AskDong

I’m not very good about throwing my shoes away.  This partly because I’m cheap, and partly because I find old worn shoes extremely comfortable.  At any given time I usually own 4 pairs of shoes - sneakers, brown shoes, black shoes, and some boots.  However, I almost always wear only wear set exclusively, the black or brown ones.  Currently it’s the brown shoes. I’ve been wearing them for about a year and half now.

I actually have some replacement shoes for my trusty old brown shoes, but I still tend to wear the old shoes. I have a hard time letting go, and I feel the longer I wear my old shoes, the longer my new shoes will last.  In college I duct taped my sneakers together after the sole loosened and flopped around.  I can’t bear to throw away shoes that have anything less than a major hole through the sole.  Why?  As I’ve seen it a shoe as long as it encloses my foot, it’s good enough to be worn. Neither my girlfriend or my parents feel this way.  My girlfriend threw away my old sneakers, and my parents did the same back when I was in high school.

Slowly, I’m coming to realize that they might be right. When wearing the same pair of shoes days in and day out it’s difficult to discern inadequacies in the shoes.  However right now as I still have my old shoes and my new new shoes, I can make a direct comparison. My old shoes really don’t offer much support or protection (the soles have small crsck which means they get wet when the sidewalk is wet).  I think I need to bite the bullet and transition to new shoes more often I do right now.

I have a question from a reader of AskDong.

i’m doing my own taxes this year for the first time in my life. what is the best software to help me? i would like to download turbotax, but want to get the right one. my taxes should be very simple. i have one salaried job, and a few bank accounts earning interest. will the free version of turbotax be enough, or should i get deluxe?

thanks!

-R

Intuit in effort to increase sales and extract extra margins had 4 different versions of TurboTax, and the online cost vs purchasing a physical copy of the software.  The physical versions are more expensive but allow those who are concerned with privacy to hold their own data, and also allow the completion of different returns. Using TurboTax online is cheaper than buying the actual turbotax software for the computer, but limits you to filing only one return.  For a family that might have many different taxes to file, the online solution might not make sense.  Intuit still charges for each electronic filing, so it still profits from each additional tax filing unless of course you decide the mail the filing.

Free - $0/Not Available. The free version of Turbotax is only available online.
Basic - $14.95/$19.95
Deluxe - $29.95/$44.95
Premiere - $49.95/$74.95
Home & Business - $74.95/$89.95

This year I got premiere, but in years past I’ve stuck with Deluxe. I know from experience now that Deluxe doesn’t differ much from Premiere. Premiere does handle rental properties, investments, and business income slightly better than Deluxe.  However for most individuals especially those who don’t have rental or business income,  Deluxe is more than adequate.

The real question is when is standard enough? Since I’ve never used either the Free or Basic version before, I decided to give them a quick run though online. There’s hardly any difference between the Free and Basic version. The Basic version has a slightly more interactive interface, and guides the user better with questions.  In terms of content I believe they are identical. I would say if you’ve used the 1040EZ in the past, and/or rent instead of owning then the free version of TurboTax is probably enough. I don’t see much of point in ponying an extra $15 for the basic version.  The big addition to the Deluxe version of TurboTax is that it handles mortgage interest deductions.

In the last part of this series, I covered what stock was. Today I cover Mutual Funds. While mutual funds are actually more complex conceptually than stocks, they are also a more appropriate investment vehicle for beginner investors.

Most people have heard of mutual funds, and a good percentage understand the basic concept behind them. Mutual funds are investments that pool together money from many different investors to purchase stocks, bonds, and other assets. Conceptually a mutual fund is not so different from getting 50 of your friends together to put in some amount and handing it over to one friend to make all the investment decisions. The benefit is diversification, and simplicity. For example let’s say I had $120 to invest. I could take that $120 and buy one share of Apple Computer stock, or buy nearly one share of the Vanguard 500 Index Mutual Fund (VFINX). In the case of the former I would have all my money riding on the future of one company, and in the latter I would be diversely invested across the 500 different companies that make up the S&P 500.

Comparing the performance of AAPL and the S&P 500 over the last three months, the advantage of diversification is clear.

Chart courtesy of BigCharts.com

The benefit of diversification is not higher returns, but lower risk. Risk in the investment sense is the high probability of negative returns. Investing in single stock can bring great returns as the case with AAPL over the last 5 years, however at at given time a single stock can also decline dramatically as AAPL shares have done over the last two month. AAPL has declined by well over 30%, while the S&P 500 is only down a little over 5%. Generally speaking the greater the risk, the greater the potential gain and loss. Diversification can lead to better returns without carrying as much risk.

Mutual Funds structurally can be broken into two types:

• Close Ended Mutual Funds - These Mutual funds take in money from investors and then close to fund to outflows and inflows. They trade like stocks with a value that might be above or below the actual value of the assets the fund owns.
• Open Ended Mutual Funds - These funds are open and can take in new funds and sell assets to fund redemptions. The fact that a fund may be Open Ended does not mean the fund is open to new investors. Often times mutual funds companies will close a popular fund to new investors to prevent the fund from growing to a unwieldy size. Closing a fund in such a manner does not make the fund close-ended as current investors are allowed to both buy and redeem shares. Open ended fund are brought at sold at what the underlying assets are worth on any given day. Each day a N.A.V. (net asset value) is caculated and that’s what shares of the fund can be purchased or sold.

What a mutual fund actually invests in varies widely depending on the mission and stated purpose of the fund. Categorically however funds can be broken in two broad categories:

• Index Funds - Index Funds track different Indexes such as the S&P 500, the Wilshire 5000, the Morgan Stanley Emerging Market Index, and many more. There are generally speaking no investment decisions to be made as the purpose of the fund is to merely own the assets that compromise the index.
• Actively Managed Funds - Actively managed funds buy and sell assets on the whim of the portfolio manager(s) in charge. That said many actively managed funds have stated purpose and restrictions that are incorporate into the bylaws of the mutual fund. For example the Prudent Bear Fund, BEARX, is a bear market fund which means it tries to make money by betting the market will fall. It’s stated purpose is capital appreciation through mostly short selling equities.

Mutual Fund Expenses
So what’s the catch? Mutual funds are a great tool for investors to quickly diversify and somewhat simplify the ongoing decision making. It’s easier to pick a few funds than to engage in active trading of different stocks. For this service, mutual funds charge a little something off the top - they charge a percentage of the amount invested. Index Funds such as those run by Vanguard and Fidelity charge very little, less than .15% a year, while actively managed funds can charge easily in excess of 1% annually.  In addition some open ended fund charge a sales comission (called a load) on purchase while some charge that load upon sale.

Worry not readers, I’m not becoming a professional blogger anytime soon. However, it seems many of my more successful compatriots are. I read the other day that Trent at The Simple Dollar turned in his letter of his resignation. Who would’ve seen that coming? <END SARCASM> I thought Trent was long overdue. He’s successful blogger who clearly has demonstrated an ability to monetize his blog, but more importantly keep his spending down. He knows what his priorities are: his Ninentdo Wii, kids, and some tasty meals. Not necessarily in that order. He joins other bloggers like J.D. at Get Rich Slowly and Lazy Man (though Lazy Man did not do it quite out of his own volition) on trying to make it a go as an independent. Others such as Flexo at Consumerist Commentary remain on the Fence.

Given that I don’t read too many blogs other than personal finance blogs, I’m not sure how common it is for bloggers to go “pro”. That said I’m not surprised that so many succesful personal finance bloggers have gone pro. The mentality that leads one to write a blog on personal finance is the exactly the mentality that it takes to escape the 9 to 6 rat race. What are some of these qualities?

• A Plan
• Frugality
• A desire for independence

Personal finance bloggers even if they love their jobs almost always have a strong desire to be financially independent. This is what drives them to frugality. This I also think what leads them to write public blogs. They want their voice to be heard above the crowd, and may cause them to dislike working under the structure of most corporations.

It is highly unlikely that I will join the ranks of financially self sufficient personal finance blogerss anytime in the near future. While I may be on my way to becoming a six figure blogger, it’s six figures in Mongolian Turgiks. While I like to believe I share some of the same qualities as these independent bloggers, I also realize I have still few more things I like to accomplish at work before I could even consider doing something else. I believe blogging will be part of that something else someday, but I’ve got some other plans for that something else as well.

Stanford just joined the ranks of Harvard and Yale in eliminating tuition for many it’s students. On one hand I think this great, and on the other hand I’m worried and concerned.  There’s no question that college is too expensive.  The average tuition for private university in 2006 was $30,367 and $5,836 at a public university.  $30,000 is a lot of money.  What’s more concerning is that college tuition consistently outpaces inflation as represented by the 6% increase in 2006.  At this rate nobody will be able to afford to send their children to a private university.

In truth the numbers on tuition are somewhat misleading.  Many families who send their children to private colleges do not pay full price.  My family didn’t pay full price for my tuition.  A combination of grants lowered my bill to about 40% of the sticker price if I recall, and loans took care of another 20%.  As a result my parents had to “only” shell out 12k a year at the time.  The sticker price for college is very different from the actual cost in a large part due to the ability of college and universities to custom tailor each family’s bill.  Colleges can charge families differing amounts based on the ability of the families to pay.

I personally suspect that University have raised their tuition not to track inflation or overall wages, but rather to track income growth at the top income brackets of America.  It’s no secret that income growth has gone disproportionately to the top.   The people who are paying full price can afford it and most likely have seen their income increase more than tuition has.  While it can be argued this is fair in the same way progressive taxation is fair (though I know there are plenty of people who don’t think progressive taxation is fair), price discrimination such as this is inefficient and distortionary.  Financial aid has become too much of game played by those who are in the know at the expense of those who aren’t.

In the end it’s not the poor or wealthy who are squeezed.  The families that suffer the most are the middle to upper middle class.  Too often I hear about families choosing not to save money because they realize they are better off trying to go for more financial aid.  What is worse  is that families are “punished” for saving too much.   I can only guess at how profound an effect these price signals have on the behavior has on different families.   I also wonder what tuition would actually be if universities actually charged everyone the same amount?  While I believe that all young adults who both have the desire and academic qualifications to attend college should be able to do so, I’m also growing more convinced that the current financial aid system might collapse under it’s own weight.  Are the declarations of free tuition by elite private universities the beginning of the end or the ushering in of a new era?