2 Apr 2008 by Chetan Shah.

Personal Finance Software like Microsoft Money do a good job at managing personal expenses, investments and loans at the very least.

Following are some benefits of using personal finance software. By using I mean not just installing it but entering financial transactions on a regular basis. Basically the data in the software should as upto date as your bank/brokerage/mortgage statement.

- Entering expenses allows an individual to identify spending habits which are draining an individual’s income and adding no value to
him/her.

- Software can forecast individual’s cash requirements. By entering recurring bills, incomes and expenses in the software it will
forecast what your cash flow will be in 90/120/180 days thus enabling you to determine whether can you take additional expense now or whether you should wait for a later date at when you have a positive cash flow.

- Enables an individual to track their charitable donations and other income tax related data efficiently. By entering mortgage
payments, charitable donations, stock transactions etc. you will be able to extract all this information instanteneously for your income tax purposes.

- Capability to generate and printout reports (for example : Spending by Category, Portfolio Analysis)

- Track Retirement Account Contributions and Portfolio Performance.

- Category Spending Trends. It will help you identify your major expense categories. This will provide insight which area to
concentrate to reduce expenses

- Help you determine where you stand in terms of savings.

Please make sure that you have a good backup strategy also, so that in the event of hard drive crash you will not lose all this vital information. You will amazed how much data you have collected if you enter data in this software regular year over year.

As always your comments are most welcome.

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14 Mar 2008 by Chetan Shah.

For individuals who cannot contribute to Roth IRA because of MAGI limits, there is one more way of contributing to Roth IRA. Come 2010 all traditional IRA contributions can be transferred over to Roth IRA. So, for 2007, 2008 and 2009 you can make a non-deductible contribution to a Traditional IRA account and then in 2010 and 2011 roll it over to Roth IRA. Agreed that it does not make sense to contribute to traditional ira and not claiming deduction on income tax return but the opportunity to later rolling it over to Roth IRA is hard to pass.

For further information read Suze Orman’s Article.

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9 Mar 2008 by Chetan Shah.

One of the easiest ways to reduce the usage of paper is to stop getting junk mails. Everyday our mailboxes are filled with all kinds of catalogues, fliers, advertisements etc. which we directly throw it away in the recycle bin. Recycling paper is at least better than just throwing in a normal garbage can but not getting these unwanted mails will be even better.

In order to stop getting junk mails. You can write to the following agencies. Within 6-8 weeks of your writing you will see a drastic reduction (close to zero) in your junk mails.

1. Direct Marketing Association

2. Abacus

3. Call 888-567-8688 to stop Credit Card offers - Look for “Remove your name from marketing lists upon request.”

4. Writing directly to the company, asking them to remove your name from their mailing list. They have to honor your request. Most of the times, companies send a business reply envelope, I have sent my removal request using that same envelope - Yes, it works

Acxiom has a good booklet which you take a gander at.

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2 Mar 2008 by Chetan Shah.

More and more brokerage companies like Fidelity, Schwab etc. are offering Full Service Brokerage accounts which act like a checking account also. I.e : they enable the account holder to do ATM Cash withdrawal, write checks, bill pay, overdraft protection and even credit cards.

In addition to that most of the full service brokerage account offer very attractive interest rates for the money sitting in their checking accounts. Like as of this writing Schwab was offering 3.01% and Fidelity was offering around 3.25%.

With all this features available from a full service brokerage account, I cannot think of any reason why we need to have a regular checking account with XYZ bank which offers less than 1% interest for the cash sitting in your checking account.

Lot of people may argue that brokerage companies need a huge “minimum balance” in order to prevent monthly charges. As of this writing Fidelity needed $2500 for its The Fidelity Account and Schwab needed $0 for its Bank Checking plus Brokerage account
Another point of concern maybe the ATM fees charged by the bank who owns the ATM machine, as neither Fidelity nor Schwab has their own ATM machines. These fees are refunded by brokerage so even if ATM machine states the bank will charge you $2 as service charge, you will be refunded this amount.

As an additional benefit, having an account with a brokerage firm like Fidelity which needs $2500 as a minimum balance at any time, will force an individual to save money for their emergency needs.

Bottom line, there is no reason why the money should be sitting in a regular checking account when most of the brokerage houses are offering all the features of a regular checking account PLUS a very decent interest rate on your liquid cash.

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23 Feb 2008 by Chetan Shah.

Covered call is a very simple options strategy to generate cash from your existing long stocks in the brokerage account.

What is a covered call ?
My Options blog entry explains “Call” option in detail. If you have long position in a security, you can sell calls on that underlying security. By selling a call on the “long” underlying security, you are executing a covered call strategy.

Why sell a covered call ?
Selling a covered call is a credit activity, i.e. once the transaction is executed, the amount for which the call was sold is credited in your brokerage account. It is a great way of generating extra cash on your existing securities. This is in addition to the dividends which you may get from the underlying security. By selling covered calls you can effectively reduce the cost basis of the underlying security also.

Risk and mitigation:
Being a conservative investor, I consider getting “assigned” for a covered call a risk. My intention is not to get assigned as I want to repeatedly sell covered calls on the same underlying security, once my existing covered call expires. In order to mitigate this risk, I try to sell covered calls which are deep out of the money.

Additional Considerations :
There is no guarantee that a deep out of the money call will not become (deep) in the money call. For a highly volatile stock this can translate into losing money if the current price of the stock is way higher than the strike price of the covered call.

Despite the above risks, selling covered calls is a simple options trading strategy which any investor can execute on a regular basis to generate additional income from their long stock positions.

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21 Feb 2008 by Chetan Shah.

Protecting one’s credit should one of the topmost priorities of any individual in this highly “credit” driven world. Identity theft can literally ruin one’s personal finance life for quite sometime. Hence the need to protect one’s credit report by all possible means.

Most of banks, insurance companies and credit reporting agencies are offering “credit monitoring service” so that the individual is notified when someone looks at their credit report, this typically happens when an individual applies for a loan, credit card, cell phone connection etc. In the event that the individual did not authorize the transaction, this service helps the individual to immediately notify the bank/police that someone tried to steal their identity. While this is a good service to utilize, I think freezing one’s credit report is an efficient and cheaper option.

By freezing one’s credit report, no one can view your credit report until you “thaw” it. Thus preventing anyone from getting a loan, mortgage, credit card etc on your name without your authorization. Once the credit report is frozen, I do not see any need of subscribing to a credit monitoring service as it is redundant if not useless.

When an individual submits the request to freeze her credit, the credit reporting agency issues a personal identification number (pin #). In future when the individual has a need to get a new credit card, mortgage etc., all she needs to do is call the credit reporting agency and mention her pin# and other personal details and if all data supplied by her is accurate the credit reporting agency will temporarily lift the freeze (thaw), the freeze can be lifted for the duration specified by the individual. The individual also has an option to selectively lift the freeze. I.e : if she knows that she is going get the credit card from Bank XYZ then she can mention that she only wants to lift the freeze so that only Bank XYZ can look at it, this way her credit report will appear frozen for all other companies.

Agreed that there is a one time charge to put the freeze on the report and a charge to lift the freeze but I think it would be unwise to try to save 30-40 dollars and potentially spend a lot more to clean your credit report after an identity theft incident, leaving aside the mental stress that you will have to go through.

Steps to freeze credit report are dependent on the state in which you reside. Please click on the link to determine the steps for your state.

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