Archives For September 2007

Here’s a quick look at some of the posts from the MoneyBlogNetwork and beyond over the past week:

NCN continues his 33-day series. Day 22 is aboutemergency funds. Wow! $20,000 seems like a lot of money to just be sitting in a bank account earning interest.

MBH’s thoughts on Maxed Out – I wasn’t too fond of it.

J.D. talked about Freegans, which are basically freaks who go through other people’s trash in order to find food. – Disgusting! I think this borders on insanity.

Here’s an FMF guest post with strategies for saving money on travel.

Nickel talks about why he and his wife are switching to Bank of America’s money market account.

Flexo highlights some of the relief that college students will get from a new bill that was passed. – This is great and all but it fails to address why college is so freakin’ expensive to begin with!

Jim wants your thoughts on the United States’ deficit. – Yeah, it’s bad but I got to say that Clinton’s rosy outlook on the debt came prior to both the tech stock bubble and 9/11. Let’s face it, elected officials are HORRIBLE money managers!

Tricia mapped out her strategy for saving money on heating costs this winter. – Sometimes it’s nice living in area where the coldest temperatures during winter are in the 20s and 30s for lows and the 40s and 50s for highs. Though, I do miss winter.

BluntMoney likes the Scanalizer she won here on AllFinancialMatters. – That’s cool!

The Digerati Life takes a look at the causes and the consequences of the subprime mortgage snafu.

Lastly, here’s Meg’s top tips for accumulating easy wealth.

That’s it for this week. Enjoy!

By the way…

I would like your opinion. How many links would you like in each week’s roundup? I have a ton of blogs in my blog roll but not nearly enough time to link to all of them each week. I think roundups should stay at or around 10-15 links. Is that too many or too few?

Commenter Chris left this response to my post, A Look at an Equity-Indexed Annuity:

O.K. I’ve read through all of this and the fact is that we’re talking about several different things.

First of all we’re talking about investment vs. insurance. To everybody trying to compare an FIA (Fixed Indexed Annuity), it shouldn’t be done. An FIA is insurance. The risk is taken on by the insurance company. Hence the ability to guarantee that the there will be no loss in the value of the contract, as long as the individual follows the rules.

Secondly, nobody should have all of their money in one type of vehichle. There needs to be diversification. However, as an individual gets closer to retirement the “time horizon” reduces. This requires an individual to reposition their funds from an investment to insurance.

Third, as the individual is getting older and is needing to preserve more of their funds, or in retirement and decumulating their funds, we need to look at the type of vehicle the individual is in. One of the things that I feel everybody can agree upon is that we’re living longer. I feel that we’re going to be looking at many “boomers” needing to take a stream of income. There’s only one vehicle that will GUARANTEE that they can never outlive their funds, annuity.

Fourth, to all the people that state that FIAs are high commission products. I will agree that in the past there were some rogue companies that were paying outragous commissions. However that arguement is outdated. Side note, the MasterDex is not the highest paying FIA.

Fifth, and finally, what is the risk tolerance of the client? What are the goals for the clients funds? How soon do they need to get at the money? We need to look at suitability. We need to take care of the client. We can argue which is better, however no one vehicle can meet all the clients needs.

I’d like to look at some of Chris’ points.

“First of all we’re talking about investment vs. insurance. To everybody trying to compare an FIA (Fixed Indexed Annuity), it shouldn’t be done. An FIA is insurance. The risk is taken on by the insurance company. Hence the ability to guarantee that the there will be no loss in the value of the contract, as long as the individual follows the rules.”

If it is fair to compare the “risk” of the stock market with the “non risk” of the EIA then it is perfectly fair to compare the performance of the two. Also, if Chris’ argument were true then why the heck do all the annuity salespeople start their presentations off by talking about the S&P 500 Index? If it’s not fair to compare an EIA with its underlying index, then salespeople shouldn’t be allowed to even MENTION the index! Once they (the salespeople) mention the index then I think it is fair game to compare the two.

I’ll stop comparing the two as soon as salespeople stop representing their product as a risk-free way to invest in the market.

“Secondly, nobody should have all of their money in one type of vehichle. There needs to be diversification. However, as an individual gets closer to retirement the “time horizon” reduces. This requires an individual to reposition their funds from an investment to insurance.

“Third, as the individual is getting older and is needing to preserve more of their funds, or in retirement and decumulating their funds, we need to look at the type of vehicle the individual is in. One of the things that I feel everybody can agree upon is that we’re living longer. I feel that we’re going to be looking at many “boomers” needing to take a stream of income. There’s only one vehicle that will GUARANTEE that they can never outlive their funds, annuity.”

Notice in the second point Chris states that as a person approaches retirement, their “time horizon” reduces and then in the very next paragraph he talks about how people are living longer. I think the insurance and brokerage industry wants people to look at an approaching retirement as a reduction in your time horizon so that they can justify selling you an annuity. If you retire at 65, there’s a pretty good chance you could still be around at 85, which is twenty years. That’s a long-term time horizon in my book.

Oh, and that GUARANTEE that Chris speaks of is only as good as the insurance company. If the insurance company goes under, guess what happens to that annuity. No, it’s not likely to happen but there’s always a chance that it could.

“Fourth, to all the people that state that EIAs are high commission products. I will agree that in the past there were some rogue companies that were paying outragous commissions. However that arguement is outdated. Side note, the MasterDex is not the highest paying EIA.”

I still say that if annuities are as great as everyone says they are, reduce the commission payout to EXACTLY the same payout as mutual funds. Seriously, why should a salesperson earn a bigger commission from an annuity sale than they earn from a mutual fund sale?

“Fifth, and finally, what is the risk tolerance of the client? What are the goals for the clients funds? How soon do they need to get at the money? We need to look at suitability. We need to take care of the client. We can argue which is better, however no one vehicle can meet all the clients needs.”

Some annuity salespeople scare people into buying an annuity. I would be willing to bet that most (notice I didn’t say ALL) annuity salespeople fail to properly explain market risk to prospect. Instead they get a prospect who is close to retirement, who has saved his money for 30-40 years, built up a nice nest egg and then ask him how much of his nest egg he can afford to lose? When the prospect naturally says, “NONE,” the salesperson is more than happy to point him to a product with a guarantee (and lots of extra fees).

Finally, I wonder how many annuity salesmen on the verge of making a big sale would actually tell a client that the annuity isn’t suitable for them? More likely, they make the sale and justify it later. No, not ALL salespeople would do this but there are those who do.

This is going to sound like a blanket statement, but most people would be better served by avoiding equity-indexed annuities. The only people I have found who even like EIAs are those who sell them.

How We Found Our Contractor

September 29, 2007

A commenter in one of my previous kitchen remodel posts asked how I found a contractor.

It all started several years ago. We bought our house in 1999 and almost immediately we started dreaming about the stuff we wanted to do to it. Our house is nearly 50 years old and nearly every room needed some type of work. I knew that a lot of the projects were going to be way out of my league so I started thinking about a contractor (keep in mind that this was seven years ago). Anyway, I started seeing signs in different yards and all of them were for the same contractor (his name is Fred). I made a mental note of it but never made any calls.

Fast forward to 2007…

After we paid off our credit cards in 2006, we started saving money for a remodel. Then earlier this year we went to Home Depot to start to get an idea of how much our kitchen remodel was going to cost. After visiting with the Home Depot guy we got cold feet and decided to put it off for a while.

Then a couple of months later, both my dad and my father-in-law suggested we refinance our house and use the equity to finance our kitchen project. In Texas, you can’t refinance for more than 80% of the value of the home, so that you at least have a 20% equity position based on market value (yes, there’s some risk to this but that’s not the point of this post). Anyway, we decided to do this and met with our bank. Our appraisal came back pretty conservative (meaning it came in for less than I thought the house was really worth), which made me feel comfortable with the refinance. We refinanced and received our funds back in early August, which I immediately rolled over to our GMAC Bank account.

Once we had the money in hand, we decided to pursue a contractor. I called a friend of mine who works with various contractors and asked him for some names. He recommended a few that I wasn’t familiar with so I asked him about Fred. He told me that Fred was really good, but that he wasn’t cheap. He also told me that Fred had crews to do different tasks, which makes his projects go a lot faster.

My wife called Fred and scheduled a meeting with him and two other contractors. Fred really impressed us. He was older, had been doing remodels for decades, and had a good reputation. And, he would do everything. A big plus in my book.

The next guy was also qualified but left us with the impression that we would have a lot more responsibility. For instance, we would be required to hire a cabinet maker, plumber and electrician. Basically, we would be the contractor for the deal. I wasn’t comfortable with this at all. His bid came in a LOT lower than Fred’s but it didn’t include everything, so it was really hard to compare.

The third contractor never called us back and we found out through my in-laws that he was really slow. So, he was out. We didn’t want our kitchen out of commission for six months!

We called Fred back out to our house to answer some more questions and decided during that meeting that he was the man for the job.

Everyone I talked to before hiring Fred had nothing but good things to say about him. That, and the fact that I saw his signs in lots of different yards over the years, made the decision easy for me. I also liked the fact that Fred didn’t require a draw (access to our funds in order to complete the project). My big fear was a contractor running off with our money and never completing the work, which seems to be rampant in the contracting business. One lady I know hired a contractor who gutted her house and then took off! She’s out some money, has a gutted house, and now has to find another contractor to come in and finish the job.

Our job’s still not done but I can tell you that so far I have been extremely impressed by Fred and his crew. They come to work. They don’t lounge around – they work! I don’t think I have ever seen one of them standing around unless they were on a lunch break.

So, that’s my experience.

Here’s the latest pictures from our kitchen remodel. They started installing the kitchen cabinets on Thursday. You can click on the pictures to see more detail. The pictures don’t do them justice because they look incredible.

That’s my son’s hand sticking out from behind the plastic and my daughter’s yogurt sitting on the floor. The big hole in the ceiling is where they inserted a huge beam to support the ceiling since they took out a load-bearing wall.

Here’s a before picture of the family room, which is connected to the kitchen:

Although we loved the fireplace, it was too big and took up too much room. It also made it hard to arrange the furniture. So, we decided that since we were in the midst of a remodel that there would never be a better time to take it out. So,… we did!

Taking out the fireplace gave us an additional 6 feet of wall space to work with. On that wall, we will put built-in bookcases with shelving for a nice-sized flat-screen TV. The fireplace will be moved to a spot in between the family room and the kitchen, which will help tie the two rooms together and make for a really nice atmosphere. I’ll post more pictures later.

This is going to end up costing us a lot of money but I think it will be worth it.

I received an email yesterday from Kimerly Palmer informing me of a new blog she is hosting for U. S. News & World Report called Alpha Consumer. It looks like an interesting blog, similar to what The Consumerist but with a little more focus on personal finance.

According to their “About” section, their blog will take a more investigative approach:

Problems in your financial life? Maybe it’s a misleading marketing campaign, workplace frustrations, or a money meltdown. E-mail us at alphaconsumer@usnews.com, and we’ll pick cases to investigate and share with you the best advice we find.

I’m a little disappointed that they don’t allow comments but I’m sure it’s done to avoid spam.

I wish Kimberly and U. S. News lots of success.

Most of the destruction is complete (except for the fireplace, which they are tearing down today) and today they are beginning to install the cabinets. They look AWESOME! I’ll add some pictures to this post later today after the crew has gone home.

It’s funny during the demolition, I was wondering what the heck we got ourselves into. Now, it is becoming clear.

Stay tuned…

One of the cover stories, A Turning Point For Health Care ($), in today’s Wall Street Journal is about how the GM-UAW deal is a turning point for health care. From the article:

The shift isn’t only about dropping coverage or making workers pay more of the bill. Like GM, many employers want to immunize themselves from the risk of rising health costs. In many cases, especially for retirees, this means shifting to plans in which the employer provides a lump sum for health coverage and employees have to figure out how to spend it. That way, the employer knows ahead of time exactly how much it is spending.

In GM’s case, an independent trust will assume the task of providing health coverage to the company’s unionized retirees and spouses. GM will put money in the trust — as much as $35 billion, according to people familiar with the deal — to get it going. But it’s up to the trust to set and manage the benefits.

According to the article Ford is going to stop providing group insurance in January to about 57,000 salaried retirees and their spouses who are over 65 years old. Each person will receive $1,800 per year to help cover insurance premiums. That’s pretty stingy if you ask me. I know it’s nothing for health insurance premiums to be over $500 per month. That measely $1,800 per year isn’t going to do much.

I don’t see how companies can make changes like this, especially to people who were counting on their benefits. Can’t they grandfather people and make cut off points for everyone else?

I wonder if Ford would like it if people stopped paying their monthly car notes? “I’m sorry Ford, but I just don’t have enough to go around so starting in January 2008, I’m only going to pay you $1,800 per year.” LOL! I bet that would go over real well!