AskDong

I tossed it right in the trash. I didn’t toss cash. I didn’t even toss a check. I tossed paperwork for reparations won from a class action suit. Years ago before I became a more disciplined investor I brought 200 shares of Enron for about $9/share in my 401k account. I was buying a falling knife. While I’m still willing to buy a stock that’s been beat up, I’m much more thorough about it now or so I like to believe.

I’m not sure what I would’ve been due from the class action. Certainly not the $1800 I lost buying shares. Enron or what is left of Enron has about $7.3 billion to pay the many people lining up for their pennies on the dollar. The many bond holders are ahead of me in the line, and as are the many equity holders who brought at $60/share. Currently, I’m not entering the queue.

The principle reason I’m passing on this opportunity is the paperwork. I’m lazy and I took one look at the paperwork and was turned instantly off. I need to determine when and at what price I brought the shares. I certainly don’t remember. The account I purchased the shares has long been closed and transferred. I may have paper records, but I’ll to look long and hard for them. For many of my older records I subscribe to box filing method, i.e. I put everything in a box until I needed. Part of the reason I was less diligent in my record keeping is that this transaction took place in a 401K brokerage account, and therefore no tax consequences to buy and selling.

I know I should be doing the work to recoup whatever I can, but my heart just isn’t in. I figure at best I’ll get something like $50, and I don’t really feel in this circumstance my time or emotional pain is worth it. I hate these class action forms. I don’t mind filling out rebate forms. I don’t mind filling out credit card applications. But, I absolutely hate these class action forms, and this particular one is a doozy. I know I should take the time, and if I’m really really bored this weekend I’ll rife through my trash for the forms.

My blog is not an investment blog. It’s a personal finance blog. However, I’ve gotten some comments from friends that some of the dribble I’m churning out nearly every day doesn’t make very much sense, and not just because I’m a terrible writer. I believe I’m probably only reaching a quarter of my audience with my posts on investing. So over the course of the next couple weeks, I’m starting a series on the basics of investments.  Consider this the table of contents, and the introductory article.

• Investment Accounts - Brokerage, Mutual Fund Account, 401K - Today’s Topic
• Fixed Income Investments (Savings Accounts, CDs, Government Bonds, Corporate Bonds)
• Stocks
• Mutual Funds
• Options
• “Exotic” Investments - Commodities, Future Contracts

I think many individuals who are new to investing often confuse investment accounts with investments.
Brokerage Account, 401k, IRAs ARE NOT Investments.

Brokerage, 401k, and IRA accounts are just that, accounts. To use a metaphor, these accounts are nothing more than folder to hold actual investments which are stocks, bonds, cash, gold, etc. Of course some of these accounts like a 401k or Roth IRA have some special tax features that basically make them invisible temporarily to taxes (401k, standard IRA) , or permanently so (Roth IRA, Roth 401k).

Brokerage Accounts
Brokerages are not very different from standard Banks. Instead of just dealing with just cash, brokerages also hold stocks, bonds, and mutual funds for their customers. While it’s possible to buy stocks and bonds directly, and even hold the those in physical form, it’s generally not recommended. A brokerage account serves as the intermediate. The brokerage helps you buy and sell those investments, handle the bookkeeping, and consolidate all the holdings. For these services customer pay in terms trading fees (i.e. 19.95 per trade), annual account fees, and interest (if you borrow money to from the brokerage to invest).

Mutual Fund Accounts
While you can buy mutual funds through your brokerage, and some mutual fund companies offer extensive brokerage arms (Fidelity comes into mind), you can also buy Mutual Funds directly through the mutual fund company. The benefit of buying mutual funds directly through the company that operates the mutual funds is that for many fund it’s generally free to do so. For instance I own Dodge & Cox’s DODFX (Dodge & Cox International) in my E*Trade brokerage account. However I could’ve just as easily opened an account with Dodge & Cox and brought shares for free instead of paying 19.95 for each buy and sell I make through E*Trade, and that’s what I’ve done in the case of Vanguard. I have Vanguard account and because they have such a wide variety of index funds from which I can choose, it’s a perfect account to my brokerage account.

401k, Traditional IRA, Non-Deductble IRA, Roth IRA
These retirement accounts are not really types of accounts because in the case of IRA (Individual Retirement Accounts) accounts each of them is usually either a brokerage account or a mutual fund account wrapped within different tax rules. The tax shelter that each of these accounts confer is intended to encourage retirement savings.

• 401k - Ok, 401ks really are different type of account since they operated on behalf of employers, and are funded via payroll deductions.  The specifics vary from plan to plan. Some offer great investment choices, and others not at all.
• Roth IRA, Roth 401k - Offers the ability to invest after tax dollars and never pay taxes again. After tax income is income that you’ve already paid taxes. For instance let’s say you make $1500, and pay $500 in taxes, you have $1000 in after tax income in which you put into a Roth IRA. No taxes are avoided initially, but after 50 years when that $1000 has grown to $70,000 no taxes are owed either. In typical investment account, you would have to pay taxes on the gain of $69,000.   A Roth 401K behaves exactly like a Roth IRA, but like a standard 401k is employer sponsored and funded by payroll deductions.
• Traditional IRA or Deductible IRA - A traditional deductible IRA if you qualify to open allows you to shelter taxes now and while the investments are in the IRA. Going back to the example in which you have $1500 in income, you could put the full $1500 into a deductible IRA and avoid paying $500 in taxes. (I’ve simplified a bit here since you can’t avoid payroll taxes such as social security and medicare). Of course upon withdrawal you owe full income taxes
• Non Deductible IRA - Like a Roth IRA in that you put after tax dollars, and at withdrawal you owe income taxes on the gains. Doesn’t sound like much of deal does it? The only taxes you avoid is incremental annual taxes. So for instance if you make $100 in interest, typically you’d have to pay taxes on that $100 in a taxable account and would then only have let’s say $70 of that interest to invest for the next year. Within a non-deductible IRA, the full amount is available for reinvestment where taxes are only paid at distribution. This is tax-deferral.

These are only a few of the different types of investment accounts. There are 529 plans, SEP-IRA, Simple IRAs, and more. However these accounts are the basics, and that’s what I’m trying to cover in this series, the basics.

I just polished off a sandwich, some coleslaw, and potato salad. The cost? Absolutely nothing. I’m a scavenger. I would say 3 out of 5 days at the office there are meetings. I’m usually not at these meetings, but still manage to feed myself more than a few times a month on the generosity of the company.

The question is what are my ethical obligations in terms of scavenging? Is it fair if I help myself to every meal? The extra food usually consisting of sandwhiches are brought into the lunch room, and are usually gone within 20 minutes as word of mouth makes it way around the office. So when I take a sadnwhich, I’m effectively taking a sandwhich from someone else. Should I only take what is my fair share? Or do I deserve every piece of food I can get because I’m faster and more alert?

I don’t stay awake at night pondering this ethical question given that nobody in my office is exactly hurting for a free sandwich. However, the question can be applied more broadly. Is it always fair to take as much as you can get, knowing full well that someone else will be shortchanged because of your actions?

Salon debuted the other day a new feature Ask Pablo.  Salon has picked up the column from Pablo’s website creatively and smartly named Ask Pablo.  Salon for those who aren’t famililar with it, is a left leaning online magazine. Since I’m a reader that probably makes me a little left leaning which I’m OK with.  Many of the readers in the comments sections think I’m wingnut troll.  Of course at other times in the same discussion, real wingnuts are just as likely to call me a moonbat.  If I can inspire ire on both sides of the fence, I’ve done something right.

So anyhow I was very intrigued when I saw “Ask Pablo” given this AskDong and I have friend named Pablo. The Pablo writing the column on Salon is sadly, howevermm not my friend, but a sustainability engineer who will answer questions about the environment and green living. As soon as read the premise, I thought “What a great concept!” As readers know, the environment is something I care about, and part of my pitch for frugality comes as much from a sense of environmental stewardhsip as it is driven by economic desire.

While some of the actions we take are obviously better for the environment - i.e. walking to work instead of driving, there are more than a few that are less than obvious. When does it make sense to buy a newer more energy efficient car versus keeping the beater? These are the type of questions that make sense to ask an expert, and Pablo advertises himself as such.

If everything works as it should should, I’ll be closing on my Condo purchase this Friday. I’ve spent the past weekend reviewing the mortgage documents. Actually the truth is that I spent most of this weekend nursing a hangover, but I did manage to put in 20 minutes on Sunday reviewing documents. I reviewed both the good faith estimate my mortgage broker sent me and the initial closing documents sent to me by the bank.

I feel like closing costs can be one of the more confusing parts of signing a mortgage. My rule of thumb is that closing costs will be around $3k regardless of what any bank or broker may say initially. Of course those who are getting a cash back mortgage or getting paid points may actually receive money at closing, but the cost of closing while obscured are still there. Just because at closing no actual money is paid towards closing does not mean that closing costs haven’t been paid. They have.

Below is what listed as my closing cost from my original Good Faith Estimate, and what the JP Morgan Chase recently sent me. The numbers don’t jive. I wouldn’t epect an exact match, but there are some fees on the bank statement that I need to question. I’m not sure the bank estimate is official since I haven’t heard my mortgage broker that my loan was going to Chase. I need to look into the matter further. Regardless I owe my broker a call to check and potentially dispute any confusion when it comes to the closing cost. Because closing costs are neither fixed or official parts of the mortgage terms, closing cost are both confusing and leave too much room for potentially extra charges. Another cost at closing is interest and escrow payments that need to be prepaid when closing happens on any date but the end of the month. Mortgages generally start on the 1st of a month so as result of closing on date that is not the last date of the month, interest needs to be paid for the period before the mortgage officially starts in the next month. These costs are more a function of the price of the home and the date of the closing and should not be considered part of the closing cost. In my example I’ve separated them, and Xed them out.

I’ve highlighted in yellow what I consider “unavoidable” closing costs. This is not to say there isn’t room to get these charges lowered, but rather these charges will always exist on any mortgage closing with any lender. While I do not dispute the need for these unavoidable costs, I do dispute the price of each. For the life of me I don’t understand why recording charges continue to be well over a hundred as we move to a more electronic world. And don’t get me started on Title Insurance which the lender requires. Title insurance financially guarantees that you (or rather the bank) owns the property in question in the case of dispute of ownership. Maybe a long lost cousin of a deceased previous owner will surface? Like most insurance, it makes logical sense. The problem is one of pricing. The cost of Title Insurance has almost nothing to do with the actual risk. Rather, the main cost component of Title Insurance is a fee that is given to Lawyer who does the closing for the bank. Title insurance is basically a kickback scheme.