The Amateur Financier

Hello my friends and other readers.  Hopefully, you’re all having a more pleasant autumn than those of us here in Pennsylvania; it’s been a cold, rainy fall so far, and there’s talk of early winter weather on the way.  It’s like the year without a fall, which is especially hard as fall is my favorite month.

Luckily, there’s plenty to keep me occupied inside.  Given that the seasons are changing, I figure it’s as good a time as any to work on changing my passwords.  If I get in the habit of changing passwords with the changing of the seasons, I’ll switch my passwords every three months, a wise precaution to ensure that my personal information (to say nothing of my money!) stays personal.  I’m also taking the precaution of encoding my password reminder notes, on the hopefully very off chance that said password notes fall into the wrong hands.  A little bit of personal protection in these uncertain times never goes amiss.

And on the subject of things that don’t go amiss… let’s consider some of the interesting posts that put up by my fellow personal finance bloggers last week.  (How’s that for a subtle transition?)

Good Posts This Week

Why I’m Not a Frugalista and Monavie Sucks – Two interesting stories were discussed over on Mrs. Micah, both involving bloggers and trademarked terms.  In both cases, the entities in question are attempting to squash the free speech of others, either to prevent bad press (the Monavie situation) or to turn a semi-common phrase into their own personal brand (the ‘frugalista’ thing).  In both cases, these complainers have no reasonable expectation that the terms used would be their own exclusive property and never, ever used by other people, ever, and should just shut up already.  That is all I have to say on both situations.

Five Lessons of the Great Recession We Probably Won’t Learn – After the last six months of stock market recovery, I doubt even the name ‘Great Recession’ will stick around for too much longer.  (If we really are in the recovery now, the whole thing lasted, what, two, maybe three years?  Not really that Great…)  Hopefully, this will serve as a teachable moment and help to prevent a repeat (and potentially worse) performance in the future.  But, Frank Curmudgeon doesn’t have much faith in that outcome, and frankly, while I’m doing all I can to keep the memory of these events in my mind, I’m not terribly optimistic that the broader public will remember.  But, the advantage of being a pessimist is that you’re always right, or pleasantly surprised; here’s hoping for a pleasant surprise.

Which Debt to Pay Off First? – There are any number of debts that you might have outstanding, which come in a variety of different flavors.  Trying to decide which one(s) to focus your extra money toward paying off can prove difficult, especially if you are just getting started in the world.  Studenomics has come to the rescue, though; making up a cheat sheet showing what order in which to pay them off.  I agree with just about all the points he makes, although I would say that depending on whom you owe your ‘personal debts’, they may actually prefer that you put your money towards other debts first (particularly if they are parents or other relatives).  Be sure to check first before bumping any personal debts down the list, though.

Foreclosure and Personal Character – Over on Mr. ToughMoneyLove, there’s some discussion of ’stripping’, the unethical practice of a homeowner who is being foreclosed on taking all the furniture, flooring, paneling, and anything else of value from a house before the bank forecloses.  I can’t even begin to imagine what being foreclosed on must feel like, but doing something like that out of spite is just plain wrong.  Besides being illegal, decreasing the values of the neighboring properties and generally making things harder for everyone around you, it just makes you come across as a petulant child and loses whatever pity you would gain from losing your house in the first place.  I just don’t know what to make of the world sometimes.

Finally, a quick little fun fact, shared by My Life ROI: Apparently, if you have alcohol in your blood stream, you are more likely to survive head trauma.  So, next time you do something where you risk serious head injury, be sure to drink up first!  (WARNING: The Amateur Financier is not a doctor (or a financial professional, for that matter; everything he says about your health should be taken with a grain of salt, and possibly a strong drink, before you attempt to act on it.)

Where The Amateur Financier Has Been Featured

The Money Hacks Carnival – 84th Edition, hosted by the Military Finance Network, hosted my article Scams, Schemes, and Scam: Protecting Yourself

• Reader Story: I Was Drowning in Debt
• What Health and Money Have in Common
• What Happened to Prosper on Lazy Man?
• Best of Money Carnival #12: Keeping It Random
• My Thoughts On Keeping Personal Finances Personal.

A common comment about children and the expense it takes to raise them is that such costs are ‘an investment in the future’.  As analogies go, this isn’t bad; we put money, time and effort into raising children, and expect them to grow, mature, and become productive when they get older.  But it’s not perfect, either; unlike stocks or mutual funds, children can’t be counted on to provide a direct return on our investment, either paying out money or increasing in their value when sold (particularly since selling children is frowned on in most places nowadays).  Instead, the payout is seeing our children grow, learn, and become useful members of society, with some possibility that they will help care and provide for us in our old age.  But, what are the costs and benefits of having and raising children?

The Costs of Raising a Child

It’s hard to say with absolute certainty just how much it will cost to raise the little bundle of joy you bring home from the hospital into a mature, productive, outstanding member of society.  A lot depends on the choices you make over the course of his or her lifetime and the costs associated with each one.  Do you spoil them with every toy and activity a child could want, do you teach them to live an austere and simple life, or do you try to stay somewhere in the middle?  Do you have to pay for expensive child-care services, or will you (or your spouse) be able to stay home to care for your children?  (Both options can have the effect of increasing the child-rearing costs, either from added expenses or decreased income.)  Don’t forget college; how much you contribute to Junior’s 529 plan (if anything) will have a drastic effect on how much you spend during his formative years.

With such a diversity of options that exist for your child-rearing options, estimates for the expense of raising a child are going to vary widely.  An series of tables from MSN, for example, shows total expenses from birth to age eighteen that range from a low of $125,000 to a high of $250,000.  That’s not including college, which they pegged at $25,000 each year (an additional $100,000 for a four-year program).  But that’s far from the only estimate that exists; the United States Department of Agriculture puts the cost at just shy of three hundred thousand, for example (and also makes me wonder why the USDA is responsible for reporting this data).  On the other end of the scale, a mother named Mary reports that her per child costs total only about fifty thousand each year, in part due to her frugal methods of raising them and the advantage of having many children, spreading out some of the larger costs associated with the other figures.

(Quarter) Million Dollar Baby

For me, when thinking about when I will start having kids, I’m going to assume a fairly high cost for each child, in the $250,000-300,000 range.  There are two big reasons for this: first, if I estimate too high and turn out to be wrong, the extra money can be diverted to other goals easily enough (such as saving for their college education, something not included in any of the figures mentioned), whereas assuming too little will put me into a scramble for more money at some point in the future.  Second, unlike Mary, my fiancee and I are planning to have a relatively small family with one, perhaps two children total.  The economies of scale that she has been able to harness with a fairly large brood simply won’t be available to us.

Financial Benefits of Children

Before you rush out to have various tubes tied or snipped to avoid ever becoming a parent, let’s not overlook the fact that children do have some financial benefits associated with them, as well.  Some of the most well known include the various tax credits and deductions available to parents.  While probably not enough for you to make a profit from your children, such tax advantages do make having dependents less costly than otherwise, decreasing the financial burden of having children.

Attempting to get a return on your ‘investment’ more directly, by getting your children to help take care of you in your old age for example, is much trickier.  In most cases, it will come down to your child’s personal feelings as to whether he or she will be willing (and financially able)  to provide for some or all of your expenses when you are ready to retire.  Unless you structure the monetary support you provide as a loan (complete with interest and other terms, backed up with the full force of law) or have a financial incentive like the possibility of a large inheritance to use as a motivator (in which case, why do you need your child’s help?), there are few ways to ensure that you will get cooperation from your children in providing for your retirement or any other financial support.

Non-Financial Benefits of Children

Before you go thinking that I’m saying you shouldn’t have children, that they are ungrateful whelps who will drain you of money while you’re raising them and you will never see a dime in return, stop.  That’s not the case.  Yes, I wouldn’t have children expecting that they will provide for my retirement; there’s simply so many unknowns to consider between when they are born and when they are grown that even if you raise caring, nurturing children who want to help and support you (as I hope all of you would), there’s no guarantee that they will be able to do so.  As many people in the Baby Boom generation are discovering, trying to balance caring for your children, your parents, and yourselves makes for a very tough balancing act (leading some to call the Boomers the ’sandwich generation’, being stuck between two groups of relatives who want financial support).  By the time your children are financially sound enough to help you, they might have children and families of their own, and need to provide support to them.  Depending on your children to support you should not be your primary retirement plan.

Instead, focus on the many intangible benefits provided by raising children.  Assuming you like kids (and if not, why are you even thinking about adding more to this world?), having children of your own is instead a chance for you to pass on your values, knowledge, and genes.  Talk to any parent (or better yet, a grandparent; they get a lot of benefits from grandchildren with much less of the work) about their (grand)children, and the responses you get will generally focus on the emotions the kids invoke and the memories they generate, not the costs incurred or the loss of returns from investments.  I am firmly of the belief that children add to the joy and wonder of the world, and if they are raised in a caring, loving family, will make the next generation an even better time to be alive on the planet.  THAT is the real return on investment that children offer.

• Joining The Top Team Of The Global Information Network Has It's Rewards
• The Top 100 Best Cities To Raise A Family.
• Prosperity 4 Kids Product Review
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• How Much Does Raising A Child Cost?

Welcome again to another session where I take on the role of Benevolent Dictator (although, not the one you learned about in Economics 101) and attempt to solve all the problems of the country in the course of a few blog entries.  This week, we’re going to look at one of the most hated, cursed, and generally despised aspects of life, as well as the only one that ranks up with death in terms of inevitability.  That’s right, this week I take on taxes!

Just about everyone believes that some level of taxation is needed, to fund the vital roles that various levels of government play in our lives; the problems arise when it comes down to who should pay those taxes, and how much.  If you do enough reading, you’ll see that everyone has their own view on how the tax system should be structured; income taxes to sales taxes, capital gains taxes to the Fair Tax, flat and progressive taxes are all thrown out by one group or another in an attempt to fill our coffers.  Going through every single proposed tax plan, discussing its pros and cons could fill weeks worth of posts, or even an entire blog.  Instead, for this exercise, I shall use my powers to cut through all that and get down to the basics of what would be in MY tax system.  The guiding principles I’m going to follow are that an ideal tax system should be:

1) Simple – The perfect tax system should be so simple that you can fill out a return on a single sheet of paper, with all the instructions included.
2) Progressive - Those who make more money should pay an equal or higher percent in taxes when compared with those who make less.
3) Controlling Disincentives – Unfortunately, taxes distort economic incentives.  Income taxes make earning an income less appealing, sales taxes make buying things less appealing, and capital gains taxes makes selling economic products less appealing.  The goal of a tax system should be to keep these disincentives to a minimum, or direct them towards decreasing the incentive for negative behavior.

With these principles in mind, what would be my ideal tax system?

My Solutions

A Graduated, Gradually Progressive Income Tax – The basic structure of the new tax system will be essentially an almost-flat income tax.  Almost because, to ensure that our tax system remains progressive, those earning a higher wage should a higher percentage in taxes on the last dollar of income than someone earning less.  A five to ten percent differential between each tax bracket (and a limit of only three or four brackets) will ensure that moving from one bracket to another won’t dramatically increase the taxes you pay on that last dollar of income.  There will be arguments that this creates a disincentive from earning more money, but if all the ways of making an income are taxed according to the same rates (in my mind, ranging from 10% to 40%), the discouragement will be minimal.  And speaking of which…

Tax ALL Income According To the Same Scale – One of the major sources of confusion and bad financial decisions when it comes to taxes is due to the numerous different types of income.  Short term capital gains are taxed at a different rate than long term capital gain, money you inherit is taxed differently than money you earn by working, and of course, if you make a high enough amount of money working, you might have the Alternate Minimum Tax to handle, as well.  The simplest way to deal with all those different systems is not to deal with them at all; treat all income as well, income, and tax accordingly.  The system will be simplified, tax incentives to act irrationally will disappear (such as holding a declining security to get the long term capital gains tax rate, even if it declines to zero), and no more finagling of HOW you get paid to lower your tax rate will be possible.

Eliminate (Almost) All Deductions – Another problem with the current tax system is that it has, over the years, become so chock full of deductions for dozens of different reasons.  Whether it’s trying to encourage homeownership, increase investments, or help people who have kids to have a little extra spending money, there are a huge number of tax deductions and credits in the current system, as you can see from this About.com list.  The easiest way to cut through all the bull honky is to eliminate all of the deductions and just add back in the few that are the most common (and popular): retirement accounts, children and mortgage interest payments will be among these selected few.  Such eliminations of ‘loopholes’ will enable taxes to be lowered all around.

Make the Tax Rates Public, Flexible, and Tied to Government Spending – If you remember last week, I railed about how I would change government budgets. Here’s another step in that plan: when government spending rises, taxes rise.  If the Federal Government wants to spend more money, rather than adding to the national debt (which, as you may recall, we will now be regularly paying down), taxes will automatically rise to a level consistent with the new budgetary needs.  Unless otherwise specified in the bill, the increase will be across the board, covering everyone from the lowly minimum wage earner to the multi-millionaire living off dividends.  If having everyone in the country watch their tax rates rise to cover new spending doesn’t make politicians think twice about adding more programs without first ensuring that they won’t add on more debt doesn’t slow them down, nothing will.

There you have it: my four step plan to a simpler, saner tax policy in the United States.  Feel free to nominate me for the Noble prize in economics, if you so desire.

• Could Your Lack Of Money Be Your Own Fault?
• Income Tax Refunds and Your Retirement Plan
• How Much Do the Wealthy Really Pay in Taxes?
• Kids Budget Game Only Four Quarters
• Saving Money with a Government Loan Option

When it comes to investing in stocks for capital gains, there are two different approaches that can be taken in order to ensure that your stocks increase their worth: growth investing and value investing.  (There are other rationales for investing, such as investing for dividends, but for now let’s stick with growth and value investing.)  These two methods represent two different ways of viewing stocks and trying to profit from them.  So, what sort of considerations do you have to make when considering which method to use when choosing your investments?

Investing Rationales

Growth Rationale – The growth investor is looking for companies that growing their business (which you probably guessed).  These could be small, upstart companies that have a great deal of potential, or large companies that continue to expand into new areas and increase their business at a much faster rate than their rivals.  If stock investing were horse racing (a reasonably apt metaphor), growth stocks would be those that are the reigning champions or the quickly rising upstarts.  The growth investing model essentially involves trying to find some of the fastest expanding companies, and tethering your fortunes to their growth.

Horse Racing - An Ideal Stock Metaphor

Value Rationale – Value investing, on the other hand, focuses on finding stocks that have been knocked below the true value of their respective companies, then buying and waiting for the broader market to recognize their worth.  As with growth investing, these companies can be either large or small, and the reasons they are currently undervalued can be diverse: bad news that took the stock prize below a reasonable level, a run of bad luck that decreased the company’s perceived value, or even a broader economic storm that dragged everything down at once (like we’ve just experienced).  To go back to our horse racing metaphor, value stocks would be akin to the strong finisher who’s failed to win the past several races and wound up as the long shot.

Why Does This Matter?

The difference between growth and value might seem academic, and in a way, it is.  There are those people who have argued that assigning stocks to the ‘growth’ or ‘value’ columns have nothing to do with the actual value of the companies, but instead such dividers display their own ignorance.  (’Those people’ in this case include Warren Buffet, as you can see at the bottom of this linked page, so perhaps they have a point.)  On the other hand, when looking at the performance of broad segments of the US economy, it appears that the value investing style has beat out the growth style in the past.

The results, if you are a mutual fund investor (particularly a passive indexer like me),  is that your portfolio should attempt to lean more towards value and less towards growth in terms of your funds’ orientation.  This does not mean that every value stock will outperform every growth stock; on the contrary, because the faster increase in value of growth stocks is sometimes deserved, the top performers in the growth category can and will outperform the best of the value classification.  Rather, it means that taken as a whole, stocks that are categorized as value will outperform those in the growth column over time.  Unless you fancy being a stock picker (and make a good job of it, as well), sticking to a portfolio that leans toward value stocks will lead to a much richer future for you and yours.

I hope you enjoyed this rather brief introduction to value and growth stocks, as well as the difference between the two.  Good luck with your investing, whichever option you decide to choose.

• Socially Responsible Investing
• Which Dividend Stocks Are Worth Looking At?
• Common Sense Advice For Investing In The Stock Market
• The Basics of Equity Mutual Funds
• The Most Area To Invest Your Money

Two trends that seem to be everywhere now are going green and cutting down on your expenses.  Both are rather similar in concept; by cutting back now, we can ensure a better future for ourselves (or our children).  You have to have an eye towards life yet to come in order to be motivated to save money or the Earth.

They also require some sacrifice on our part.  It’s more fun to party, buy expensive things  that will just sit on the shelf, and to just throw away anything we don’t need than to worry about the costs to our pocketbook and planet.  How can we overcome our less caring nature and start to focus on the future?

First, know yourself and your motivations.  It’s easier to commit to a plan to ‘green up’ your life or to get your finances in order if there’s some strong rationale you have to do so.  You might look to your faith for reasons to protect God’s creation or to not be a borrower.  If your family feels strongly about having financial security or saving nature, you can turn to them for support on your decision.  One big motivator for many parents is protecting and providing for their children’s future; these could be all the motivation you need to save money and the planet.

Once you have your motivation, start small.  Don’t try to cut your expenses or your emissions to the bone in the first month; much like trying to go on a crash diet, you’re going to feel deprived if you change too much at once.  Instead, trying making a few changes at first, to feel out where you can make cuts without too much trouble.  Cutting down on eating out, using less electricity or decreasing your driving won’t be enough to save the planet (or your financial future) all on its own, but will be easier to handle at first, and will give you encouragement to take on bigger reductions in the future.

Since we’re trying to do two things at once, it’s good to find ways we can work on both goals simultaneously.  If you can find methods that will be good for the environment and save you money, you can kill two birds with one stone, improving two areas of your life at once.  In addition to the already mentioned areas, you can also purchase energy efficient appliances or make an effort to drive no faster than the speed limit; both methods will help to reduce your expenses and carbon emissions over the long term.

Of course, there are situations where saving money comes at the price of increasing pollution, or where the environmentally best solution costs more money.  Buying organic food, for example, can be significantly more expensive than traditionally grown food, while decreasing the impact on the environment.  On the other side of the coin, shopping at a ‘big box’ department store can cut your expenses significantly, but the environmental impact of shipping the items around the planet is substantial.

For these circumstances, the only thing you can do is try to do the best you can, according to which principle you value more highly.  If you are a die hard environmentalist, you’re obviously going to make different trade-offs between cost and environmental principles than someone who wants more than anything to live frugally.  This goes back to our first point; if you don’t think about what you are really want to accomplish, your values, and your priorities, you’ll end up facing situations where you have to choose between the two without the guidance of a prior decision.

Follow these simple steps, and you’ll be able to go green and keep yourself on the right path financially.

• Roundup for week of 17 June 2007
• Basics of Budgeting 1
• Why We Save Our Money.
• 20 Ways to Convince Someone to Save More Money
• Choosing the Right Ball pt 2

It’s been a while since I wrote anything on Lending Club.  At first I had trouble, since Lending Club doesn’t enable Pennsylvania residents to directly purchase loans .  Luckily, I was able to purchase a few notes through their loan exchange system.  Now, six months since I started to dip my toes into the Lending Club pool, where do things stand with my investments?

Well, not too bad, overall.  One of the loans I purchased has gone more than thirty days without making a payment, which likely means that I won’t get all (or any) of my money back from that particular loan.  I was considering selling it when it was first declining, but I was confident that it would work out (at least at first), and then I was (and still am) interested in how much I will get when Lending Club attempts to get the money that is owed.  So far, I’m still credited as owning the remaining value of the loan, so I want to know how much I will actually get back.

My current Lending Club portfolio

The other three loans I own are going fine, and should continue to generate income in the near future.  The borrowers are paying on time, and as long as that continues, I’ll be happy.  Plus, since half of the money I was using for my Lending Club investments came from Lending Club itself, the one loan failure still leaves me with one ‘freebie’ loan as well as the two I bought with my own money.  Not a bad return on invested capital.

Lending Club in Review

So, what do I think of my first six months with Lending Club?  Overall, I like it.  The interface is simple, the loans are a good investment, and they provide nice diversification from my stock mutual funds.  The concept is a very good one, lending money to people who need it, making a decent return on your money in the process.

As my finances allow, I’m going to add to my Lending Club portfolio.  I’m going to focus on higher quality loans, in the hopes that, by being less risky with my investments, I can avoid having the loans go without being paid back.  (The loan that went without being paid back was ranked E, on a scale of A as the best and G as the worst.)  By being smarter with my allocation, I’m sure that Lending Club will grow in usefulness as part of my investment portfolio.

• How to Apply for a Loan at Lending Club or Prosper Marketplace
• Lending Club Files S1 with SEC
• Lending Club Performance Update
• Lending Club Review and Progress
• Prosper and Lending Club – Scam or Real Thing?

(This is the first in a series of posts where I will rant and rave about the state of the world and how things would be different if Roger, The Amateur Financier, was in charge.  Consider them conversation starters; I’d like to hear the solutions my readers have for some of these pressing problems facing the country and world today.)

I don’t know how much of a story this was in other states, but the big news in Pennsylvania is that we finally have a state budget.  The governor and the state congress have been at odds with each other for over eighty days (that’s 8-0, nearly three months) trying to work things out; they finally reached an agreement at the end of last week, although it could be another week before it goes through (and even then, our governor had threatened to veto it, although I don’t know if that threat is still outstanding).  This impasse has had some serious consequences; government workers haven’t been getting paid, some have even been laid off, and any program or person who receives state money has been at the end of their financial rope for nearly three months.  It’s been a horrible, horrible situation.

Still More Organized than the Pennsylvania Budget

This whole ordeal has had me thinking.  I’ve been trying to come up with some ways to improve the budgetary process in the government, to avoid situations like this in the future.  (It’s either that, or start screaming in frustration at the sky.)  Clearly, there’s plenty of changes that could be made to the budgetary process.  So, I’ve taken on the task of fixing the budgeting process in my role as benevolent (well…mostly benevolent) fictional dictator and created a few solutions to make budgeting more effective.

My Solutions

No Budget, No Pay -  One of the most galling parts of the whole budget debacle is that the legislators and governor continued to draw their salaries (and benefits) while people who depended on state government money, from employees to beneficiaries of state programs, had to suffer and muddle through without any help.  So, my first change is rather simple: if a governing body can’t come up with a budget, the members don’t get paid.  Period; no ifs, ands, buts, or per diems.  Perhaps losing some of their income will inspire our legislators to be more friendly and less confrontational.  (Or we go onto the next stage: locking them in the capitol building until they come up with a workable, balanced budget.)

Balance the Budget – More directed at the federal government than the states, since all the states (except Vermont, apparently) are already required to have balanced budgets.  Nothing good will come if the federal government is allowed to lower taxes, raise spending, and push off the bill to the future taxpayers (and those of us young enough to still be paying taxes decades from now when the bills start coming due).  Eventually, something has to give; taxes will have to go up, the budget will be slashed, or inflation will climb (and in the worst case, we will have to deal with all three at once).  It’s much better to reign in the spending now, before things start to get even worse.  And on that subject…

Pay Down the National Debt – I’m not saying we need to completely pay off the national debt; there are solid arguments for some level of national debt, and many people like to invest in federal government bonds.  But reversing the trend, from growing fairly rapidly to staying steady, or better yet, declining, would definitely be a positive trend.  Gradually decreasing the amount of government bonds issued each year (the amount of new debt we take on) will slowly decrease the debt, as well as any negative effects associated with a large and ever increasing debt.

Sell (More Specific) Bonds – Perhaps my favorite idea on the subject, inspired by the war bonds sold to help finance World War II.  The concept is simple: start selling bonds that cover specific expenditures, rather than having all the proceeds from government bonds going into the same pot of money.  The same values, types of bonds and return on investment; the only difference is where the money goes.  So, now we’ll have Afghanistan War Bonds, WIC Bonds and National Endowment for the Arts Bonds, each providing money to different programs.

Think of it as an indirect form of voting; by buying bonds in programs we support and avoiding those we don’t, we’ll be able to help direct where the government places its priorities.  If the Michigan Trout Fishing Fund can’t get enough investors, well, perhaps we can do without it.  Similarly, if there is overwhelming financial support for the National Endowment for the Arts program, well, all the more reason to keep it going and expand it.  (Admittedly, this gets complicated when dealing with foreign governments buying Treasuries; keeping bonds for foreign consumption broad would be one way to avoid having foreign investors dictate US policy.)

For smaller programs, this could be the only funding that is needed.  Programs with expenses under $100 million (small by federal government standards) that get enough investor interest get funded; those that don’t, get canceled (unless they get funded by a specifc government bill).  As a result, we can trim some of the little expenses from federal spending bills without much time or effort involved.  No need for legislators to comb through the minutiae of the budget to hunt down small programs to cut; just let the market handle it.

That, in a nutshell, is my plan to fix the governmental budget system.  It might not be perfect, but compared to our current system, it’ll be a definite improvement.

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• What Are The Different Types of Taxes?
• The Secrets Of Living A Debt Free Life.
• Is Debt Consolidation the Right Option?

It’s time to play ‘Good News, Bad News’.  The good news is that my job is going well, my relationship with my fiancee is proceeding nicely, and my net worth is steadily increasing, thanks to the proceeds from new job and the recent market upturn.  (I’m not sure said market upturn is here to stay, though that’s a subject that can wait for another day.)  The bad news is that the night shift is wrecking havoc with my schedule, leaving me with much less time for blogging and other personal finance tasks than I would prefer. For some reason, working the night shift leaves me with much less free time than working the equivalent length of time on the day shift.  I think it’s probably the difficulty in getting used to being awake when everyone else is asleep, and keeping yourself motivated when you’re one of the few people who are conscious.

Still, there are much worse fates in the world than being gainfully employed; given the current state of the economy and the job market, having a job is a good start in and of itself.  Plus, I like the work I’m doing, as well as the company for which I’m working, which makes it a pretty good place to be right now.  Hopefully, I’ll get better at balancing my social life, my work, and everything I want to do (such as blogging) as time goes on.  For now, though, here are a few good posts from the past week:

Good Posts This Week

Credit Card vs. Charge Card: What’s the Difference? – Sometimes, the difference between these two types of plastic get mixed up in the financial media.  Luckily, Mrs. Micah is here to set us all straight.  I won’t get too much into the details myself (as she does a much better job than I could, anyway), but knowing the difference is important in deciding which, if either, is right for you.

Claiming a Child for Taxes – An interesting topic I’ll admit I hadn’t really considered before, My Life ROI details the rules used by the IRS to determine which parent (or other care-giver) can claim a deduction for a child.  There are some rather detailed rules that come into play, apparently, which I did not realize.  Then again, we are talking about the IRS; there are rules for just about every eventuality you could imagine (and many others you couldn’t), so I suppose that’s to be expected.

If Taxes Were Going Up – It seems to be an article of faith in the financial media lately that taxes are going to be going up, rather drastically, in the near future.  (I think they are operating on the assumption that Democratic President plus Democratic Congress equals Higher Taxes, which is rather simplistic, at best.)  I’m not quite convinced, and neither is Frank Curmudgeon; he details how little impact higher taxes would actually have on your normal spending and saving plans, along with his own reasons for doubting the worst case scenarios being discussed.  All good advice, even if you think taxes are about to go through the roof.

Moving: Titling, Registering, and Insuring Your Car – There is a LOT that you need to do if you are moving, even more so if you are going from one state to another.  For some help on what to expect when it comes to your car, check out Stephanie’s post; it’s full of good tips, as well as some interesting facts.  For example, did you know that you aren’t allowed to smile in your license photo in Virginia?  Well, you would if you read her post!

Mortgage and Down Payment – Over on Green Panda Treehouse, big moves are afoot, and as she gets ready to take the plunge, she’s sharing all the preparation work she’s doing.  It’s quite a list of considerations, and she is definitely doing her research and being careful to ensure her finances are in order.  Good plans for everyone who is looking to own a home, and ones that could have prevented a lot of heartache in the recent past.

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“Greetings!  I am the executor of the estate of the Nigerian Prince Iam Notreal.  I am looking for someone who can help transfer the money from his estate into the United States.  In return for your help in conducting this transfer, you will receive a substantial reward, equal to 45,029,387 US dollars.  I just need a few thousand dollars to pay the accounting expenses.  Please respond with your bank account information and relevant passwords at your earliest convenience.”  Sound like a tempting offer?  Think again!

The Scheme

Chances are, you’ve encountered emails saying something similar to this during your  time online, particularly if you don’t have a very effective spam filter on your email system.  The scam is hopefully very obvious; if you give up your financial information (or send money in advance as a ‘processing fee’, or something similar), you’ll end up losing your money and never see a penny in return.  By holding out the possibility of huge returns on your ‘investment’, the scammer hopes to make you blind to the reality that the offer is a fake, and to get money or financial information out of you.

Historical Advance Fee Frauds

Spanish Prisoner: A classic advance fee fraud, dating back to the beginning of the twentieth century.  The fraudster convinces the victim that there is a rich man being held in a Spanish prison, and if some money can be provided to secure his release (in the form of bribes), then the victim will be richly rewarded when the man is released.  Of course, such a reward will never come.
Nigerian (419) Scam: The modern scam with which most of us are familiar, featuring emails sent from untraceable accounts (frequently originating in Nigeria, hence the name of the scam), trying to get money from victims.  They can either focus on getting victims to send them money voluntarily (usually through a wire transfer, making the money untraceable and unrecoverable) or on getting financial information from the victim in order to defraud them.

An Example Scheme

I decide that, after a whole week spent scamming my way to a small fortune, to use my email skills to make money.  I create an elaborate scenario, where I claim to be an employee at a bank who knows of a rich, elderly client who is about to die with nobody to inherit his vast fortune.  Now of course, I can’t simply keep all his money for myself; being an employee, I would be too suspicious.  Instead, I offer to transfer the money into the account of the email recipient, in exchange for an ‘advance fee’ to cover the legal fees of the transfer.

What the average 'Nigerian Prince' actually looks like

Realizing that there are few people who would fall for such a scheme, I decide to contact thousands, even millions of people at once.  Luckily for me, I can use the power of technology to reach them via email and other technological means to reach those people with minimal effort on my part.  So what if only one in a million people will fall for my scheme; if I contact ten or twenty million, I’ll still have a steady supply of people responding.  Once they do, I can follow up with the next part of plan, to get the people who respond to give me access to their accounts or to send me money through a wire transfer, whatever my diabolical mind can determine.  All I need is an opening.

How to Protect Yourself

Be Skeptical – I hate to be the bearer of bad news, but nobody, with the possible exception of your parents, will give you great amounts of money for nothing.  If you get any offers for free money, there’s going to be some kind of catch. There’s always a price when you receive money, such as having to do something you’d prefer not to do with your time in exchange for money (also known as ‘work’).  Don’t expect to get money for nothing, and you’ll reduce your risk of being scammed significantly.

Take Care When Sending Money to Strangers – You shouldn’t send money to people who try to contact you online.  If you do need to send money to someone online, for a legitimate item sold on an auction site, for example, stick to methods that offer you some protection, such as PayPal or other online payment services, rather than using wire transfers.  There are legitimate sources of goods and services online, but avoiding scams requires diligence and care.

Don’t Give Out Financial Information – The best way to protect yourself is to ensure that nobody other than you has access to your financial info.  If you do get embroiled in a scam, sending money via a wire transfer or other method will be bad, but at least your losses will be limited to what you actually send; the scammers won’t get any more money from you (at least, as long as you don’t take their comments about ‘needing more money for additional fees’ seriously).  While losing money is never fun, having your life savings depleted because a scammer got into your accounts is even worse.

Follow these steps, and you’ll find yourself much safer from advanced fee frauds.  Just don’t worry the next time someone from Nigeria tries to give you some money, and delete the email right off the bat.

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If you spend much time reading financial information online, you’ve probably noticed that many otherwise reputable sites have sidebars displaying advertisements touting penny stocks, with a come on like ‘3 penny stocks about to soar.’  In fact, you probably see several of them on my sidebar, now that I’ve used the phrase ‘penny stocks’ in this article.  The problem with penny stocks is that, by definition, they are associated with lightly traded companies who have only a small net capitalization, making them subject to any number of scams.  Which brings us to today’s topic…

The Scheme

The basic pump and dump scam has three main parts.  First, the schemers buy up a great deal of a stock, preferably one with a small price, allowing them to purchase a lot of shares.   Second, the schemers attempt to build a buzz for the stock, touting it on message boards and other resources, hoping to pump up the perceived value (the ‘pump’ part of the scheme).  This is why penny stocks and others with few outstanding shares are favored; few scammers possess the resources needed to move the price of large-cap stocks, given the high trade volumes, large numbers of shares and many sources of other information.

First Comes the Pump...

Finally, after the price of the stock has risen significantly, the scammers sell their shares, netting a large profit and leaving the victims holding greatly overpriced shares (the ‘dump’ step of the scheme).  The overall result is schemers who profit greatly, and investors who lose money on stocks they never should have purchased.

A Historic Pump and Dump Scheme

Jonathon Lebed: An example of one teenager doing something other than loitering, he made a small fortune buying penny stocks, touting them on message boards, and then selling them.  The SEC caught wind of him and prosecuted him (the first time they ever prosecuted a minor), eventually settling out of court and allowing Johnathon to keep more than a half a million dollars in profit.  Not bad for someone who couldn’t legally drive at the time.

An Example Pump and Dump Scheme

Once again, I decide I can make a much higher profit by running a stock scheme than I can by blogging, and this time (luckily for our example) I decide to try a pump and dump scheme.  I search through the ranks of penny stocks, eventually settling on one (or a small number) that are selling for a very small price, are lightly traded, and sound vaguely intriguing.  I purchase  a large number of shares of each company, after I do some homework to ensure there isn’t much information to be found on any of them.

After I buy up a large amount of these stocks, it’s time to make them appealing to other investors.  There are any number of ways to do this; creating a fake review of the company, making a video that calls it the ‘pick of the century’ or even writing posts recommending my own stocks on a financial blog.  To ensure that people encounter my ‘pumps’, all I need is some clever and provocative ads, like the ones mentioned at the start of this article, placed on sites that gather a lot of traffic.  Before long, I’ve got thousands of people reading my ‘expert’ views on these crummy stocks, and with few, if any, sources contradicting me, more than a few of them will take me at my word and start bidding up the stock price in their rush to buy.

...Then Comes The Dump

Depending on how greedy I am (as well as how much I think my touts will bump up the price of the stock before people get wise to my scheme), I can start selling after the stock prices double, or triple, or increase ten-fold, netting me massive profits.  I will more than cover the expense of the advertising and other costs associated with setting up the scheme, leaving the people I conned into buying those securities holding the bag, with stocks that have no justifiable reason for their high valuation.

How to Protect Yourself

Avoid Penny Stocks – Frankly, there’s few reasons to ever consider penny stocks.  There are plenty of opportunities in small cap stocks that are small enough to grow rapidly, but large enough that they can’t be readily manipulated by unscrupulous profiteers.  Save yourself a great deal of time and aggravation and avoid penny stocks (and other questionable investments, while we’re on the subject).

Be Skeptical About Investment Advice – Hopefully, you already take most investment claims and suggestions with a grain of salt; not all advice is appropriate for everyone, after all.  But especially when taking advice from online sources (which do not require fact-checking or even knowledge of the creator’s true identity), you have to stop and ask yourself what the writer has to gain from you following their advice.  Most people, if they have a stock they genuinely believe will increase many times its current price in a short time, will not be willing to share that stock’s identity with you; if they are, you have to ask yourself, why?

Do Your Own Research – Alright, so you’ve just read about a stock that sounds like a fantastic investment.  Before you go and buy based on a single recommendation, it’s time to do plenty of research.  There should be plenty of resources that detail the stock, providing you with material to support your choice, or perhaps to change it.  If you can’t find research on the stock (preferably from large, well-established firms and not just blogs or other ‘anonymous’ sources), then do yourself a favor and don’t buy it.

Follow these simple steps, and you should have few problems with ‘advisers’ trying to pump up their stocks and then dump them on you.

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