This is the last installment in our series on Brandon, the $32,000-a-year tycoon who’s the new favorite to be Control Your Cash 2010 Man of the Year. Read the previous couple of posts to find out how he pays his car loans off early, lives in a decent home with positive cash flow, and spends strategically to get the most out of life (which, last we checked, still requires money.) Today, Brandon explains just how he receives that money and what he does with it.
In sum, I take advantage of cost-savings overlaps, and try to kill a few birds with one stone. I’ve discovered that I don’t need to buy to be happy. I have never taken advantage of charity, welfare, food stamps, etc. despite being qualified a few times. I never needed them, even when I was 21 and lived out of my car for 6 months. I was raised middle class (slightly lower to start, then solid middle, slightly upper middle the last bit.) My mother and stepfather were frugal. I never wanted, but they didn’t overspend. My mom used to talk about how she used to go out with friends and sip a Diet Coke the entire night, and that would be her only expense.* My parents are solidly upper-middle class now, perhaps upper here in the Midwest. Their financial help comes mainly in the form of hand-me-downs, but more recently a new bedroom set and couch when I bought my house (I didn’t need them, but it was nice), and the recent minor vacation stuff.
My mortgage rate is 5¾%. I bought at the worst possible moment in the last 2 years. It goes down to ~4.32% with the credit, although it’s a bit higher due to the delay in receiving the credit. I pencil it in as 4.4%.
I have a Sears credit card, for the credit limit and the very rare Craftsman lifetime warranty tool coupons and sales. I also have a Citi Driver’s Edge card, which Citi no longer offers, but it refunds 3% on gas, groceries and drugs, 1% on everything else, and 1¢/mile on my car).
I’d like to add 2 more cards, for what that’ll do to my FICO score and to avoid having all my eggs in one basket. One of the likely candidates is a Pentagon Federal Credit Union Promise card, which carries no fees and is useful for foreign travel. I’m also looking for a 2% cash back card. Charles Schwab offered one, then rescinded the offer in April. Fidelity offers one, but I don’t like the way they set it up. Then there’s PerkStreet, which requires me to keep $5000 in my current account. I don’t care for the American Express Blue Cash** structure, so I’m waiting for something else: maybe a rewards card if I do more traveling, e.g. a Starwood American Express.
As for my investments, I’m a fan of Harry Browne and the Permanent Portfolio.
Harry Browne (1933-2006) was an investment analyst and the Libertarian candidate for president in 1996 and 2000 (in other words, our kind of guy.) His brainchild, the Permanent Portfolio, involves putting equal amounts of your money in:
I. an index fund
II. the longest T-bonds you can find, or AAA corporate bonds
IV. cash (or its equivalent, short-term T-bills)
Ignore for 3 months. Then, if any class over- or underperformed by 10%, redistribute to maintain the balance.
I’m with Vanguard, but they charge a lot to buy bonds and non-Vanguard exchange-traded funds, so I’m looking at Wells Fargo. I have $4k in my Indiana Public Employees Retirement Fund account and $14k in my Roth IRA. That’s allocated as:
I. 70% Standard & Poor’s 500 index fund
15% small cap value fund
15% emerging markets fund
II. 70% special stable income fund in state plan
30% Vanguard Extended Duration Treasury Exchange-Traded fund.
(Ed. Note: That latter item tracks the value of the Barclays Capital U.S. Treasury STRIPS 20-30 Year Equal Par Bond index. That fund invests >80% of its assets in U.S. Treasury securities held in the index. The fund weighs the maturity of each dollar, and tries to keep pace with the index, which usually means maturities of 20-30 years.
U.S. Treasury STRIPS [Separate Trading of Registered Interest and Principal Securities] are notes, bonds and inflation-protected securities whose interest and principal portions have been separated [“stripped”.] STRIPS work like bonds, selling at a discount and then maturing at face value. They’re formed by investment banks and brokerage firms, rather than sold by the Treasury.)
III. 80% iShares commodity exchange gold trust, which lets you trade gold throughout the day and not have to take physical possession of it.
My cash reserve is the IV leg. I think we’ll see deflation for the next few years, maybe longer.***
Finally, between my roommate and work, I collect enough cans to pay the utilities. With regard to taxes, I haven’t looked into how to minimize my return, but considering I collect the rent and foreclosure income without having taxes taken out, I have a virtual head start on doing so.
*The Control Your Cash authors always do this, despite not having to. Enriching taverns ≠ Controlling Your Cash.
**Even though Blue Cash only refunds you annually, Control Your Cash: Making Money Make Sense recommends it. At press time, Blue Cash gave you ½% cash back on the first $6500 you spent, 1½% beyond that.
But that was then. Today, that 1½% is 1¼%. Blue Cash does give 5% back on groceries and gasoline, which might only sway you if you categorize your spending to mesh with your card rewards. But groceries and gasoline are reasonably constant expenses for most of us.
Still, this brings up a worthwhile tangent. Would we still recommend Blue Cash?
Discover gives 1% back, in $50 increments. You’d have to spend $19,500 before Blue Cash gives you more cash back than Discover does. That could take well over a year, which is how long it takes Blue Cash to cut you a check anyway.
If that doesn’t give you a satisfactory answer, the next criterion should be convenience. (Notice we’re not even looking at interest rates. They don’t matter.) More American merchants accept Discover than American Express, but around the world, a Discover card is largely useless.
Ready for a little disclosure? Your blogger has an American Express Hilton Honors card, because a) there’s no annual fee and b) he stays in Hampton Inns a few times a month anyway. Which means I’m getting rewarded without changing my behavior to accommodate the card. (Lots of people do it the other way around.) In other words, if American Express offered a Celibacy Card or an US Weekly Subscriber’s Card, I wouldn’t be interested.
***Not sure if he’s right. Deflation is easy for the Fed to negate – just put more money in circulation. Inflation is harder to negate. And, of course, it’s open-ended. Practically speaking, deflation is limited to a few percentage points. Inflation can visit the exosphere.