It’s been a year since I signed up for Vonage’s service. And I have to say that I am very happy about it. Before I signed up, I did tons of research on the web and compared them with other services. Back then, I felt that Vonage offered the most value for the money. It was cheaper than Verizon VoiceWing. Comast did not have their phone service yet (it is still more expensive) and a couple of other VOIP services that were much cheaper were not so well known, hence I did not take the risk with them.

The package I got was the standard unlimited calls (including long distance) within the US. The international rates were low and competitive compared to other VOIP players. The monthly fee was and still is $24.95 (without taxes). With taxes, it came up about $27 or so. If I do make lots of oversears call during the month, the bill comes up to about $30.

The service came with most features which are common in VOIP providers and which you have to pay extra with traditional land lines. Call waiting, voice messages, 3-way conferences, free fax line are included. Once I subsribed to the service, I had to get a new phone which can receive wireless signals. I got the Vtech 5.8GHZ cordless model.

I applied for the service over the phone and had to give my credit card number. With this service, you have to pay by your credit card (which was fine by me). By the way, I charged it to my Blue Cash to earn cash rebates. The service also came with a free Linksys wireless router. You get to keep this if you stay with Vonage for one year.

So how is the service. Well, firstly, the voice quality is very good. That may be a function of the Vtech phone that I bought, but the reception is always clear. One of the things that bothered me in the beginning was that my calls were dropped occasionally (like how it is in the Cingular advertisement). I was very frustrated but still kept the service because I was too lazy to change providers and also because traditional phone lines still cost more. Then one day, a Verizon salesperson came knocking on my door and sold me on their FIOS fiber optic internet connection. I signed up for it and immediately, my dropped call problem stopped. Previously, I was using Comcast as my internet service provider. But I always had problems with it in the sense that if I leave my computer for too long, my internet connection also drops. I suspect that had to do with my dropped calls on Vonage.

After switching to verizon FIOS, my Vonage has been working like a charm. I have not had to make a single customer service call. Every month, my bills comes through my email and my credit card gets billed. I would highly recommed Vonage to anyone who is looking to save money on their phone bills.

Recently, it has come to my attention that another provider SunRocket Internet Phone Service is offering an even better deal than Vonage at $199 a year or about $17 a month with essentially identical features. I do not use this service, but it is something that you should also consider.

We all know how coupon cutting saves you lots of money at supermarkets. Mrs Credit Card cuts up coupons every weekend from the papers and strategically makes our household purchases whenever she could take advantage of the coupons she has amassed.

But when I use coupons for an auto repair shop, the story is a bit different. Just a two minute drive from my place is Monroe’s. Monroe’s is a chain of auto repair shops. Each shop is managed by someone who is actually just an employee. There are always Monroe coupons every week in the papers.

The first time I went to Monroe’s, Mrs Credit Card gave me the coupons. But I forgot to use them and when we told the manager, he said he could not change the system and told us he would give us a discount the next time (which he did).

On the third occasion, I gave him the coupon just before he input the details in the cashier’s machine. “Oh” he said, and he went on keying in the details. The bill came up to an amount that was similar with no discount. “I have to include certain labor cost!” he said.

On the fourth occasion, I had a similar service performed. This time I gave him the coupon right from the start. When I came to pick up the car, I was told I needed to change something (can’t remember cos I’m not a car guy). It was very minor. But there goes my discount!

I have been to this place a few more times because it is close to my place. But I can’t help but think that all these coupons for auto repair shops are worthless. They will always find something wrong with your car or include some other “service cost” if you tell them you are using the coupons! The manager also said that he does not advertise the coupons, but instead it is done by the “corporate marketing department”. Go figure.

Do you really love your job or the money you make? I guess this question applies more to professions that “pay more” than the average job. I did a little survey among random group pf friends. The answers were pretty interesting.

Doctor Friend : His background is that his father was a doctor and he followed his footsteps. Did you really have the burning desire to “save lifes”? Well, he certainly did when he was studying medicine. Did he really enjoy his job because he enjoys it or because the money was “good”. Dr Doctor was honest with me and said that he can’t really answer that because he has “no complaints about his work” and the “money is good”. Jury out on him.

Real Estate Friend : Well, she got into the business because clearly the “money was good”. It may not be as great right now but she has had her good years. Does she really “love your job or career”? Hard to answer honestly. She can obviously do any sales job and if real estate does not pay, she would have never gotten into it in the first place. The jury is out for her as well. One thing is for sure : she will never work for a corporation in the normal sense. She’ll always be a free independent agent.

Ms Advertising : Ms Advertising has just quite her job and going to Business School. She wants to get a job on Wall Street. Being in the advertising business seldom gets you a six figure salary (according to her), while a first year MBA on major Wall Street firms nets at least $120,000! The decision to take her MBA to allow for a “career change” was a no brainer for her. But in my opinion, it will be a no-brainer if she does get her wall street job! Clearly, money is the motivating factor. When I asked her what type of job on wall street would she want (trading, sales, investment banking, stocks, bonds, commodities), she said she was indifferent. Anything will do! Well, at least she was honest about it. Money Talks and Bullshit Walks.

Ms Artist : Ms Artist is well, an artist and this is something that she honestly loves doing. Is the money great? Well, it can be. But to great great money, Ms Artist says that you need to be a publicist and be great at marketing. The days when Artist just did their stuff and hope for the best are over. Ms Artist feels that many of the very successful modern artist are masters at publicity and that it is a skill she may not necessarily have. But she clearly enjoys what she is doing.

These are just a few examples of friend’s response when I pose the question of whether they really their job or were they in it for the money. The truth is that for some people, it is purely for the money, while for others, they truly love what they are doing. However, I think that for the most of us that have a high paying job (career), we aren’t really too sure about whether we really do love our job or is it because of the money. It could be that we learnt to love our work because the money was good. I suspect that is the case with many of us.

But why is this question so important. It is important because I think that the truly successful people in every profession has a passion for their work (not just loving their work but having true passion). If you really want to excel in something, passion is what keeps you going. The problem arises when we have a good and high paying career but it is something that does not ignite our passion. What do we do then? Look elsewhere, or just continue (as most of us do) because hey, it pays well and pays the bills! Well, it would be interesting to hear what you think.

Should you have a joint or seperate credit card account with your spouse or partner? I’m not too sure if there is a right answer, but for me, both Mrs Credit Card and myself have seperate credit card accounts.

We always had seperate credit card accounts because when we got married, we were both working. I had my card and she had hers. This has worked out well and I think there are a few advantages to having a seperate account.

Firstly, having seperate credit card accounts mean that your credit scores are seperate. If one of us get into any credit problems, there will be no spillover effects.

Secondly, having your own credit cards means you can charge some little luxury purchases to your card if you want to.

Thirdly, if a couple were to seperate, having joint accounts can be a nightmare. Having seperate credit cards makes any seperation much cleaner when to comes to any credit card debt.

However, I can see some advantages in having a joint credit card account. If one partner has a slightly lower credit score and wants a boost, having a joint account will help. You may want to do this if one partner needs to take a credit loan and would get a better rate if the FICO score was higher.

Whether you want a joint account also depends on how you want your finances to be set up. If you decide to open a joint checking and savings account and charge your monthly bills to a credit card to be paid by this joint account, then you may want to get a joint account.

At the end of the day, there probably isn’t a better way - but do what is right for you and your partner.

There have lots of blog posts and articles about 0% balance transfer credit card deals and arbitrage. In the real estate, zero downpayment is a buzzword. Also hot not so recently was the interest only deal financing. The mainstream press has written a lot of negative articles on these teaser financing techniques, especially with regards to the interest only loans. The fact of the matter is that many people have gotten into financial troubles because of these deals. I know people who got carried away with 0% apr credit card deals and ended up with massive credit card debt. I also know people who bought properties in the last 2 years on interest only or adjustable mortgages and are now feeling the pain.

The truth of the matter of all these deals is that they are best taken advantage of if you do not really need them. Below are a few examples of friends of mine (not their real names) who have wisely taken advantage of these deals. Notice how different they are compared to others who have gotten into trouble because of these teaser deals.

Example 1 : Billy - Using 0% credit card deals for his home improvement

Rather than take out a home equity line of credit or a home improvement loan, Billy decided to get a 0% apr balance transfer deal for 12 months. He got a $15,000 credit line, which he used to furnish his basement and some other kitchen works. He could have easily paid by check or cash. But he decided to stretch out his payment over 12 months.

Example 2 : John got 0% financing with a credit card on his plasma purchase

John wanted to get the latest Panasonic Plasma. I went to Best Buy with him and helped him choose a model. But before he decided on the model, John had just got approval for the Discover® Platinum Card, which gave him a 0% apr rate for 12 months on purchases and balance transfer. He got the latest model for about $2700 (thereabouts) and instead of paying up front, he got 0% financing from his Discover card. But unlike most people who use these deals to buy stuff they really shouldn’t be buying, John can easily pay off the Plasma TV in cash. But he simple chose not to do so.

Example 3 : Jack Bought His House with No Money Down

How is this possible? You might ask. Well, Jack did not use any of the shaddy techniques that are thought in real estate courses. Instead, what Jack has a large portfolio (nearly 7 figures) with Salomon Smith Barney. Most major brokerage firms will give you a mortgage with no money down if you pledge your “securities” as a colleteral. The value of the house he bought was way below the value of his portfolio. He could have paid it off in cash if he wanted. But since he did not want to touch his retirement portfolio, he decided to take advantage of the no downpayment deal.

Example 4: Mary has an interest only mortgage

Huh! We all thought interest only mortgage was bad because it induced people who really could afford the house to buy them. Years later, they will have a higher principal outstanding compared to if they had taken a conventional 30 year fixed mortgage. However, Mary isn’t someone who had to stretch to buy her house. Like John, she can pay off her house if she had wanted to. Instead, she is using the money she is saving from the lower interest payment to invest for both herself and her kids college education. She figured she the returns of her investment over 10 years will be more than the cost of her mortgage. If things go sour, she is not in trouble at all.

If You Need Cheap Financing For Your Purchase, then You Probably Should Not Be Getting It

Notice what my four “successful friends” have in common. They could all easily have paid up for their purchases, but instead took advantage of favourable financing when they were available to “stretch their dollars”. They are different from those who actually should not be buying what they buy and only do because these cheap financing were available. I guess the lesson is that if you are wealthy, more cheap financing is available to you and perhaps you should take advantage of it. But if you can only afford these high price items because of cheap financing, then perhaps you should reconsider!.

I have just enrolled in a new 401K plan. One of the important decisions I had to make was the fund to choose. Obviously, asset allocation had a big part to play in my decision. But as I looked through all the mutual funds that was available, I found myself not looking at whether the fund outperformed the index, or the fees that the fund charged. But before I explained how I chose my fund, let’s review what mainstream advice is.

Check Past Performance

Well, this really isn’t a correct headline. Past performance does not indicate future performance. But you certainly want to look at past performance because you do not want to fund to have too many negative years.

Performance Relative to the Index

If 90 something percent to active fund managers failed to beat the index, the theory goes that if you choose an active manager, he or she better outperform the index. Otherwise, just buy the index? Well, for reasons I’ll explain below, this argument has major flaws in it that too few people bother to discuss. This relates to the fact that an index may be “overvalued”.

Fees

Pretty self explanatory. Fees have to be reasonable and not outrages.

Method of choosing investments

I paid close attention this. The reason for this was my experience with most of my funds from 2001 to 2002, when the major market indices as well as most mutual funds suffered massive negative performance for a couple of years.

I tossed out funds that chose “stocks that showed potential for capital appreciation or growth”. I seriously considered on funds that bought “cheap stocks that were perceived to be undervalued by the market”. Reason for this, as I’ll explain later relates to my experience during the last bear market.

How I chose my fund?

Well, let’s get to how I chose my fund. Firstly, this is what I did not bother to check.

1. I did not bother about beating the index. Why? Simply because I want fund managers not to overpay for stocks. I want to buy cheap and safe stocks because only by having a disciplined approach in buying can you minimize your “permanent loss of capital risk”. This is the type of risk that hardly anyone talks about. Most mainstream articles and financial talk about volatility risk. But there are other risk to consider as well.

2. I did not bother about fees. Because I am not bothered about beating the index, but more about making sure the fund manager only buys stocks at an appropriate discount to where he thinks their value should be, I believe in paying a manager to buy only cheap stocks to minimize the risk of a permanent loss of capital.

3. I did look at past performance. But like I said earlier, I did not look at whether the fund outperformed the index. I looked at how the fund did during 2001 and 2002. This was the period when the S&P had negative returns and most funds had negative returns too. It did not matter to me if the funds “outperformed the market”! A negative return is a negative return.

Why Did I place so much emphasize on returns during the last Bear Market?

It is simply because it tells me how the manager chooses his investments and stocks. It tells me that the manager does not “overpay” for stocks even for “good long term holdings”. Bear in mind that fund managers who had postitive returns in 2001 and 2002 probably “underperformed the market” in the previous years of the technology boom. But they had the discipline of not “joining the crowd”.

But I do not care less if they underperformed the market in the 90s as long they had decent positive returns. Even Warren Buffet underperformed the market in the late 90s. There were articles in the press questioning if “he had lost it!”. It was simply the case that he did not join the hype and buy “overvalued stocks”. In my opinion, any fund manager that outperformed the index in the late nineties ought to be fired because they bought expensive stocks and were counting on another “fool paying a higher price”.

So at the end, I ended up choosing Dodge and Cox Balanced Fund. Their worst year in 2000 was down 2%, better than those who were down 25% or so, but still “outperformed the index”!. Another fund that I have been watching is Marty Whitman’s Third Avenue Fund, which is now unfortunately closed to new investors.

My first mutual funds were purchased back in 1995. I had just started work a year earlier and was pretty tuned in to my “personal finance”. My first funds were Stein Roe Opportunity Fund (acquired by Columbus Management), AIM Constellation Fund and American Century Ultra Growth Fund.

Looking back, I took months to research what funds to buy. I went over Morningstar a gazillion times, going over past performance. Back then, these funds had some of the best 10 year performances. I could only dream what they would be worth 10 years later with such “stellar performances”.

Well guess what? Ten Years is up and sadly speaking, these funds gave me an average return of 5-6% (nominal return) over the last 10 years. To say that I was disappointed was an understatement. Historically, stocks have given holders a 6% real return. With inflation at about 2-3%, we should expect norminal return to be about 8%-9%. 5%-6% falls short of that.

What did I do with these funds? Well, I have sold them. But looking back, I have learnt a few things as choosing funds and investment philosophy.

1. Past performance is certainly not an indicator of future performance.

2. You should never bother about the index.

Why do I say that? It is because during the bear market in the earlier 2000s, I did not care about the fund outperforming the S&P. A negative return is a negative return. What disappointed me was finding out that there were actually funds that had positives returns during the bear market.

Proponents of indexing do not address the underlying flaw of indexing, which is the index could be overvalued at set for a dramatic fall as witnessed during the late 90s and early 2000s. Which leads me to my next lesson?

3. The investment discipline of a fund manager is so important.

When I went through the fund prospectus of each of the funds that I held, I realize that each one was set up and invested just to “beat the market”. The fund managers chose stocks that they believe would “outperform” because of “earning momentum” or because they looked “relatively cheap compared to the sector”. Yet when I looked at funds that really did well during the bear market, they had one thing in common. That one common thing was they only bought stocks that were deemed to be “undervalued by the market”. Buying stocks that a discount to where they think intrinsic value is minimizes the risk of a “permanent loss of capital”. After the tech bubble, many investors and fund managers suffered a permanent loss of capital. The best example is to compare an investment in Coke and a busted tech stock. If you had invested in Coke over the last few years, it really has not done much. It was priced at a 40 PE back in the mid and late 90s. Buying this “great company” at expensive prices would not have been wise. But at least, you do not lose your capital. You lose opportunity cost. In contrast, had you bought any internet stock with no earnings in the late 90s, you would have suffered a “permanent loss” in your capital. Unlike Coke, it is gone!

These are the few takaways I have from Lessons from Past. I will soon be discussing how I chose my new mutual fund. Stay tuned.

My oldest son is now 7 years old and Mrs Credit Card and myself have started to think about educating him about the value of money. Our aim is to instill discipline in him and to educate him that money has to be earned and spent wisely. This is what we have done.

We give him a weekly budget. But we only him to buy lunch from school twice a week. It is on those days that he chooses. Here are also several things we have done.

1. Explain why we do not want him to buy food from school everyday (cos he does not finish them most of the time). We take the time to explain that the prices charged for certain food offers little value and that Mommy can cook a better dish at lower cost!.

2. Insist that he save most of the weekly allowance we give him and we ask him how much he has saved every week.

3. Encourage him to save for things that he wants to buy.

4. We tell him that he cannot buy something unless he has saved enough. This we think is one of the most important lessons we want him to learn. I think many people have got into credit card debt trouble simply because they never had the concept that “you buy only what you can afford”. It’s pretty elementary, but we want to make sure he understands this concept.

5. One thing have not done and will not do is to reward him for doing household “chores”. We feel that it is his duty to clean his room and help with the household stuff and that he should not be expected to be “paid” for this.

I was thinking of making him to a little “spreadsheet” every week to highlight what he has spent, how much he has saved and how much does he have at the moment. But we both felt that we should hold that off for a while, perhaps until next year. Educating our kids about finances is something both my Mrs Credit Card and myself will do because it can only be taught at home. Schools do not teach them. I will periodically update all of you of our process and observations.

Did you know that Costco sell diamond rings? Even Amazon.com sells them. Around christmas time last year, CN8 (Comcast in Philly) showed a report where they asked a diamond expert to check out 2 diamonds, one from Costco and one from Tiffany’s. These 2 diamonds had identical specifications. After examining these 2 pieces of gems, the expert concluded that they are geniune (obviously) and matched their specs.

But there was obviously a huge price difference. The diamond at Tiffany’s cost $8,000 more than the identical piece at Costco’s. So, when you buy that bling bling from Tiffany’s as your engagement ring, you are obviously paying a “Tiffany Premium”.

The interesting part of this story is that I found out about this at a party that I was attending. Then, we decided to take a little poll from the ladies. Question is will you accept an engagement ring from Costco? Or must it be from Tiffany’s (or any well known jeweller)?

The answers varies among different ladies. For some, an engagement ring from Costco’s is simply unacceptable. There was also an interesting answer from another friend, who said that her original engagement ring must be from a reputable (at least well known) jeweler, but that for her 10th wedding anniversary, a second diamond ring from Costco would be ok. I did not find a single lady in the party who said it was ok if their engagement ring was from Costco!

This topic brings up an interesting issue. When we read articles and advice columns about personal finance, one of the hottest topic is about how buying a new car is one of the worst investments you can ever make because your car depreciates the moment it is driven out of the showroom. Well, aside from cars, I would think that an engagement diamond ring has to come up as an item that (though may not depreciate as much), certainly adds no economic value to one’s family finances or life. At least with a car, you get to go from point A to B.

The diamond engagement ring though, is a tradition. I am not advocating that this ritual be abandoned. Mrs Credit Card obviously has a diamond ring from me years ago. But everyday, I read blogs about how to save money? how to reduce debt? who is the cheapest discount broker? why pay high fees for managed mutual funds? Why not just invest in a low cost index? How to do a 0% apr balance transfer arbitrage? which online bank has the highest interest rate? How to shop for the cheapest car?

But nowhere do I see any article on where to get the best value for a diamond engagement ring? And hey - this gem cost a least a couple of thousand dollars.

So to all you personal finance readers and bloggers out there, I would like to know what you think about this issue. Ladies - would it be OK for you if your diamond engagement ring was from Costco? And guys - would you even consider getting an engagement ring from Costco?

I am taking a poll below. Would be interested in looking at the results!

 Loading ...

 Loading ...

How big a mortgage can you take? How much credit card debt can you carry?

Much has been made about good debt versus bad debt. Getting a mortage for your home is “good” while an “auto loan” is bad because your auto purchase will depreciate. But how much debt can you afford. Below are some guidelines that in my opinion, you should consider.

Stability of income

How stable is your income? This is a very important factor. The more stable your income, the higher debt load you can sustain. Doctors, for example, can afford to have a bigger mortgage than most of us. It is not just because they have high income, but also because they have higher income potential that is more stable. Most new doctors who graduate have a ton of student loans. Yet banks are slightly more lenient on them simply because they have high and yet stable income growth ahead of them. Many doctors have high student loan debt, a mortage and very little cash and investible assets in the beginning of their careers.

However, if you are an insurance agent or real estate agent, then your income inherently is less stable (though lucrative). Your ideal debt ratio will depend on your income and assets.

Alternative source of income

Do you have alternative sources of income? Do you have a rental property producing postive cash flow? How much dividends are your investible assets giving you? The more sources of cash inflow you have, the better your ability to take on debt.

What is Your Coverage Ratio?

When bond investors invest in bonds, one of the key ratios they look at is the companys’ coverage ratio. What is the the cash flow versus interest payments? For triple A bonds, it is not uncommon to find coverege ratios of 10. For junk bonds, coverage ratios of 1.2 to 1.5 are not uncommon.

What is your coverage ratio? How much income are you bringing in? What is your interest payment every month. To be even more conservative, subtract all necessary household expenses from your income and use that number to calculate your coverage ratio. Ask yourself what your coverage ratio will be if you take on a loan, credit card debt, or a mortgage? If you coverage ratio will barely be one, then you should reconsider whether or not to take than loan or mortgage. If your coverage ratio is above 3 and you have a stable income, then you will be a lot safer.

What is your Debt to Equity or Asset Ratio?

How much debt you can take is also influenced by what is your net worth. If you have a few properties free and clear, taking on another mortgage may not be an issue even if your income source is not stable. Before you take on another debt, be sure to calculate your net worth, both equity and assets, accurately.

How much cash on hand do you have?

Ford and General Motors are in big trouble for their North American Operations. But has kept them going is that they have tons of cash on their balance sheet.

How large is your emergency fund? How long can you last if your present source dries up? Think long and hard about this when before you take on any new debt.

Summary

To sum up, I think you have to look at a variety of factors before you can decide how much debt you can take - whether it is a mortgage, auto loan or home improvement loan. Look through these factors carefully before making any big decision that will impact your financial future.