QuestForAMillion.net

After taking a long look at our television viewing, we’ve decided to dump cable. Other than cartoons, most of what we watch is on the free broadcast channels, and the kids are starting to outgrow some of the cartoons. We’re currently on a special deal with Comcast where we get a ton of channels, HBO and a couple of DVRs for about $45/month. That ends in June and our current package cost would increase to $110/month. I don’t mind paying for something if I feel like I’m getting value out of it, but we don’t anywhere near $110 worth of value out of cable TV every month. Even if we dropped to a lower package we’re looking at over $50/month and that wouldn’t include any DVRs. We don’t watch much TV but we’ve come to totally rely on DVR capability. That’s one thing we’re not willing to give up.

To that end, we’ve decided to be good American citizens and stimulate the economy with the stimulus check we received today. We purchased a home theater PC and a media center extender to be able to get TV in the bedroom. The PC has an HDTV tuner in it so we can get the over-the-air broadcast channels. We’ll be able to record TV shows and have a media hub for all of our digital movies and music. This is a significant up-front cost but within a relatively short time we’ll have made it up by not paying for cable. And we’ll have a laptop we can take on the trips we intend to start taking over the next few years.

Anything we can do to eliminate monthly expenses is a bonus as far as I’m concerned, even if it does require an up-front cost. As long as we can absorb the cost without difficulty it places us in a better position for the future. Part of what helped to push us to make this decision now is “free” money from the government plus a small expected inheritance. Our income is sufficient for the stuff we need to do, we might as well have a little fun with some of the “extra” money that comes in.

April’s net worth calculation is up on the Monthly Results page. We had a net worth increase of $3265.25 or about 3% for the month.

We’ve been doing well lately, plowing money into the bank. We’ve resisted buying anything extraneous, though we both really want to. We’re finally to the point where we’re truly getting ahead. And then my Jeep broke. I was on my way to the airport to fly out of town and it suddenly wouldn’t shift right. I had to call my wife to pick me up and get me to the airport on time. Then she had to deal with getting it fixed.

Luckily we could still drive the thing, just kind of slowly. She wound up getting to a transmission shop where for $733 I now have a functioning vehicle once again. This isn’t a large expense and we have plenty of money to handle. Things like this are part of the reason we’ve been building up a cash position anyway. I had just kind of hoped to not use that money. The timing for this couldn’t be much better actually. Our economic stimulus check should arrive any day and I get an extra paycheck in May. This truly isn’t any kind of financial setback at all and that makes me feel good. We’re being smart with our money and it’s in situations like this that it really pays off.

This just gives me drive to continue what we’re doing. We’ll keep hoarding money in the bank. We’ll build up our savings account to payoff the credit cards in January and we’ll build up the emergency fund to provide a couple months worth of living expenses. We’ll keep plugging along and know that the choices we’ve made over the last year are putting us in a position to be in complete financial control. And that’s a very good feeling.

I’ve been testing out investment ideas in my IRA over the last few months. I tried No-Load FundX, Trader Vic strategies, gold, and a couple of other things. I never gave any of them enough time before I’d move on to the next one. All it has done is cost me money. Well no more! I’ve finally come to the conclusion that the money in my IRA is not for playing around with.

The last couple of days I’ve been working on moving the money in the account to a decent asset allocation. Once done, I’m leaving it alone. I’ll save some other money to be used to “play” with while investing. I’ve settled on an asset allocation for my retirement funds of:

• 70% Large-cap
• 20% Small-cap
• 5% Bonds
• 5% Commodities

This is an aggressive portfolio but this is retirement money that I basically can’t touch for another 23 years anyway. I’ll just let it grow. The two accounts I’m using this asset allocation for are my 401(k) and my rollover IRA. I’ll look at these accounts about every 6 months and rebalance as needed. I’m sticking with this this time, no more playing around.

For the large-cap investments I have Harbor International fund, Fidelity Freedom 2040 fund, Vanguard Total Stock Market ETF (VTI), and something as yet undetermined. I still need to increase this portion of my portfolio by about $7800. For the small-cap portion I have mainly the iShares Russell 2000 Index ETF (IWM), with a portion coming from Fidelity Freedom as well as VTI. Bonds are mainly in iShares Lehman TIPS Bond ETF (TIP), with a small portion coming from Fidelity Freedom. Commodities are in PowerShares Commodity Index Tracking ETF (DBC). (I love ETFs).

I still need to figure out what to put the rest of the large-cap money into. It’ll likely be an S&P 500 Index ETF (SPY) or Dow Jones Industrial Average Index ETF (DIA), but I may increase my international exposure with an international index ETF. Once I make the decision I’ll post an update.

Since it looks like we’re going to get some money from the idiotic economic “stimulus” bill our esteemed leaders in Washington passed, I thought I’d discuss our plans for it. You can probably tell I’m not too thrilled with the passage of this law. It’s yet another bill our government is paying with future money…assuming the government and the money are even around in the future. With the way the Fed and the Treasury Department are handling our current economic environment I have no faith in anyone in government to make smart fiscal decisions, but that’s a topic for another post.

It looks like we’ll be receiving $1800 sometime around May 9th. Since our kids are the reason for $600 of what we’ll get, I figure they’re entitled to $300 each. So, when the stimulus check is deposited into our bank account, I’ll quickly move $300 to each child’s 529 college savings.

With the rest of the money I’m going to be a good American citizen…screw that, we’re saving it. Yep, this money is only going to go towards stimulating my savings account. Thanks kids, someday you’ll be paying so I can have an extra $1000 in savings.

March net worth is posted on the Monthly Results page. We had a net worth increase of $2854.38 or about 3% for the month.

After much deliberation we’ve decided to redo our bedroom closet. There’s a useless vanity area right next to our closet that is getting ripped out and our closet will be extended to take one entire wall of our bedroom. We’re still intent on saving money and getting our 0% credit card paid off in time to avoid paying any interest, but because of my strong belief that inflation will get bad in the next 1-2 years, we’ve decided to bite the bullet and spend the money for the closet now. As usual we’ll take advantage of free credit for the bulk of the cost.

Our friendly neighborhood Home Depot (a store that gets too much of my money) is offering 0% interest, no payments until January 2009. We’ve purchased everything we need to go into the closet with this plan. Now in addition to our other 0% credit card, we have this one too. We’re saving more than enough money every month to be able to pay both of these cards off without incurring any interest. And if I get my expected bonus at the end of summer, we’ll have absolutely no worries whatsoever.

About the only problem I foresee with this plan is losing my job, our major source of income. Of course, we’ve been living that way for just about ever.

The more I learn about economics and how government actions affect the economy, the more I’m convinced we’re coming upon a period of high inflation. Wikipedia defines inflation as a rise in the general level of prices over time. The Consumer Price Index (CPI) is the most generally accepted measure of inflation. A rising CPI indicates inflation, a falling CPI indicates deflation.  The CPI is tracked by the Bureau of Labor Statistics and has it’s own web page here. What most people don’t know is that the way the CPI is calculated has changed over time. In the early 1980’s the calculation was changed and again in the early 1990’s the calculation was changed. While the most recent CPI reading available indicates inflation running at 4.3%, if the CPI were calculated as it was in ’90s the reading would be 7.6% and it would be 11.8% if calculated as it was in 1980.

Causes of Inflation

What causes inflation? Supply and demand is one generally accepted reason. As the demand for goods and services goes up, the price of those goods and services goes up. This should bring more producers into the marketplace to meet the increased demand and should cause prices to level off and eventually decrease. Supply and demand can also be related to natural resources. For example, there’s only so much oil available to the world. With increased use of oil (demand), prices should increase. We’ve seen this exact scenario happening over the past couple of years. Money is a commodity. Supply and demand affects the value of money just as it affects the value of other commodities. If there’s a greater supply of money, the value of it decreases. I believe this is the largest factor in the coming era of high inflation.

The Money Supply

The money supply in the United States is officially measured with three calculations, M0, M1 and M2. There used to be a fourth calculation, M3, but that was stopped in 2006. The following details their principal components^:

• M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
• M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts (”checking” or “current” accounts).
• M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
• M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.

Eurodollars are deposits denominated in United States dollars at banks outside the United States. Repurchase agreements are where cash receivers (borrowers/sellers) sell securities to the cash provider (lender/buyer) now in return for cash, and agrees to repurchase those securities from the buyer for a greater sum of cash at some later date. Repurchase agreements are used heavily by the Fed to control credit and money supply to banks. Current measures of M2, the broadest official money supply measurement, show about a 7% year-over-year rise in the money supply. This number is fairly close to average and is pretty steady, indicating little growth in the money supply. However, a current measurement in M3 shows over 16% year-over-year growth in the money supply. Since M3 counts US dollars held outside the United States, and more importantly repurchase agreements, this indicates a massive increase in the supply of money in the United States. This huge increase in the supply of money can have no other affect than decreasing the value of money, resulting in inflation, which is really just a decrease in the purchasing power of money.

Is The Government Trying To Hide Something?

I find it interesting that the way CPI is calculated has changed over time to keep the number fairly steady. Would the government really want us to know inflation is probably closer to 12% than 4%? It’s also interesting that the M3 calculation was officially discontinued shortly before the government went on a massive money printing binge. The government prints money in two primary ways: repurchase agreements and buying securities. When a bank enters into a repurchase agreement with the government, the government buys securities from the bank with the understanding that the bank will buy them back in the future. When the government simply buys securities, they buy them from banks. These securities are generally US Treasury bills, notes and bonds. Where does the government get the money to buy its own debt from the banks? It creates it out of thin air. So the government creates money to lend itself money while allowing a middle man, the banking system, to profit from the transaction. How do the banks profit? Banks have a federally mandated reserve requirement of 10%. This means that for every dollar a bank has in vault cash or demand deposits, it can loan out $10. If the Fed buys $200 billion worth of securities from banks, it has created $200 billion out of thin air while allowing banks to make loans of $2 trillion. $2.2 trillion was just created and injected into the money supply. This has been happening a lot recently, with most Americans blissfully unaware.

What Can We Do About It?

We cannot control the government nor it’s policies, so we’re left with reacting to what is happening. The money supply has been increasing at a phenomenal rate, with only one result possible: our money is being devalued and it will take more of it to buy things in the future. Personally I’m stocking up on non-perishables I know we’ll need or use in the next 2-3 years. I’m also curtailing spending on all non-essentials. Only a big supply of cash or a steadily increasing inflow will help weather the affects of devalued money. I’m also looking into investing in inflation hedges, things such as gold, commodities, etc. I would encourage everyone out there to consider doing the same.

Now that we’ve transferred the car and student loans to a 0% credit card, we’ve tweaked our budget categories as follows:

• Committed Expenses: 65.44% (down from 72%)
• Fun: 4.30% (up from 4.16%)
• Irregular Expenses: 5.38% (down from 5.55%)
• Savings & Debt: 17.9% (up from 11.09%)
• Retirement: 6.98% (down from  7.2%)

All the money we’re saving on the loan payments is going to Savings & Debt. Some of the number changes were due to recalculating our average monthly income, which is up a bit.
As more debts get retired these numbers will continue to change until we can hit our targets. Our #1 financial goal right now is to get rid of all debt except the mortgage as quickly as possible. Progress is being made!

After much internal debate, debate with my wife, and playing around with different scenarios in Microsoft Money, we’ve decided to change around some of our cash flow. Currently we’re putting about $700/month into our Irregular Expenses account and budgeting to spend $500 or less on Irregular Expense categories each month. We’re usually around $300 - $500 with spending on Irregular Expense categories. Most of this spending actually goes on our rewards credit card which then gets paid off out of our checking account each month. The $700 we put into Irregular Expenses each month is a transfer from the checking account, where all of our income goes in to. We transfer enough money from the Irregular Expenses account each month to cover what we’ve spend on the rewards card. This means about 2 1/2 weeks after we move money into Irregular Expenses, we’re moving a large chunk of it back out.

I’ve never been comfortable with this money movement. It always seemed like we could do something more efficient, something…simpler. Now that we’ve opened our Wells Fargo PMA account and we’re actually earning interest on money in checking, we’re eliminating the Irregular Expenses account. Since checking doesn’t earn as much interest as Irregular Expenses we’re giving up on some interest income each month. However, we’re greatly simplifying things. We no longer have two bank transfers each month. We no longer have to figure out how much of the irregular expense categories were spend on the rewards card for one of those transfers. We no longer have another account to reconcile each month.

Our plan going forward is to put $700 each payday to the Savings & Debt account, preparing us to pay off the 0% credit card by next January and pay for the wedding travel this summer. We’ll let anything extra build in checking and turn the cushion in checking into our emergency fund. The money we currently have in Irregular Expenses will get moved to checking. Anything we were paying from the Irregular Expenses account will now get paid from checking. With the elimination of the car and student loan payments, and our inherent discipline, this situation will work out much better for us. Starting in January we’ll be able to put some money toward savings for stuff (vacations, home improvements, etc), put some money in the brokerage account for investment, and start paying down the HELOC. It’s amazing how eliminating debt payments opens up whole new possibilities.