Want to make ten times the amount you are now on your savings?
Take money lying in your savings account, which is probably earning only one-half of one percent interest right now and consider putting this into a Certificate of Deposit (CD). Many are currently earning about five-percent interest, and these investments are federally-insured through the FDIC up to $100,000 just like your savings account. So, no additional risk of losing your principal, but you receive up to ten times the rate of return!
Depending on the amount of money you have in savings, you may consider "laddering" your CD investments. What the term "laddering" means is simply dividing the total amount up into smaller portions with varying maturity dates.
For example: instead of having one $25,000 CD mature in twelve months, you could break it up into five $5,000 CDs maturing in three months, six months, one year, two years, three years, and five years.
Why ladder?
There are a few benefits to laddering:
First, if you need to cash in a CD, you take a smaller penalty -- just on the amount within the one smaller CD -- or a portion of the overall amount. Second, if rates decline, you have only a portion of your money maturing at any one time to invest at the then lower rate. Third, psychologically, people seem to keep the CDs in place -- or spend only the portion that matures -- as opposed to indulging big by spending everything when it matures in one large lump sum.
But what about early withdraw penalties?
Penalties vary, but many early withdraw penalties are only one to three months worth of interest. So, the world does not necessarily end if you do need the money for an emergency before the maturity date.
Although transferring money into CDs may not be sexy, it is a simple way to make much more on your savings.
Tuesday, October 9, 2007
Friday, October 5, 2007
County Tax Sale Rapidly Approaching
If you think you really own your home just try ignoring your real estate taxes and see how long you "own" it! No, this isn't a dare, but just a friendly reminder that the county's annual tax sale will be held shortly on October 10th to sell those tax liens to the highest bidder.
So, what happens if a person fails to pay their property taxes? And how do some people invest in the resulting tax liens?
Let's discuss the process:
Properties that are at least three installments behind are eligible to be added to the tax sale list. The minimum bid for the auction is set at the amount of property taxes owed, plus any penalties, auction fees, and public notice or advertisement costs.
At the public auction, the bidding starts with this minimum bid and proceeds until there are no more bids. The highest bidder receives a tax lien certificate (not a deed!) on the property in return, which is essentially a first-priority lien and one that is superior to most everything, even previously-recorded mortgages, except certain federal and state tax liens. (As you know, Uncle Sam always gets his money first, but the Governor does too! This is an interesting phenomenon because in Indiana liens typically attach to a property in the order -- or priority -- that they were filed, so tax liens are unique in this respect. This also explains one of the reasons why lenders want to escrow for property taxes when you have a loan secured with real estate. This way they know that the taxes are paid, and they won't have a higher-priority tax lien to resolve down the road.)
The purchaser of the tax lien must send a "notice of sale" letter to the owner and any other person(s) with a "substantial interest" in the property (e.g. the bank with a mortgage on the property) with all the information required under the Indiana Code at least three months before the redemption period expiration, which is 12 months from the date of sale. Of course, this requires a title search to be conducted to find out exactly who these "substantial" interest holders are. After these notices are sent, the tax lien holder asks the same court that issued the original judgment for delinquent taxes on the property to order the County Auditor to issue a tax deed if the property is not redeemed by the redemption period expiration date.
For the 12 months between the tax sale auction date and the expiration of the redemption period, the tax lien holder may pay the subsequent property taxes and special assessments. Immediately upon paying for any of these additional costs, including the title search mentioned above, it must be reported to the Auditor's office on a special form with the receipts. If this is not done, those additional expenses will not be reimbursed if the tax lien is redeemed by the property owner, who will probably not send you a "thank you" card in the mail either.
So, what if the property owner pays within the twelve month redemption period?
He or she pays interest -- and a lot of it!
For up to six months, the lien holder will receive a refund equal to 110% of the minimum sale price and 10% per year of the amount that the purchase price exceeds the minimum sale price. So, on an annualized basis, the return is much, much higher than 10% if redeemed within a short period after the sale.
If redeemed after six months from the sale, the property owner must pay 115% of the minimum sale price, plus 10% per annum of the amount that the purchase price exceeded the minimum sale price.
As a person can see, the returns to the investor are very high in comparison to other traditional investments, but there are several risks, including:
*The bidder must determine what it is that he or she is actually bidding on, as it could be a property with environmental contamination, a useless strip of ground only a few feet wide and hundreds of feet long, or a parcel with other major issues. There are no guarantees or warranties, so that can be a huge risk, too, if the bidder does not do his or her homework.
*The tax lien holder does not actually own the property during the twelve month redemption period, so the tax lien holder has no right to trespass on the property. Needless to say, the owners -- or vandals in general -- can damage the property during that time.
*If the winning bidder on the tax lien fails to have the cash or financing available to him or her to pay the County Treasurer the full amount of their winning bid by the deadline on the sale date, which is usually in the afternoon of the auction, the bid is not only canceled but the bidder is subject to a penalty equal to 25% of the total amount bid.
*If the tax lien holder fails to notify the owner and those with a substantial property interest, as discussed above, the court may say, "Sorry, you just lost everything that you bid on it because you didn't follow the rules!" So, a total loss of investment is possible.
As a person can see, where there is money to be made, there is also risk. Greater returns typically involve greater risk.
If there are any morals to this story, they are: (1.) pay your property taxes on time, and (2.) if you want to invest, be sure to find a competent legal advisor with experience in this area of investing. Although this may have whetted your appetite for large investment returns, you simply cannot read just one article and prudently expect to invest without major problems.
So, what happens if a person fails to pay their property taxes? And how do some people invest in the resulting tax liens?
Let's discuss the process:
Properties that are at least three installments behind are eligible to be added to the tax sale list. The minimum bid for the auction is set at the amount of property taxes owed, plus any penalties, auction fees, and public notice or advertisement costs.
At the public auction, the bidding starts with this minimum bid and proceeds until there are no more bids. The highest bidder receives a tax lien certificate (not a deed!) on the property in return, which is essentially a first-priority lien and one that is superior to most everything, even previously-recorded mortgages, except certain federal and state tax liens. (As you know, Uncle Sam always gets his money first, but the Governor does too! This is an interesting phenomenon because in Indiana liens typically attach to a property in the order -- or priority -- that they were filed, so tax liens are unique in this respect. This also explains one of the reasons why lenders want to escrow for property taxes when you have a loan secured with real estate. This way they know that the taxes are paid, and they won't have a higher-priority tax lien to resolve down the road.)
The purchaser of the tax lien must send a "notice of sale" letter to the owner and any other person(s) with a "substantial interest" in the property (e.g. the bank with a mortgage on the property) with all the information required under the Indiana Code at least three months before the redemption period expiration, which is 12 months from the date of sale. Of course, this requires a title search to be conducted to find out exactly who these "substantial" interest holders are. After these notices are sent, the tax lien holder asks the same court that issued the original judgment for delinquent taxes on the property to order the County Auditor to issue a tax deed if the property is not redeemed by the redemption period expiration date.
For the 12 months between the tax sale auction date and the expiration of the redemption period, the tax lien holder may pay the subsequent property taxes and special assessments. Immediately upon paying for any of these additional costs, including the title search mentioned above, it must be reported to the Auditor's office on a special form with the receipts. If this is not done, those additional expenses will not be reimbursed if the tax lien is redeemed by the property owner, who will probably not send you a "thank you" card in the mail either.
So, what if the property owner pays within the twelve month redemption period?
He or she pays interest -- and a lot of it!
For up to six months, the lien holder will receive a refund equal to 110% of the minimum sale price and 10% per year of the amount that the purchase price exceeds the minimum sale price. So, on an annualized basis, the return is much, much higher than 10% if redeemed within a short period after the sale.
If redeemed after six months from the sale, the property owner must pay 115% of the minimum sale price, plus 10% per annum of the amount that the purchase price exceeded the minimum sale price.
As a person can see, the returns to the investor are very high in comparison to other traditional investments, but there are several risks, including:
*The bidder must determine what it is that he or she is actually bidding on, as it could be a property with environmental contamination, a useless strip of ground only a few feet wide and hundreds of feet long, or a parcel with other major issues. There are no guarantees or warranties, so that can be a huge risk, too, if the bidder does not do his or her homework.
*The tax lien holder does not actually own the property during the twelve month redemption period, so the tax lien holder has no right to trespass on the property. Needless to say, the owners -- or vandals in general -- can damage the property during that time.
*If the winning bidder on the tax lien fails to have the cash or financing available to him or her to pay the County Treasurer the full amount of their winning bid by the deadline on the sale date, which is usually in the afternoon of the auction, the bid is not only canceled but the bidder is subject to a penalty equal to 25% of the total amount bid.
*If the tax lien holder fails to notify the owner and those with a substantial property interest, as discussed above, the court may say, "Sorry, you just lost everything that you bid on it because you didn't follow the rules!" So, a total loss of investment is possible.
As a person can see, where there is money to be made, there is also risk. Greater returns typically involve greater risk.
If there are any morals to this story, they are: (1.) pay your property taxes on time, and (2.) if you want to invest, be sure to find a competent legal advisor with experience in this area of investing. Although this may have whetted your appetite for large investment returns, you simply cannot read just one article and prudently expect to invest without major problems.
Thursday, October 4, 2007
A Retirement Dilemma
With many wondering how long Social Security will remain in place as we know it, more than ever the question, "How much money do I need to accumulate to retire?" is a common one with several "rules of thumb" as a potential answer.
One simple answer is to accumulate $100,000 in a retirement account for each $500 that you will need to live on each month. For example, you determine that you live on $2,500 a month and want to continue your current lifestyle in retirement. In that case, using this rule of thumb, you should accumulate $500,000.
($2,500 / $500 = 5 and $100,000 X 5 = $500,000)
The theory behind this is that a 6% return on the principal amount you have invested is a sustainable rate for a well-diversified portfolio. Under this method, you will never theoretically need to spend the principal invested, but only the money it produces. This is important because whether you live until you are age 67 or 107, you will not "run out of money" if only the earnings are spent. After all, you probably don't want to be trying to find a job at age 90 because your bank account is empty.
This meets another good question, namely, "How can I accumulate such an amount of money?"
Certainly, taking advantage of employer-provided retirement plans can help, such as a 401(k) account, as many will even match funds up to a certain percentage. Traditional and Roth IRAs are also available on a personal level. (All of these provide certain tax benefits as well.)
Large amounts can be accumulated, but keeping time on your side will make all of the difference. Although unconfirmed, Albert Einstein is credited by many sources with declaring that the power of compounding interest is the most powerful force in the universe.
To illustrate, consider these three scenarios:
(1.) It would take 30 years to accumulate $500,000 if a person invested about $498 per month and received a 6% return per year on the money they invested.
(2.) If the same scenario was put into place just five years later, and the person only had 25 years to invest, it would take setting aside over $721 per month.
(3.) If the person puts off investing for an additional five years, and there is only 20 years left to invest, it would take slightly over $1,082 per month to accumulate $500,000.
Please know there are certain negative arguments made about this rule-of-thumb of $100,000 invested for every $500 per month needed, especially those questioning sustainable rates of return and future inflation considerations; however, it seems to be a very simple one to set initial goals to. Once you're on-track to achieve this, those and other issues can be considered too.
One simple answer is to accumulate $100,000 in a retirement account for each $500 that you will need to live on each month. For example, you determine that you live on $2,500 a month and want to continue your current lifestyle in retirement. In that case, using this rule of thumb, you should accumulate $500,000.
($2,500 / $500 = 5 and $100,000 X 5 = $500,000)
The theory behind this is that a 6% return on the principal amount you have invested is a sustainable rate for a well-diversified portfolio. Under this method, you will never theoretically need to spend the principal invested, but only the money it produces. This is important because whether you live until you are age 67 or 107, you will not "run out of money" if only the earnings are spent. After all, you probably don't want to be trying to find a job at age 90 because your bank account is empty.
This meets another good question, namely, "How can I accumulate such an amount of money?"
Certainly, taking advantage of employer-provided retirement plans can help, such as a 401(k) account, as many will even match funds up to a certain percentage. Traditional and Roth IRAs are also available on a personal level. (All of these provide certain tax benefits as well.)
Large amounts can be accumulated, but keeping time on your side will make all of the difference. Although unconfirmed, Albert Einstein is credited by many sources with declaring that the power of compounding interest is the most powerful force in the universe.
To illustrate, consider these three scenarios:
(1.) It would take 30 years to accumulate $500,000 if a person invested about $498 per month and received a 6% return per year on the money they invested.
(2.) If the same scenario was put into place just five years later, and the person only had 25 years to invest, it would take setting aside over $721 per month.
(3.) If the person puts off investing for an additional five years, and there is only 20 years left to invest, it would take slightly over $1,082 per month to accumulate $500,000.
Please know there are certain negative arguments made about this rule-of-thumb of $100,000 invested for every $500 per month needed, especially those questioning sustainable rates of return and future inflation considerations; however, it seems to be a very simple one to set initial goals to. Once you're on-track to achieve this, those and other issues can be considered too.
Wednesday, October 3, 2007
Has Idaho Lost Its Potatoes?
An interesting find in my change yesterday was a new 2007 Idaho quarter.
If I were to ask you what you thought would be on the Idaho quarter, what would you say? I've asked several people already, and they've all said a potato. I would have said the same.
That's incorrect though. It's a Peregrine Falcon, and I'm still trying to figure out why.
Can anyone enlighten me why this carnivorous -- sometimes even cannibalistic -- bird represents Idaho? Curious minds want to know.
UPDATE:
This bird may represent Idaho on the quarter, but it seems even those from Idaho don't necessarily approve. An online poll conducted by KTVB, an Idaho news group, indicated more than 75 percent of people who voted on the coin did not like the design.
According to this same news group, the Peregrine Falcon was picked because of Idaho's role in removing the raptor from the Endangered Species List.
Still, the potato seems like a better choice given Idaho grows more potatoes than any other U.S. region, producing about one-third of the U.S. production annually, according to the Idaho Potato Commission. The Commission also says that potatoes contribute $2.5 billion or 15% of Idaho's gross state product.
If I were to ask you what you thought would be on the Idaho quarter, what would you say? I've asked several people already, and they've all said a potato. I would have said the same.
That's incorrect though. It's a Peregrine Falcon, and I'm still trying to figure out why.
Can anyone enlighten me why this carnivorous -- sometimes even cannibalistic -- bird represents Idaho? Curious minds want to know.
UPDATE:
This bird may represent Idaho on the quarter, but it seems even those from Idaho don't necessarily approve. An online poll conducted by KTVB, an Idaho news group, indicated more than 75 percent of people who voted on the coin did not like the design.
According to this same news group, the Peregrine Falcon was picked because of Idaho's role in removing the raptor from the Endangered Species List.
Still, the potato seems like a better choice given Idaho grows more potatoes than any other U.S. region, producing about one-third of the U.S. production annually, according to the Idaho Potato Commission. The Commission also says that potatoes contribute $2.5 billion or 15% of Idaho's gross state product.
Monday, October 1, 2007
A New Twist on "Forever"
Everything we buy seems to be getting more expensive almost by the day, whether it is gasoline, a gallon of milk, a McDonald's value meal, or even first-class postage stamps. These are just some of the many items that you may have noticed have risen in price lately. With this last item, the postage stamp, something very interesting has happened recently, and it could be called the most pure marketing genius to ever come from the halls of government: the "Forever Stamp".
In May 2007, the United States Postal Service (USPS) introduced this latest innovation, which depicts an image of the Liberty Bell and the word "forever" on it. The truly unique aspect, however, is that the stamp will be good for mailing first-class letters up to one-ounce in weight anytime in the future, regardless of price changes. So, it's good for -- well -- forever!
While this may be a great marketing tool to help justify the two cent increase that went along with the rollout of this new stamp, it also could be viewed as a zero percent interest rate loan made to the post office through millions of these mini "gift certificates" that they have had printed. Sure, each is only valued at forty-one cents, but since they have printed millions upon millions of them the dollar amount becomes much more significant. Consider each person in the United States has a few lying around, while many of the stamps will either be lost or somehow destroyed, and you can see the benefits to the USPS.
But while this event marks yet another two-cent postage increase, provides a zero-percent interest loan to the postal system, and saves the USPS the hassle of printing, distributing, and selling millions of "make up" stamps (the stamps that "make up" the difference between the old postage rate and the new one) in future years when rates undoubtedly will increase again, could this new stamp and concept be good for consumers too?
Since the postage rates seem to always be rising, could this be a quirky, yet viable investment opportunity? After all, if a person can literally use them forever -- or sell them to someone else to be used in the future -- could someone reap the benefits of "postage rate inflation" by hoarding these unique stamps?
A little bit of research was necessary to answer that question, namely discovering what postage rates have been in the past and exactly when they have changed. Although "past performance is not indicative of future results" as they say in many investment disclosures, the past postage rates should tell us if we are on to something, as off-the-beaten path as this investment idea may seem.
An internet website for the Postal Regulatory Commission (http://www.prc.gov/) yielded the results we needed, which is summarized below, showing the first day the rate became available and the postage rate for the first ounce of a first-class letter:
Date:
Rate ($):
July 1, 1999
0.02
July 6, 1932
0.03
August 1, 1958
0.04
January 7, 1963
0.05
January 7, 1968
0.06
May 16, 1971
0.08
March 2, 1974
0.10
December 31, 1975
0.13
May 29, 1978
0.15
March 22, 1981
0.18
November 1, 1981
0.20
February 17, 1985
0.22
April 3, 1988
0.25
February 3, 1991
0.29
January 1, 1995
0.32
January 10, 1999
0.33
January 7, 2001
0.34
June 30, 2002
0.37
January 8, 2006
0.39
May 14, 2007
0.41
At first glance, the rate hikes appear to have grown by leaps-and-bounds, but it is important to keep in mind that although the postage rates have risen from only two cents in 1919 to forty-one cents today, the increases have occurred over roughly eighty-eight years.
Applying this to investments, if you made an investment of two cents in 1919, which ultimately returned a total of forty-one cents in 2007, the result is an annual return of less than 3.5%.
With many interest rates currently available on money market accounts and certificates of deposit currently between 4 to 5 percent -- or even slightly more -- it appears that those are much better returns than hoarding postage stamps for use or to sell in the future, yet it may make for a much less interesting dinner conversation…
In May 2007, the United States Postal Service (USPS) introduced this latest innovation, which depicts an image of the Liberty Bell and the word "forever" on it. The truly unique aspect, however, is that the stamp will be good for mailing first-class letters up to one-ounce in weight anytime in the future, regardless of price changes. So, it's good for -- well -- forever!
While this may be a great marketing tool to help justify the two cent increase that went along with the rollout of this new stamp, it also could be viewed as a zero percent interest rate loan made to the post office through millions of these mini "gift certificates" that they have had printed. Sure, each is only valued at forty-one cents, but since they have printed millions upon millions of them the dollar amount becomes much more significant. Consider each person in the United States has a few lying around, while many of the stamps will either be lost or somehow destroyed, and you can see the benefits to the USPS.
But while this event marks yet another two-cent postage increase, provides a zero-percent interest loan to the postal system, and saves the USPS the hassle of printing, distributing, and selling millions of "make up" stamps (the stamps that "make up" the difference between the old postage rate and the new one) in future years when rates undoubtedly will increase again, could this new stamp and concept be good for consumers too?
Since the postage rates seem to always be rising, could this be a quirky, yet viable investment opportunity? After all, if a person can literally use them forever -- or sell them to someone else to be used in the future -- could someone reap the benefits of "postage rate inflation" by hoarding these unique stamps?
A little bit of research was necessary to answer that question, namely discovering what postage rates have been in the past and exactly when they have changed. Although "past performance is not indicative of future results" as they say in many investment disclosures, the past postage rates should tell us if we are on to something, as off-the-beaten path as this investment idea may seem.
An internet website for the Postal Regulatory Commission (http://www.prc.gov/) yielded the results we needed, which is summarized below, showing the first day the rate became available and the postage rate for the first ounce of a first-class letter:
Date:
Rate ($):
July 1, 1999
0.02
July 6, 1932
0.03
August 1, 1958
0.04
January 7, 1963
0.05
January 7, 1968
0.06
May 16, 1971
0.08
March 2, 1974
0.10
December 31, 1975
0.13
May 29, 1978
0.15
March 22, 1981
0.18
November 1, 1981
0.20
February 17, 1985
0.22
April 3, 1988
0.25
February 3, 1991
0.29
January 1, 1995
0.32
January 10, 1999
0.33
January 7, 2001
0.34
June 30, 2002
0.37
January 8, 2006
0.39
May 14, 2007
0.41
At first glance, the rate hikes appear to have grown by leaps-and-bounds, but it is important to keep in mind that although the postage rates have risen from only two cents in 1919 to forty-one cents today, the increases have occurred over roughly eighty-eight years.
Applying this to investments, if you made an investment of two cents in 1919, which ultimately returned a total of forty-one cents in 2007, the result is an annual return of less than 3.5%.
With many interest rates currently available on money market accounts and certificates of deposit currently between 4 to 5 percent -- or even slightly more -- it appears that those are much better returns than hoarding postage stamps for use or to sell in the future, yet it may make for a much less interesting dinner conversation…
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