My Personal Finance Journey

All posts by Jacob A Irwin

It’s a Hot Summer – Weekly Roundup – Week of July 19th, 2010

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Howdy, everyone! I would like to thank you for visiting My Personal Finance Journey, and being a part of it – whether you’re commenting or reading. Both are equally important! I appreciate your interest, and hope you keep coming back as we continue to grow.

This week was a big week for the blog! We joined the Yakezie Challenge to give us more incentive to improve the quality of the content and overall experience.

Going along with this, as mentioned several days ago, I created a short questionnaire (can be filled out at the link below) as a way for you all to give me feedback on how I can improve the site. It really helps me! So please take a moment and do that if you haven’t already!

My Personal Finance Journey 1 Minute Reader Feedback Questionnaire

Here are some articles that caught my eye this week/that I commented on, that I consider to be recommended reading:

  • Some Areas of the Country Producing More Millionaires Than Others at Freemoneyfinance.com
  • Do You Need All of These Insurance Policies? at Squirrelers.com
  • Stable Value Funds at MyMoneyBlog.com
My Personal Finance Journey was featured in the following carnivals and roundups:
Enjoy the weekend!

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Subscribe to My Personal Finance Journey via Email

Related weekly roundup posts at several of my favorite personal finance blogs:
FreeMoneyFinance – July 19th Weekly Roundup
Squirrelers.com – Weekly Review, Updates, and Favorites

A Credit Card Debt Saga – And How I Survived

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Today’s post comes to use from Kathryn, a dedicated My Personal Finance Journey reader and a valuable contributor to the commentary on a lot of posts during the past 6 months. Enjoy as she shares her story of how she got out of credit card debt.
A Credit Card Saga – And How I Survived
Background

The company I work for is sending me to England on a 6 month assignment. Because of this, I called the bank to ask them to place a note on my account that says that I am living in England. 
As part of this conversation, the banker informed me that I was pre-approved for a Wells Fargo credit card. While it would be nice to have a credit card while overseas, I had to respectfully decline this particular card on principle. The rate, following the introductary APR of 0% for 12 months, skyrockets to a variable 17.5%! Also, if you miss a payment, the variable APR jumps to 27.3%! Wow. That’s a ton of interest.
People often talk about sub-prime mortgages as a major reason for the current economic woes. Little has been discussed about credit cards, which appear to be equally as predatory. To see how this type of credit card could truly bite you, let’s use a situation from my college days:
The Saga Begins – Get Ready
When I was a senior in college, in my last semester, I had a job lined up and my parents informed me that they would no longer be paying for my living expenses. Without any money secured, I applied for a credit card to use as a stop gap until I started making real income. I would not advise anybody to do this, for the reasons that I will discuss below. 
I charged approximately $3000 in living expenses over a 6 month period, and paid the card minimum ($20) each month. The card interest rate was 0% for the first 6 months, and then it jumped to 11 APR%. This particular credit card was compounded monthly.
It is important to note that the rate that the credit card company gives you is not exactly the actual interest rate. A more adequate way of characterizing the actual rate for a stable balance over a year period is call the EAR, or effective annual rate.
Let’s take a moment to explain what EAR is to get everyone on the same page. 
  • You can convert your APR to an EAR by using the following formula: EAR=((1+APR/n)^n)-1. n represents the number of compounding periods in a year. 
  • Thus, a credit card with an 11% APR compounded monthly is actually earning interest of around 11.6% per year. 
  • The Wells Fargo credit card I mentioned above has a 17.5% interest rate, compounded daily. That means the effective annual rate is 19.1%. 
So, as you can see, a monthly compounding would be closer to the actual rate than a daily compounding. For the penalty rate of 27.3%, the effective annual rate with daily compounding would be 31.4%. Yikes!
Let’s say that in the first 6 months, I charge $500 per month to my credit card and pay the minimum off. This would mean that at the end of the 6 months (in the introductury period), I have a balance of $2880. Under the credit card I used, if I continued to pay the minimum, and didn’t charge anything else, my balance would continue to increase as follows (note that I am using EAR/12 as an estimate for the monthly interest):
  • Month 1: $2880 (1+(0.116/12)) – $20 = 2887.84
  • Month 2: 2887.84 (1+(0.116/12)) – $20 = 2895.76
  • Month 3: 2903.75
  • Month 4: 2911.82
  • Month 5: 2919.97
  • Month 6: 2928.19
Okay…so now, in 12 months, I have charged $3000, but the total amount I’ve committed to giving the credit card company is $3168.19. And this is assuming I have that much money to pay the credit card company after 12 months, otherwise the balance will continue to increase. Honestly, this credit card isn’t too bad because of monthly compounding and the relatively low APR.
However, let’s do the same scenario under the Wells Fargo credit card with the 17.5% rate and daily compounding. Let’s say I have the same starting balance of when the interest rate kicks in. What does the amount of money I have committed to the credit card company come out to after 6 months? $3375.09. Wow! That’s a $375 profit for the credit card company.
The problem that people get into with credit cards is that they rack up a large balance and then don’t have the means to quickly pay it off. Once the balance gets higher, the interest starts going higher. And then you gain interest on that interest. The other problem is that variable rates can change at any time. Just because your credit card has a 17.5% rate today doesn’t mean it won’t have a 27% rate when your check gets lost in the mail.
As another scenario, say I’m a student who has put up $3000 in credit card debt over several years. What if I have the means to pay off $200 to this credit card per month? Under a normal, no interest situation, it would take me 15 months to pay my credit card off. However, say I pay my $200/month, but at month 6, the check gets lost in the mail. How long would it take to pay off this credit card? 18 months. And I’ve paid over $500 in interest.
What if I only have the means to pay $100 to this credit card per month? No interest, 30 months to pay it off. Under the scenario above, it would take 47 months and almost $1700 in interest. That’s over 50% of what I charged originally!
My Debt Repayment Method and Some Lessons Learned to Pass On
So, there are a few lessons to be learned. 
  • First, if you have gotten yourself into trouble with credit cards, you need to pay the largest possible amount of money you can pay to that credit card every time. In the scenario above, an extra $100 per month decreased the interest by over $1000 and allowed payoff much quicker. That will reduce the interest that your interest is earning. 
  • Second, try to find credit cards that compound monthly. Apparently, these are few and far between these days. 
  • Third, convert your APR to an EAR to get a better feel for how compounding will affect your interest rate. Be careful with how you use credit cards and never spend more than you earn.
How about you all? Do you have any credit card debt stories to share? Have you ever made purchases on a credit card knowing that would were not going to pay it back any time soon?

Please share by commenting below!
Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time. 
Related articles about credit card debt stories at several of my favorite personal finance blogs:

Review of Change in eBay Fee Structure – No Listing Fees

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Today, I got an email from eBay’s Seller Central stating that I can now, “make easy money selling items on eBay because you can now list items for free.”
Needless to say, I was fairly skeptical about this ad. However, I checked it out on eBay’s website, and sure enough, it’s true! They are now offering free auction style listings. However, we first want to make sure to check up on the details before we jump for joy.
This further strengthens my statement from a previous post about eBay being very seller friendly/oriented, generally making eBay and better place to sell your items online than Amazon due to several reasons.
What are the details of this deal?

According to the links below from eBay, you pay no listing fee for the first 100 items per month that you list on eBay for under $1.

It is very important to pay close attention to the restrictions of this listed in bold above.

Key takeaway from this deal


For me, the key takeaway from this change on eBay fees is that this will significantly reduce the financial barrier to listing household items that I simply want to unload and sell (when I don’t really care what the minimum price is that is sells for).

However, if I am running an eBay business, the $0.99 maximum starting bid could get me in trouble by not allowing me to make any profit from a sale, in the event that not enough bids come in.

How about you all? Will this change in fees influence you to sell more on eBay? Will it influence you to steer away from sales on Amazon?

Share your thoughts by posting a comment below!

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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Help a Reader – Can You Skip Out on Federal Taxes and Donate Income Directly to Charity?

Recently, a reader and friend asked me if I had ever investigated much in to donating money to charity.
As soon as she asked me this, I was thinking to myself, “This shouldn’t be too hard to answer the follow-up questions, seeing as how I had investigated this topic on several occasions throughout the year.”

Note: To view the previous posts I have written on charitable contributions, click on either of the links below.


However, as I constantly am reminded by her follow-up question, I most certainly do not have all of the answers. Not by a long shot!
What she was wondering was if it was possible to legally bypass paying a large portion of federal income taxes up front, and donating the would-be tax amount to a registered charity instead.
“This is a very good question!” I said, and mentioned that I would start looking in to it.
 So, in other words, my friend is wondering if she can donate money pre-tax to charity, similar to a payroll deduction on a pre-tax basis for your 401k retirement account.
Results of Investigation
After searching around for a while, the closest article I could get to answering this question is the one from EchoDonations.org, at the link shown below.
EchoDonations.org – Is it Possible to Donate with Pre-Tax Dollars
The article states that charitable donations are not listed as an eligible pre-tax deduction by the IRS (a list of eligible deductions is shown below), and therefore have to be subject to Social Security and Medicare taxes before being eligible for donating.
Eligible Pre-Tax Deductions
  • Dental Insurance
  • Medical Insurance
  • 401K Contributions
  • Vision Insurance
  • Flexible Healthcare Spending Accounts



So, after looking at the evidence, it is looking like I will have to report to my friend that she cannot contribute to charities with her pre-tax funds.

Two Other Interesting Findings


As I was searching for an answer to my friend’s question, I came across two other interesting things that are worth sharing:

  • First, I found an Austrailian website, CareAustralia.org, that says that charitable gifts to help their efforts are made on a pre-tax basis.
    • Therefore, it makes me think that donating money pre-tax is possible in other countries. Does anyone have experience with this?
  • Second, I found that if you are over the age of 70.5 years old, you can make a Qualified Charitable Donation from an IRA using your pre-tax funds in the account. See the link below from Ameriprise for more information about this.
    • Ameriprise.com – Charitable Tax Donations
How about you all? 



Have you tried and/or been successful at donating money on a pre-tax basis? Did you meet any obstacles? Are any of the ex-United States readers out there able to do this?

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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Related articles about taxes and donations/charitable contributions at several of my favorite personal finance blogs:
ChristianPF.com – See the Impact When You Donate to Charity
Smartmoney.com – Investigate Your Charity Before You Donate

Help a Blogger: Reader Feedback Requested on My Personal Finance Journey

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In order to go along with the spirit of the Yakezie Challenge (which I recently joined), I am dedicated to improving the quality of this site so that it best serves you all, the readers.
In order to make sure I am doing this as best I can, I created a reader feedback questionnaire, which can be accessed at the link below. 
The questionnaire is less than 10 questions, and will only take 1 minute to fill out. If you have a free moment during the day, please stop by and submit your feedback. It will very much help me. Remember, the best feedback is not totally positive in nature, but honest opinions about how I need to improve.

The questionnaire will be placed, and can always be found going forward, on the Contact Me page link in the top menu. I’ve attached this link below as well.
Contact Me – My Personal Finance Journey

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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Microloans Part 2 – How Should Microloans Be Treated in My Overall Financial Plan?

Yesterday, in Part 1 of this series, we explored a general overview of what microloans/microcredit is and how you, as a normal human being, can get involved in them. If you missed Part 1, click on the link below to read up!

Microloans Part 1 – What Are Microloans and How I Invest in Them?

So, you now know what microloans are, where you can access them, and what the risk are. You are ready to invest.

However, the question then becomes, how do these loans fit in to my overall financial plan?

More specifically, are they donations? Are they play money? Are they fixed income investments? Are they equity? How do they fit in to my overall asset allocation?

Whew…those are a lot of questions! Let’s take things one question at a time before my head starts to spin!

Are microloans fixed-income investments?

Investopedia defines a fixed income investment as follows:

An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance. Investopedia.com – Fixed Income Securities

So, according to the definition above, microloans are fixed-income investments.

However, the real question is if they are the type of fixed income investments that we would want to include in our overall asset allocation.

According to Part 3 (see link below) of our previous Investment Strategy Series, the only 3 types of fixed income investments that belong in our long term portfolio are 1) cash, 2) inflated protected bonds, and 3) short term index bond funds.

Investment Strategy – Defining Your Specific Mix of Fixed Income Securities

Since microloans fall in to none of these categories, they cannot be grouped in to our fixed income asset allocation.

Are microloans equity investments?

No – they are fixed-income investment, as evidenced by the definition above. They are just not the type we need to build our long term portfolio.

Are microloans donations?

Absolutely not (at least not technically). Microloans are not donations because the money you loan out is promised to be repaid, with interest added.

Additionally, as we saw in Part 1, micrloans are fairly reliable, displaying a 97% repayment rate.

Because of this, it is not definitely not a donation, by definition.

Are microloans play money?

As we have seen in previous posts, play money is a category for funds which we commit to use to either help us learn, enjoy life, and feel rich, and don’t expect to ever get back.

While it could be argued loaning small amounts of money to the poor can make you feel rich, I do not feel comfortable grouping microloans in to this category. For my purposes, I generally reserve this category for any funds I use to invest in individual stocks.

So, how do microloans fit in to my financial plan?

After doing some thinking, I believe that I will integrate microloans in to my “Making a Difference” life value that I discovered in Part 2 (can be accessed at link below) of creating a Purpose Focused Financial Plan.

Determine and Take Action on Your Life Values

Currently, this year’s goal for my “Making a Difference” life value is to donate 5% of my income to charity.

However, I think it would fit incredibly well to add a goal in here to partcipate in a microloan of $500 to help people in poverty in Latin America.

Yes, I think that works! I just updated Part 2 to include that. This was a cool exercise!


How about you all?

How do you treat microloans (if you invest in them) in your overall financial plan? Do they count as donations? Do they count towards your retirement?

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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Microloans Part 1 – What Are Microloans and How Can I Invest in Them?

Recently, I made my first ever microloan / microfinance investment, using a microfinance site called Microplace.
The loan, at the moutainous amount of $20, was to help finance entrepreneurs in Ecuador with their start-up businesses. These businesses include a diverse array of categories such as water-treatment processing, grocery stores, and clothing weaving.
Furthermore, I was recently reading through an article on Wealth Pilgrim about the subject of whether or not investments in “green” companies should be considered as part of your retirement money or as a donation.
As I was reading this, I began to also wonder how microloans should be treated. Therefore, I thought it would be a learning process for everyone (including me) to investigate some more about this subject.

I will address this subject in two parts.

What is a microloan?
To start off, we first need to know what exactly a microloan is.
A microloan is pretty easy to understand. It is a loan to poor individuals around the world (mostly in developing countries) to provide them funding for starting their own business.
What makes these loans different than normal loans is that they are typically in small amounts ($30-$200), have to be repaid in weekly installments (this discourages default), and typically have a short term of 3-6 months.
The individual borrowers are charged an interest rate on the loan amount until it is repaid. At the end of the loan term, the individual pays back the money to the lending institution.
Some excellent resources for additional reading material can be found at the links below from Microplace.com and Wikipedia.org.
Microplace.com – How Microfinancing Works
Microplace.com – FAQs for Common Questions

Who offers microloans and how can I participate?

From a personal access point of view, a microloan works as follows:

  • 1) You, or another individual that has extra money that he or she wants to invest, goes to a microloan broker. This usually happens through their website. Several common brokers are listed below.
  • 2) You perform a search to narrow down what you would like to invest in based on geographic location, investment minimum, and the business type/model.
  • 3) The loan note is issued to you through a separate lending organization (not the broker).
  • 4) The loan is repaid by the individual in the developing country to the lending organization.
  • 5) The lending organization then repays you (including interest) through the brokerage house.

Several of the providers (they are officially classified as brokers and are registered as such) that I have heard about can be found at the links below.

What kind of return can I expect?

Generally, the returns of these investments of pretty low. Currently, a one year loan on Microplace.com is earning a 3% rate of return.

While this is not stellar, I consider it a very good sign for several reasons.

  • First, it is probably a realistic estimate due to the increased risk with this type of investment being counterbalanced by high interest rates charged to the borrowers.
  • Second, and maybe most importantly, it is currently double what I am earning on my online money market savings account (1.4%). So, it is not all that bad when you think about it!

How is the payback reliability of microloans?

As I was investigating this topic today, I was shocked to find out that microloans actually have a 97% successful payback rate.

This is truly an awesome find! I think it is also proof that people are more motivated to do well if they are treated with respect.

By giving poverty stricken individuals a loan (instead of a donation), they are being instilled with responsibility. It is a pretty cool thing!

My experience with microloans


I always like to add a little human element to my postings whenever possible. This helps it keep this blog alive and not be a dry Newsweek article.

Since this was my first ever microloan, I started with a small $20 loan with Microplace.com. I choose this broker because they are supported through eBay / Paypal, two companies I trust.

The loan note was actually issued by the Calvert Foundation. This organization is a non-profit group that issues community (meaning multiple lenders) loans to help fight poverty. Looking at their website, it actually looks like it would be a pretty cool company to work for for finance majors!

The audited financial statement of the Calvert Foundation can be accessed at the link below.

Google Docs – Calvert Foundation – My Microloan Issuer

Details of my loan are as follows:

  • $20
  • Repayment in less than one year (Jan 2011)
  • 3% annual interest

Since I just made the investment, I haven’t received any interest payments to date.
How about you all? Have you made any investments in micrloans? Did you get your money paid back on time?
How was the overall experience? Was it rewarding?
Tomorrow, we will continue with Part 2 of this series, where we will explore how microloans should fit overall in to your Purpose Focused Financial Plan and overall investment strategy.
Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.
Related articles about microloans at several of my favorite personal finance blogs:
My Money Blog – Microplace Loan Performance
NextBillion.com – When Microcredit Isn’t the First Step

My Personal Finance Journey Just Joined the Yakezie Challenge

The Yakezie challenge was started by personal finance blog, Financial Samurai, as a personal finance blog challenge revolving around the group goal of increasing the Alexa rank of every site in the group and promoting other members of the challenge.
Over time, the Yakezie Challenge has morphed into a personal finance blog group called “The Yakezie” that is dedicated to promoting high quality personal finance content on the Internet. To view the complete list of members, click on the link below.
List of Yakezie Personal Finance Blogs
I am joining the challenge because I have been blogging for some time now (a little over six months), feel I have some good articles to share, and want to meet other personal finance geeks out there that enjoy writing this stuff as much as I do.
How about you all? Does any one out there that runs a personal finance blog partcipate in this Challenge? What have your experiences been?

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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My Personal Finance Journey’s First Blog Carnival

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Good Monday morning everyone! 
Great news to report today. A recent article on My Personal Finance Journey (shown at the link below) was just selected to be featured in this week’s edition of The Carnival of Personal Finance. The topic of the article is about the different types of taxes (and when you have to pay them) that result from selling items on eBay, either as a hobby or as a business.
To view the Carnival, click on the link below to go to NerdWallet.com, the blog who hosted the Carnival this week.

Carnival of Personal Finance #266 – NerdWallet.com

Also featured in this same blog Carnival are some very insightful posts from several of my favorite personal finance bloggers. A quick overview of some of the articles is listed below:

Do you run a personal finance blog and are interested in participating in the next Carnival of Personal Finance? Simply click the link below to submit your article!

Submit Your Article To Carnival of Personal Finance

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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Frugal Living Idea – Skip the Barber and Cut Your Own Hair

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For about the past year, I have been mulling over the idea of cutting my own hair, instead of going to the barber. However, today, I am proud to report that I gave myself my first ever self-conducted haircut! It was quite a fun experience.
What got me started thinking about this?
Since during the past two years, my hair has started thinning out, it has also become easier to cut. Whenever I go in to the hair cuttery, I tell them that they can either cut it using scissors or with the electric razor.
Usually, the hair stylist opts for using the electric razor 100%. He or she simply slaps on the #4 blade guard for the top and the #3 guard for the sides of my hair, and goes to work! And, viola! Five minutes later, he or she is finished!
How much could I save by cutting my own hair?
These are the kinds of analysis I love doing! 
Assumptions: 
  • Frequency that I need to get a haircut = Once every 5 weeks
    • 52 weeks = 1 year
    • Equates to 10.4 haircuts per year
  • Price I pay (including tip to get my haircut) = $17
    • $17 x 10.4 haircuts per year = $176.80 per year, increasing at the rate of inflation (3.2%)
  • Cost to purchase the Wahl automatic trimmer/haircut kit from Target I bought several weeks ago = ~$30
  • I start cutting my hair from now (age 24) until I am age 70 (at which time, I will probably have no hair)
Using these assumptions, I put together the spreadsheet which can be accessed at the Google Docs link below.

As you can see in the table below, the total cost savings that I could realize by cutting my own hair are truly incredible (over $18,000)!
Even  more incredible than that amount of savings is to consider the total value of money that we could have if I invested the money I saved from not having a barber cut my hair, and invested it in an index mutual fund, earning 10% per year.
The total that I could have access to at age 70 would be almost a QUARTER MILLION DOLLARS.
How to decide if cutting your own hair is right for you
As I was cutting my hair today, I realized that the exercise would definitely not be good for everyone. There is a certain level of comfort, good-feeling, and satisfaction that one gets from going to the hair stylist. 
In addition, after cutting your own hair, you have to deal with the clean up part, and getting hair off of you. These activities would of course be taken care of by the barber if you had gone to him/her.

Aside from the two points above, the biggest factor I think that should influence someone to cut their own hair is the length/ease of cutting for your hair. In other words, I think this probably works best for guys’ haircuts, since they are very hard to mess up.

How about you all? Have you ever tried cutting your own hair? Were you satisfied with the results?


How much money did it save you you think?

My Personal Finance Journey
Learning for Life

Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.

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Related articles about cutting your own hair at several of my favorite personal finance blogs:

FreeMoneyFinance – Places in Your Household Budget to Cut Expenses
Bargaineering.com – Tipping When Getting a Haircut
FiveCentNickel – Confession – I Cut My Own Hair

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