to paying off a mortgage (or pretty much any type of loan).

If inflation averages 3% per year, in 10 years, the $1,264.14 payment would have about $941 in purchasing power. In other words, had the mortgage payment increased with the inflation rate, the payment would be nearly $1,700 per month. However, the mortgage payment is still just $1,264.14.

I put together a spreadsheet to calculate the inflation-adjusted cost of the mortgage used in this example. To make the calculation I simply discounted each payment by the periodic inflation rate, which was .2466%. Then I summed all the discounted payments to arrive at the inflation-adjusted cost of the mortgage. The formula for discounting a payment (also called a cashflow) looks like this:

Payment ÷ (1 + i)n


Payment = $1,264.14
i = inflation rate of 3% or .03 raised to 1/12 since there are 12 payments per year
n = number of the payment

So, the first discounted cashflow looks like this:

$1,264.14 ÷ (1 + .002466)1

$1,264.14 ÷ 1.002466


This calculation is really easy to perform with the aid of a spreadsheet. Anyway, I came up with an inflation-adjusted total cost of $301,398 for this mortgage compared to $455,089 before the inflation adjustment.

The bottom line: mortgages aren’t as expensive as we think they are after we figure in the effects of inflation. This is especially important to think about when trying to decide between renting or buying. What are the chances of not facing a rent increase over 30 years?


Average vs. Geometric Average

Do You Play the Lottery?

August 27, 2007

I just saw on the Drudge Report that someone won a Powerball jackpot worth $314 million. I can’t even imagine coming into that much money all at one time.

I have never played the lottery. To me the odds of winning are so slim that it’s just not worth it. Besides I’m not so sure I want $314 million. But that’s just me. What about you?

Do you play the lottery? If so, do you play it all the time or just when the jackpot gets to a certain size?

I read an interesting editorial in this weekend’s Wall Street Journal titled Fair Tax, Flawed Tax. I have not read Neal Boortz’s The FairTax Book (affiliate link), which is a book about abolishing the IRS and the income tax and moving to a consumption tax. Boortz calls this a fair tax. In my opinion, it doesn’t seem fair. Why? Because the less money you make, the higher percentage of your income will be spent on consumption. In other words, it seems like a regressive tax, not a fair tax (for the record I’m not a fan of progressive taxation since it too is not fair).

Personally, I like the idea of a flat tax. I think it’s fair for everyone since everyone pays the same percentage regardless of income. I know, I know, I’m too simplistic!

UPDATE: For those who are interested, here’s Neal Boortz’s Response.