Updated on 04.19.07

Money Magazine – May 2007

Trent Hamm

Money Magazine logoThe May 2007 issue of Money Magazine arrived in my mailbox yesterday, and as I was at home dealing with my sore throat, I had the time to read it immediately. Here are the ten points from the issue that really jumped out at me.

“Two cycle billing” is insidious. Do you have a Discover card, or a credit card issued by Washington Mutual? They do “two cycle billing,” which basically means if you pay off your balance one month, you’ll still pay interest on half of that balance next month – even though there’s no balance on your card. Each month, you’re billed for interest on the average of this month’s and last month’s balance. That’s a rip off. (p. 19)

Reason #978 to invest in index funds over managed funds: they’re not nearly as taxed. Managed funds often have tax consequences due to the buying and selling of assets; index funds rarely make such moves. Unless you like giving portions of your “gains” to Uncle Sam on a regular basis, stick with the index funds and turn those short term capital gains into long term gains. (p. 21)

Consider all of the costs before signing up for a career switch. This is the only thing that’s keeping me from jumping on board and becoming a full time writer – I’m just not convinced I’m covering everything. (p. 30)

Earn up to 30% tax free! How? By paying off your outstanding credit card debt. If you have credit card debt, pay it off before even worrying about investing, because the long-term benefits of eliminating credit card debt are better than almost any investment you can find. (p. 38)

Paying off a mortgage is a great investment. It’s incredibly stable and offers a return around 6% (on an 8% mortgage). This is substantially better than most other stable investments – the stock market can beat it, but it’s not a guarantee. (p. 40B)

If you get started early (well before 30), you don’t need to save 10% of your salary for retirement. I’ve been saving at least 10% since I was 23, and according to this article, I can cut it back to about 7% and still retire at 65. Too bad – I want to retire earlier, so I’m keeping it at at least 10%. In fact, once we’ve made the move to buy a home, I may bump it up from there. (p. 50)

Life cycle funds vary widely. The article compares the AllianceBernstein 2025 fund and the TIAA-CREF Lifecycle 2025 funds and shows that their component investments are very different from one another and, as a result, their returns are very different, too. Just because two target funds have the same year doesn’t really mean much at all – investigate them anyway. (p. 54)

Scared to pick a fund? You can pick a mutual fund just as well as an investment advisor. Just trust yourself a bit. I followed my own path and wound up in the Vanguard 500 and I couldn’t be happier about it. (p. 56)

Invest in stocks, not real estate. That’s the conclusion of a lengthy comparison of the two investment vehicles. (p. 98)

Quote of the month:

I’m inclined to think there’s a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end.

– Robert Shiller, author of the book Irrational Exuberance, who called the end of the dot.com boom almost to the day (p. 83)

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. James says:

    Care to explain the math they used behind paying off your mortgage?

  2. Carl says:

    Wow, I did not know that about Discover Card. I hardly if ever use mine (except for gas 5% cashback, but i barely drive my own car – company truck)

  3. Trent Hamm Trent says:

    James: what do you mean? The 6% return on paying off an 8% mortgage includes the income tax benefits of mortgage interest.

  4. Henry @ Binary Dollar says:

    Wow what the crap? I didn’t know Discover did two-cycle billing. Thanks for the heads up.

  5. Blair says:

    I certainly understood the notion discussed in the article about paying off your mortgage early, however, one of the issues to consider is liquidity. While it is true that if you pay off your mortgage you can always get access to that money via a home-equity line of credit. However, these rates may not be as favorable now as they were in the late 90s. Furthermore, you have to go through the hassel of working with banks to set one of these up. Whereas, with say a Vanguard Prime Money-Market Account (paying roughly 5.1%), with the click of a button, you can have the cash you desire in a matter of days. I am certainly in favor of paying off your mortage early, but I also think it is important that each investor consider what that value of liquidity is worth to them and be sure to incorporate it into your analysis. So if you had an 8% mortgage (whic would be about a 6% return if you paid it off, according to the article) versus a 5.10% return investment (not including the amount taken out for taxes) you have to decide if that difference is worth it for you.

  6. Pat says:

    I have trouble with the Discover Card. I’ve got 2 of them and pay them off religiously every month so I’ve never had a balance move from one month to the other. I’ve yet to pay a single penny of interest to them. In fact on a couple months when I ended up with an extremely small balance (around $1) Discover Card has actually written it off and zeroed my card for me.

  7. Andamom says:

    One of the side articles caught my eye… It was on the 3 ways to drop a cell-phone contract (page 20). It is shocking to see how these cell phone companies lock people into exorbitant contracts and then find ways to make them unhappy (excess fees, poor billing, etc.). So, it is nice to know that there are options for getting out of a contract.

  8. James says:

    I guess I just fail to see how PAYING 8% interest on your mortgage payments (6% after tax benefits) is considered a rate of return.

    I get that you are paying down your debt, which is good…and that the tax benefits reduce your effective interest rate, which is also good…but what is the reasoning/logic/math behind how paying interest becomes a rate of return?

  9. Lifeguard says:

    Money: Paying off a mortgage is a great investment.
    Me: My mortgage is at 4.875%. My car loan is even lower at 3.75%. Vanguard Prime Money-Market Account pays ~5.1%. For me, it makes more sense to leave my money in the Vanguard MMA instead of paying off the mortgage early.

    Of course, if interest rates reverse, and the MMA earns less than the mortgage, then I can shift money from the MMA to pay ahead on the mortgage.

Leave a Reply

Your email address will not be published. Required fields are marked *