Wealth – The Two Things That Matter

by David@MoneyNing.com · 19 comments

Here’s the simplest equation describing what we talk about everyday.

wealth = accumulated (income – spending)

There are essentially two ways to increase your wealth:

  1. increase your income
  2. decrease your spending

Do this and over time, you will accumulate wealth.

You are probably thinking that this is pointless, but sometimes we need a reminder because we over complicate personal finance.

Every time you wonder why you aren’t rich, you should ask yourself whether you are working hard enough on the right side of the equation. Have you exhausted all avenues of making more money? Do you live frugally?

If not, just spend some time brainstorming on ideas to improve the two things that matter: income and spending. Here are a few quick suggestions:

Increasing Your Income:

  1. Build passive income
  2. Ask for a raise
  3. Take full advantage of retirement accounts

Decreasing Your Spending:

  1. Cut up your credit cards
  2. Don’t look at advertisements as 40% off actually means you still need to spend 60% to get it
  3. Stop eating out already
  4. Call every company you are buying a service with and see if you get a better deal (TV, cell phone, car insurance etc)
  5. Search the web when something breaks to see if you can fix it before going out to buy a new one

I bet you can think of more to add to this list. Keep at it and increasing your wealth will become easier.

Is Market Linked Certificates of Deposit Right for You?

by David@MoneyNing.com · 78 comments

I was speaking to a representative at Wells Fargo today when she pushed their Market Linked Certificate of Deposit (MLCD).  To be honest, I knew nothing about it so I did a little research.

How It Works

Basically, Market Linked CDs are like traditional CDs but instead of a fixed interest rate, the CD’s returns can be tied to a major index like the Dow Jones Industrial Average of the S&P 500.  The return can also be linked to commodity prices, currencies, and even benchmarks like the Consumer Price Index (CPI) so this allows retail investors to invest in areas that are otherwise too complicated to get into.

The interesting thing to note is that these CDs are backed by the FDIC so they are insured.   On top of that, it is set up so if the benchmark (or index) falls by the maturity date, you still get your principal back.

Advantages of Market Linked CDs

These MLCDs seem to be a marriage between the stock market with the traditional CDs that we are familiar with.  The advantages are as follows:

  • FDIC Insurance – Yup the principal is insured to a maximum of $250,000 this year and up to $100,000 thereafter, just like any other savings accounts or CDs.
  • Unlike the stock market, you are guaranteed to get your principal back as long as you don’t withdraw before the maturity date
  • Keeps you from buying and selling since a CD gives you the “locked-up” effect that traditional CDs provide (lack of liquidity can sometimes be a good thing)

Possible Gotchas

MLCDs sound almost too good to be true since it’s got all the upside rewards but none of the downside risks.  Of course, once you look into it further, it’s not perfect.

  • Early Withdrawal Penalties – Even though the principal is guaranteed if you hold it to maturity, this is not the case for early withdrawals.  Therefore, it might be possible to have a huge withdrawal penalty if you need the money before maturity.
  • Bad Tax Rates – Your returns are considered interests so even though it might be from the performance of a stock market, it doesn’t qualify for the long term tax rate of 15%.
  • Ugly Tax Treatment – Furthermore, there’s a quirky rule that says you have to report returns as income every year you own this CD (if held in a taxable account).  So while you might not even receive anything until maturity, you have to pay taxes on some return (the return is based on a traditional CD that the bank deems comparable).
  • Possible Upper Limit – Some MLCDs have a cap on the high end that limits the returns, so the comparable index returning 100% doesn’t mean you will get a 100% return in your MLCD investment.
  • Dividend Reinvestment – A big chunk of market returns are actually provided by the dividends that the company pays.  Investing in MLCDs that track the index will not benefit from this.

What I Think of MLCDs

The tax implications really turns me off so this option for taxable accounts are automatically out of the question.  It’s not just the higher tax rate, but needing to pay taxes on money that I don’t even have yet really turns me off.

As for IRAs, the guarantee of no lost of principal is really great but as I have a very long time horizon, strictly investing in index funds is a much simpler strategy than investing in MLCDs due to the fact that I can’t imagine the S&P 500 being much lower than it is now in something like 35 years in the future (Remember that even if the index is lower, I would’ve reaped the benefits of reinvesting the dividends).

Who could really benefit from something like this are people who will retire in the next 10 years.  These people might not have the time horizon to wait for the stock market to come back, so giving up the dividends might be worth it to lower the risk of possibly another market crash before retirement.

Have you thought about this type of investments and do you own any?  Will you consider it?  What do you think?

Update: My dad sent me an email with a good way to take advantage of this.  If the MLCDs have short terms (like 3 to 6 months), then it’s a great way to make money since you can take advantage of the volatility and only pocket the interests when the benchmark goes up..  This is almost like free money but then I checked a bunch of offerings and they all have 3 year terms at a minimum.  No free lunch this time.

Too Many Reasons Why Being More Considerate Makes Everything Better

by David@MoneyNing.com · 6 comments

be considerate
Let’s be honest.  Some people are just more considerate than others.

These type of people always seem to understand how you feel.  You want to be with them but do you ever want to be them?  Do you think of each situation as if you are in the other person’s shoes?

Someone was helping me with a logo recently.  She didn’t charge me for it, but she still found the time to send me a couple emails along the way to let me know what she’s working on and when I should expect the final design.  When she missed the dates she promised, she explained why and apologized even though those recent events made it impossible for her to do what needed to be done.

It’s these types of people that I feel so lucky to be around.  The completion of the work probably wouldn’t matter much to her (after all, it was for free and it was a personal favor for a friend’s friend.), but she still took the time to communicate and let me know what’s happening.  On the other hand, I probably would’ve been wondering what was happening and would feel uneasy as I keep myself from asking her because I didn’t want to annoy her.
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Scaling Up to Make More Money is Not Impossible

by David@MoneyNing.com · 8 comments

The thought of being able to make more money always come across everyone’s mind at some point in our lives. It could be thinking about a side job to supplement the 9-5 or it could be the thought of expanding if you are a business owner. In most of those cases, the major excuse obstacle most people come up with is time.

There’s not enough time and it’s impossible to make more.

Next time when you tell yourself that you don’t have enough time, come back and take a look at these pictures:
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Do You Switch “Frugal Mode” On When You Come Back from Vacation?

by David@MoneyNing.com · 13 comments

should I walk or take the taxi
Have you ever came back from vacation and felt a different side of you take over? How about when you go on vacation? I believe it’s quite normal for us to feel and act a little different during days where we are away from home, but how dramatic are the differences?

Yesterday, I came back from my trip to see my parents and I wasn’t even home yet when all of a sudden a rush of money saving thoughts hit me. Should I grab a bunch of biscuits on the plane so I don’t need to get dinner at the food court? What about the taxi ride home? I could theoretically walk home and drive the car back to pickup Emma and all the luggage. It might take me about 30 minutes to get home and another 5 to drive back, but it will save me $12 on the taxi ride. We are tired and it’s 11 o’clock at night (more like 2am if you factor in timezone differences) but hey, $12 saved is $24 earned.

Luckily, I came to my senses and we got a cab in the end (a decision that I’m sure my wife applauded with hint of relief). I’m not even sure why (or for that matter, how) those thoughts got into my head. If I was still in Canada, there was no way I could even think of something like this. Do I have a “vacation mode” where I shut off part of my frugal senses? Or do I have a “frugal mode” where I can completely turn things off?

I’m sure most people’s spending habits change when they are on vacation, especially when it’s coupled with the happiness that typically surround the end of the year (less stress at work, more gatherings). So perhaps when discussing something like this, it’s not the answers, but the questions themselves.

For those of us who are out and about, have a great trip. For the rest of us, Good Morning and cheers for another (going-to-be) great day.

Value Added Tax Refund (VAT) for Vacation Shopping

by David@MoneyNing.com · 25 comments

Many travel to different countries around the year but few take advantage of the sales tax refund policies that some countries provide.  The most common reasons for not applying are:

  1. never knew tax refund are possible for visitors
  2. didn’t know how to get your tax refunds back
  3. laziness

If you fall under any of the following, this article is for you.

Why Countries Allow Sales Tax Refunds for Visitors

The reason is simple – visitor attraction.  Countries want you to spend, spend and spend when you are visiting, so offering a tax refund works the same way as someone putting a sign that says “Big Discount”.  Whether this tactic works or not is a different debate because so many people never bother with this but if you care about your money and finances, there is no reason not to take advantage and leave money on the table.

How to Get Your Money Back

Most countries have different procedures of applying for tax refunds as well as which part of the sales tax can be refunded.  However, the general procedure consists of:

  1. Filling out some type of form
  2. Bringing your passport
  3. Proof that you are a visitor – some form of boarding pass or itinerary etc

Easiest Way to Get Tax Refunds Back

Sometimes, shoppers can sweet talk the store into not charging the sales tax in the first place, but this method usually doesn’t work for larger retailers.  Many department stores have a semi-convenient way to getting tax refunds back via their customer service section.  Whenever you shop, the cashier can usually tell you where to go.  For example, Holt Renfrew had a customer service department that will refund all applicable sales tax back if you show them your receipt, boarding pass as well as your passport.  If all else fails, you can usually find a tax refund form by googling “country sales tax refund” and applying for it by mail.  Just make sure to search as soon as possible as most countries will need some sort of approval via an official stamp from an authorized personnel (read – get it figured out before you leave the country).

Countries Participating

There are hundreds of countries that have their own version of the sales tax refund program, here are a few in more detail.

  1. Canada – Visitors are allowed to get the provincial sales tax (PST) portion of the purchase back, with the tax being a minimum of $50 CDN per purchase.
  2. Japan – Visitors who spend more than 10,001 yen on any given day are allowed to get the 5% sales tax refunded.
  3. Taiwan – Receipts showing a spending of NT$3,000 on any single day.
  4. United Kingdom – European countries call it VAT (value added taxes).  UK’s VAT is currently at 17.5% with the minimum amount £30 GBP to qualify.

Some Additional Tips for Getting Your Tax Refund

Many people give up on sales taxes because it could be rather complicated to get money back.  To help you succeed, here are some more tips to remember.

  1. Shop at Stores that Embraces the Program – Not every store will know everything about tax refunds, so it makes sense to ask before you make a big purchase when traveling aboard.  With taxes as high as 25% in some countries, it would be a shame to not being able to get the refund back.
  2. Get the Necessary Documents – Most stores that are familiar with tax refund programs have the necessary forms in-store.  If possible, ask the customer service representative to help you fill out the form.  Otherwise, fill it out as much as possible yourself and ask all questions you have.
  3. Give Yourself Ample Time – The official stamp (if needed) are usually given by customs at border crossings and can take time to line up and get processed.  Don’t short change yourself by thinking that you can just get it done within 5 minutes.
  4. Bring the Product – Some countries require you to bring the purchased item to get the stamp, while others will tell you that it’s unnecessary.  Some officers will even require the item to be unused and in brand new condition, so don’t wear it believing you can just show the officer.  Since there are discrepancies from country to country on this rule and they are ever changing, bring the item with you unused.
  5. Getting the Refund – Once you get your stamp, it’s time to mail the form to the address provided.  The process could sometimes take months with more variables so I always try to see if there’s a way to get the refund immediately.  Some countries / stores allow you to get the refund right then and there, while others use a third party service where they will charge you a processing fee for servicing your refund.
  6. The Government is Involved After All – Even with all the procedures and documents, the refund might not come.  There were reports that some people have all the documents ready but just couldn’t find the customs personnel at the airport, while others claim that they mailed the form but didn’t receive any reply.  That’s why even if there’s a service fee to get the refund right away, it’s a good idea to always take advantage of it.

Is It Really Worth It

It’s complicated and worst of all, you might not even get any money back even if you follow all the rules.  However, not even trying is like saying no to a company match in our 401k plans.  If there’s even a slight chance of getting money returned, I strongly urge you to give this shot.  At the very least, ask the cashier about it when you buy something while traveling.  It might turn out that it’s as easy as going to the customer service representative and talking to them.

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