AskDong

I got my girlfriend an iPod Touch for Christmas. Her Palm Pilot and iPod Nano were both getting long in the tooth. I had given her the Palm Pilot for her birthday 3 years ago, and the Nano about 2 years ago as a Valentine gift. I thought the the Touch would be great replacement for both devices. I thought about the iPhone, but she’s on contract with Verizon. In addition much of her family and friends are on Verizon including myself. The touch seemed like a good compromise.

One problem currently with the iPhone and the iTouch is the lack of 3rd party applications. Apple has so far locked down the device, though it has promised to deliver an SDK in February. For those non-geeks in the audience, a SDK is a Software Development Kit, basically a set of tools and applications that allow programmers build programs for a given device. Without the SDK, programmers can’t officially build applications for the iPhone. This lack of an SDK and official support from Apple has meant a relative dearth of iPhone applications.

One of the programs my girlfriend uses on her Palm is inExpense. It’s a basic personal finance tracking program. It’s not much more than online checkbook, but it works great for her because she’s organized and meticulous. It’d be utterly useless for me as I’m neither organized or meticulous. I need things to be as automated as possible. I can’t be bothered with having to enter my expenses. My time is too valuable, or so I like to believe. The only available, non web, personal finance application I know of is PocketMoney which is in beta. Given that SDK is due for imminent release, I think it might be best to hold off a bit.

In all of this there is a larger issue of what the role of mobile personal finance applications are? Personally the only area I need to track is my cash expenditures, but at the same time I do like the idea of tapping into my overall financial picture on the go. Realistically however, there’s really no reason for me to know exactly what my net worth is at any given time. If my sense is off by a couple hundred dollars that’s not make or break. In my younger years knowing what my balance was on any given day would’ve been more important. I think a good portable personal finance application augments a larger system. For example while I don’t use Quicken anymore being able to note cash transaction on the go and then being able to reconcile them within Quicken is a useful feature.

The bulk of my income (98%) comes from my job, however like many other personal bloggers I’m actively concerned with growing my other income streams. Earlier in the year I detailed some methods of making money. These income streams are primarily:

• Rental Properties - I have just one right now, my old condo. (.5%/-6%)
• Interest and Dividends (4%)
• Peer to Peer lending via Prosper (13%)
• And pulling the rear in dollar terms, Blogging (30%)

The number in parentheses is my return on investment for the year. This is the first year I have income from each of these sources. Without question, making money off dividends and interest has been by far the “easiest”, but is also the most difficult one to earn out-sized returns (at least for me).

Rental Property
I reported two number as my return, both are calculated as function of the money I put down (the down payment). The lower number, -6%, reflects that on cash flow basis I’ve lost money. I don’t generate any income on this property as I have to augment the rent I receive to cover the mortgage payment, condo fee, and taxes. The higher number, .5%, reflects increased equity.  Given that a portion of what I’m paying towards the mortgage is applied to the principal, I am in effect also paying myself.  That should count for somethig, though I doubt seasoned real estate professionals would ever count it.

Interest and Dividends
I’ve earned the most money in dollar terms via interest and dividends and expect this will continue to be case in 2008. My 4% return is reflective dividends and interest paid as a function of the amount invested. It does not reflect higher (or lower) stock prices.  I am expecting a dip in dividends and interest in the coming year given the lower interest rates, and the tough economic climate especially as related to banking stocks. Bank stocks are some the best paying stocks out there, but some like Washington Mutual have already cut their dividends. They are amongst the hardest hit companies by the ever expanding housing and subprime crisis. I would expect a dividend cut from many a bank.

Prosper
I haven’t put much money into prosper, only a few thousand, and have been lucky to have had no defaults as of yet. The 13% return is reflective of the total I’ve put into prosper, not just what I’ve deployed which is only 2/3rds of that amount. While it’s still early, I think I’ve been able to keep my default rate fairly low by both being selective on the borrowers I’ve lent to and actually reading each profile in detail.  Even though I’ve been lucky with defaults, I should anticipate that a few of might lons may not pan out, and pre-emptively earmark amount as an expected loss which would reduce my rate of return.  The biggest problem for me is how I approve loans, it’s hard for me to scale as I don’t want to dedicate all my free time bidding on loans.

Blogging
This is the income source I’m most interested in growing.  Not because I think I can earn the most money - the fact I’ve been able to cover my costs has already made me happy. I expect dividends and rental properties will be my primary sources of alternative income later in life.  Blogging however is the one I have the most fun doing, and earning more by it really gives me a great sense of satisfaction. It’s primarily my hobby, and secondly an income earning venture.  That said I’ve made a great return on capital (though not labor) as I’ve spent less than $50 on hosting for the year.  I would still have a computer and Internet connection even if I wasn’t blogging so I haven’t included those as part of my cost.

I like many bloggers have aspirations to have a decent stream of “side” income.  Lazy Man and Money calls this Alternative Income. Others call it passive income.  Jonathan at MyMoneyBlog questions if it (being passive income) exists at all. He offers a great breakdown of typical income streams that many of us might define as passive, and asks how passive are they really?

I agree, I think many of the income streams that are typically defined as passive are hardly passive. Rental properties can be ton of work.  Effectively picking good dividend paying stocks is hardly without substantial risk.  Writing the next number one hit doesn’t just happen.  All these “passive” incomes are however unrelated to any kind traditional employment.  Being a landlord is a form of self-employment. As is being a stock or mutual fund picker.  These passive income streams are all in some way or another a form of entrepreneurship.

I think the labels “passive” and “side” do not fully convey the entire purpose of having additional income sources. In my mind these additional income sources form the bed rock of what I consider “sustainable” income. I use the word sustain to convey two meanings.

1. To bear up under; withstand
2. To supply with necessities or nourishment; provide for

Even if you’re in stable job, employment (other than self-employment) is always at the whim of someone else.  For that reason I think it’s not only important to have an emergency fund, but additional income from other sources. Self-employment is not necessarily stable, but those who are self-employed generally enjoy a level of control that conventional jobs can’t give.  Ideally this income becomes large enough to sustain us.  In that light the day job becomes the “side” income.

It’s funny that I just recently wrote about my worries about making a late payment. No sooner than the digital ink was dry, I had a late payment. I completely missed one of my credit card bills. However, the problem really wasn’t with me or the system I have in place for paying my bills but with my mail. I had signed up for the University Iowa Bank of America card for the equivalent of $250 via a promotion they were running(they are no longer running it). I got the card in late July, and started making purchases to qualify for the promotion.

In the middle of last month, I began worrying about my payment. It had been what seemed like a month since I received the card, but still no statement. When I called the automated information service there was no statement issued. I filed the worry away, and worried instead about other more pressing financial matters, like what was I was going to have for dinner.

This week I called again since I still hadn’t received a bill. As fate would have it my bill was due last week, and I was 5 days past due. I got hold of a customer service representative and explained my situation. I told him I hadn’t received any bills, and given that this was my first statement I had no sense of when the due date was. He was kind enough to give me a credit for the $29 late fee, and send me another copy of the bill. Later that evening, I then signed up for online access for the credit card and paid my bill. I had hoped to avoid signing up for online access as this was a card I had no plans on using on a long term basis.

Given that I’m only 5 days late on the payment, my credit score should not be be affected. 60 day past due is typically when a late payment is reported to the credit agencies, though some companies will report individuals after just 30 days. I also got the late fee waived, so I’m not paying anything extra. Though I’ll have to wait to the next statement to see if I end being assessed interest on the balance, though that should be minimal. However this mistake was a reminder to me why opening too many credit card accounts for every single promotion really can be a hassle. Yes, $250 is worth it assuming the ding to my credit score is immaterial and quick repairable (which it is), but the hassle gives me more pause on signing up for the next promotion I come across.

This is not a post about why anyone should be running from the equity (or debt) markets. I’m firm a believer that most individuals should be as close to fully invested in the markets at all times. Market timing is awfully hard to accomplish. Nor do I believe that anyone needs more than 3 months in emergency fund assuming there are other sources to be tapped like equity lines of credit, maturing CDs, etc. Yet contrary to all those beliefs above, I believe many individuals would greatly benefit from having a cash stash.

There’s nothing else like cash. Not just cold hard cash in the form of bills and coins, but cash in a savings accounts, money market funds, checking accounts - basically what is defined as the M2 money supply less CDs. Unlike other investments which can be both illiquid and are generally invested with a time frame in mind, cash is definitionally liquid, and has no time constraints upon it.

However, the virtue of holding cash is not just having cash itself, but the opportunities that having cash begets. How many times have any of us said, “If I only had the money, I would’ve made fortune in X.’ X might be great real estate purchase. X could be an incredible stock idea. X could have been put into helping a friend start up a business. I don’t believe in get rich quick schemes, but I also believe that many successful individuals take calculated risk with the right business opportunities. In order to take those financial risk you either need to have the cash or borrow it. Unlike corporations, individuals cannot easily go out into the debt market and borrow money. The best option we have is to borrow via home equity. Personal loans generally have onerous terms that make them unpalatable for the purpose taking risks. Even if I did have good access to funds via a home equity line, I would not want to be 100% leveraged in a risk taking venture. I would be more comfortable putting cash to work and then using some leverage.

The question is how much cash is appropriate? Warren Buffet holds over 50 billion in cash at Berkshire Hathaway for potential investments. This is nearly 1/4 of the company’s market capitalization. 25 percent would be very large percentage of someones’ networth to be held in cash. I believe for most people the percentage held in cash should be much lower, and generally slides up as someones’ networth increases. Cash in some ways is the investment you make after you’ve made all your other investments. I can’t imagine most people would want to target more than 25% in cash holdings, but many people would be well served by being 10-20% cash. However, the most important part of being in cash is understanding that you are the type of person who wants and plans on taking risk with that cash.