Merry Christmas

I'm taking the week off to celebrate Christmas. I wish you all a very merry one.

Paying Less for Books: Part 2 – Money Saving Tactics

I am a bibliophile. I prefer holding a book in my hand while I read. I like to own books. I like to look at them on my shelves and recall their main points or stories.

Because it’s important to minimize the cost of the books I buy, I’ve developed a strategy and tactics to substantially reduce the price I pay. The strategy is patience. I put books I’m interested in on a list and wait.

Several good tactics are based on the strategy of patience.

First:
As time passes I validate my interest in the books on my list. About half of them I eventually delete from the list without buying; I’ve lost interest in them or my interest is insufficient to justify the money or the time to read them

Second:
I wait for the mass-market paperback edition. I use this tactic for most of the novels on my list. A typical hardback novel lists for around $30. The mass-market paperback typically lists for around $8.

Third:
I have a Barnes & Noble membership providing a 10% minimum discount on any B&N paperback or a 20% minimum discount on hardbacks. As a member, Barnes & Noble sends me a discount coupon at least once a month for an additional discount on anything in the store. The additional discount ranges from 10% to 25% with 15% discount coupons being normal.

The B&N discounts are cumulative not additive. That is, they take the 10% membership discount and then they take the 15% coupon discount on the balance; instead of adding the 10% and 15% coupons and taking a 25% discount once. This process reduces the total savings, but it’s still a good deal.

Fourth:
I shop the remainders. Book sellers, including B&N, deeply discount books that fail to meet their sales expectations or to make room on their shelves for newer issues. Sometimes, books on my list show up on the discount displays. When they do I snap them up and still take the 10% B&N membership discount. On those occasions when I buy books on impulse, they’re almost always on the discount shelves.

Fifth:
I shop the used books on Amazon.com. When the mass-market paperback edition is published, the remaining hardbacks are discounted, especially by the used book sellers on Amazon. Even with a $4 typical shipping & handling fee, the total discounted cost of used books on Amazon often drops below the $8 price of the paperback edition. I’ve bought several books at a discounted price of $0.01 plus the $4 shipping & handling.

The combination of these tactics – based on the strategy of patience – enables me to buy the books that I really want without busting the budget.

Link to Other Topics in the Special Report: Cutting Expenses

Paying Less for Books: Part 1 – Patience and Making a List

I am a bibliophile. I read – a lot. And I prefer holding a book in my hand while I read. Oh, I read email and email newsletters and articles and blogs on the internet. But, when I hold a good book in my hands my attention span is much better than when I read from a computer screen.

I like to own books. I like to look at them on my book shelves and recall their main points or their stories. Because I like to own books it’s important for me to minimize their cost and so, I’ve developed a strategy that substantially reduces the price I pay for most books.

The key to my strategy for paying less for books is patience. I rarely buy books impulsively. I keep a list of desirable books on my pocket computer with a duplicate of the list set up as a “Wish List” in Amazon.

When I discover a book I’m interested in I add the title and author to my list. Then I wait. Right now my list contains 83 titles; evenly split between fiction and non-fiction.

The easiest way the list saves me money is when, after some time has past, I realize that a particular title doesn’t interest nearly as much anymore. It no longer seems worth the money to buy it or the time required to read it. And so, I delete it from my list.

This is the ultimate fate of half of the books I capture on my “Wish List”.

The passing of time also permits other money-saving tactics to come to fruition. Tactics to be discussed in future posts.

Link to Other Topics in the Special Report: Cutting Expenses

Covered Call Options: Part 3 – How to Analyze a Covered Call Option

Writing a covered call option is the least mysterious and arcane black magic technique of options investing. It’s simple enough that I’ve done it myself and made a few bucks.

My analysis for writing (selling) a covered call goes like this:

1. Select a stock with at least 100 shares in my portfolio that has active options trading; for example Southern Copper – ticker symbol PCU.

2. Determine the minimum price I would be willing to sell PCU if my covered call is exercised.

3. Go to my on-line broker’s web site and look up the “options chain” for the stock – PCU.

4. Choose a selection of PCU call options at acceptable striking prices and several expiration dates (near term, three months out, and six months out).

5. Get the price quotes (bid price or last price paid) for each option.

6. Calculate the profitability of each option applying my broker’s option commission structure. I use an Excel spreadsheet for this analysis.

7. Choose the most profitable option in the selection.

8. Final gut check on the striking price and the price for which I’m willing to sell the option.

9. If I decide to set a price for my covered call option different from the price quotes used in my analysis then plug my price into my analysis model to check its profit.

10. Place the trade order thru my on-line broker.

After that, you wait for the call to sell. If it sells, you wait for it to expire or be exercised. If it expires, you can start the process over and sell another call. If it’s exercised then you have just sold your stock at the option striking price.

After you place the sell order for the covered call you will either sell the call earning the exact profit you calculated or you will not sell the call - you will have lost or gained nothing.

If you sell the call the only risk you take is the possibility of having to sell your stock for a price less than the market price at the time the call is exercised. If you chose a striking price that gives you an acceptable return then the worst case is you miss making a bonus profit on the sale of the stock.

Here is an analysis of a real selection of PCU call options:

My broker’s commission structure is as follows. A $9.20 commission is charged per trade or transaction. In addition, $0.75 is charged for each contract. In this example all of the potential trades analyzed are for one contract so the total commission in each case is $9.95.

The price is the price per share so 100 shares at $0.65 per share is $65.00 – this is the amount the buyer will pay me for selling the PCU AH call. $65 less the $9.95 commission yields my profit of $55.05. If the market price rises above the $40 striking price per share then the option would probably get exercised. Since my current cost basis (the average price I paid for my PCU shares) is $21.04 per share, I stand to make a profit of $18.96 per share or $1,896 for my 100 shares - less my broker’s commission on the stock sale of $5.95.

I chose these specific call options because their striking prices are above the current $36.40 market price for PCU and, since I’m not really interested in selling my PCU shares, I want to reduce the probability of being forced to sell the stock. I also want to ensure that if I’m forced to sell I get a price I’ll be happy with.

The number of contracts offered makes a difference to the profitability of covered calls because of the option commission structure. The same analysis is shown below using four contracts per transaction.
On the PCU AI call you see the difference in profitability due to the increased number of contracts. When one contract is sold the profit is $0.05 but when four contracts are sold the profit jumps to $27.80 – considerably more than four times the original profit.

You also see that a more profitable single contract is less affected by the commission structure when the number of contracts increases.

Another consideration is the expiration date. The more time allowed before the expiration date the higher the probability the stock price will rise above the striking price. Of course, if the stock goes down the option will expire. If you want to sell the underlying stock before the option expires, you will need to buy the option back at the current market price.

Writing covered call options allows you to lock in a profit with the risk of possibly missing out on some bonus profit if the underlying stock goes up above the option striking price.

Links to Other Topics in the Special Report: Covered Call Options

Covered Call Options: Part 2 - Definitions of Option Terms

Covered Call Options: Part 2 – Definitions of Option Terms

Options are mysterious and arcane - the black magic of investing – primarily because they have their own language. The language of stocks and bonds is more than most people want to try to master. Options seem to be a completely different language – not a mere dialect of investing but something completely different. As such, they are intimidating.

I’m not an expert investor – let alone an expert options trader. But I’ve dabbled in the covered call enough to understand the basics; and, enough to want to learn more.

So, here is a short vocabulary in options – enough, I hope, to let you make an informed decision about the usefulness of covered call options to your personal investing.


Option (or options contract, or contract)
A binding contract in which one person promises to sell and deliver to another person 100 shares of the common stock of a specific company for a specific selling price. The contract is valid for a specific period of time and after the designated end date the contract is void. The buyer of the contract is not required to exercise his rights under the contract but the seller of the contract is required to deliver as agreed if the buyer exercises the contract.

Expiration Date
The expiration date is the specific date on which the options contract will become void. The buyer of the contract must exercise his rights under the contract before the expiration date because on the expiration date he loses those rights. All options contracts have an expiration date.

Underlying Stock
The underlying stock is the 100 shares of the specific company for which promises to buy or sell are made in the options contract. All options contracts have underlying stock.

Striking Price (or strike price)
The striking price of the options contract is the price at which the underlying stock will change ownership if the options contract is exercised. All options contracts have a striking price.

Call (or call option, or call contract, or call options contract)
A call option is an options contract in which the seller of the option promises to sell the underlying stock to the buyer of the option.

Put (or put option, or put contract, or put options contract)
A put option is an options contract in which the seller of the option promises to buy the underlying stock from the buyer of the option.

Covered Call (or covered call option, or covered call contract)
A covered call is an options contract in which the seller of the call option actually owns at least 100 shares of the underlying stock.

Naked Call (or uncovered call)
A naked call is an options contract in which the seller of the call does not own at least 100 shares of the underlying stock. If the options contract is exercised, the seller of the call must buy shares of the underlying stock in order to deliver them to the buyer of the call option – and yes, people actually do this.


These are the definitions you will need to understand the covered call. Using these definitions, the next post will review how to analyze a potential covered call to determine if you can expect to make money on the trade.

Links to Other Topics in the Special Report: Covered Call Options

Special Report: Covered Call Options

Links to Other Topics in the Special Report: Covered Call Options

Covered Call Options: Part 1 - What Are Covered Call Options?
Covered Call Options: Part 2 - Definitions of Option Terms
Covered Call Options: Part 3 - How to Analyze a Covered Call Option

Covered Call Options: Part 1 – What Are Covered Call Options?

Options are mysterious and arcane. They’re the black magic of investing. Few understand them and fewer make money with them. But there is one straight-forward class of options and the way to use them to make money is clear – writing covered calls.

Writing a covered call means selling to someone else an option to buy your stock. A single covered call options contract gives the buyer the right to purchase 100 shares of your stock in the specified company (the underlying stock).

Since not all stocks have options contracts, the first requirement to sell (or write) a covered call option is that you must own at least 100 shares of a stock for which options are traded. So check with your broker to see if options are traded for your stock.

When you have at least 100 shares of a stock that has options trading, your next task is to determine your broker’s commission structure for writing covered call options contracts. My broker charges a flat rate per transaction plus a surcharge for each 100 share contract in the trade. This has the effect of reducing the cost per contract on multiple contract transactions. I have only used one broker for selling covered calls so I don’t know if this commission structure is standard. In any case, you need to determine exactly what your broker will charge.

The commission structure is very important because the prices of options contracts vary all over the place and you want to be sure that when you sell your covered call you make enough money on the sale to pay the commission and a profit large enough to make it worth the trouble

The next post will review some basic options definitions.

Links to Other Topics in the Special Report: Covered Call Options

Flexible Spending Accounts: Part 2 – Calculating a Safe Contribution

If you aren’t participating in your Flexible Spending Account, you’re literally giving money to the Internal Revenue Service unnecessarily. Still, if you go overboard on your contributions you can lose money

Start calculating a “safe” flexible spending account contribution by listing everything you spent out of pocket on health care last year. Capture the description and out of pocket expenditure for each line item. Classify each item as covered or not covered and repeatable or not repeatable.

Example Expense List:

Annual physical exam; $25; covered; repeatable
Blood work for physical exam; $25; covered repeatable
Semi-annual dental exam; $30; covered; repeatable
Emergency room; $150; covered; not repeatable
Aspirin; $12; covered; repeatable
Multivitamins; $10; not covered; repeatable
Band-Aids; $4, covered, repeatable
Nail Clippers; $3; not covered; not repeatable
Wrist Brace; $7; covered; not repeatable
Shampoo; $4; not covered; repeatable

Covered expenses include co-pays for medical, dental, and vision office visits, lab work and tests, and any hospitalization or emergency medical expenses. Out of pocket expenses for prescription and over-the-counter medications are covered as are prescription and over-the-counter medical devices and supplies.

In general, if you incur the expense to heal, cure, or control pain then it’s probably covered. If it’s a “wellness” expense - like vitamins, food supplements, or exercise equipment - it’s probably not covered unless your doctor wrote a prescription ordering you to incur the expense.

Total the annual amount twice – once with all covered expenses and once with only those covered expenses that are repeatable.

Example (using the Expenses List):

Total of all covered items = (25+30+150+12+4+7) = $228
Total of covered & repeatable items = (25+30+12+4) = $71

Odds are good that your list will be much longer and the totals much higher than the example– but let’s continue to use the Example List.

Next, you need to know your approximate income tax rate. You can calculate an estimate of your income tax rate from last year’s Form 1040. Look up your actual tax paid and your adjusted gross income from your Form 1040.

Example Form 1040 Information:

Tax Paid = $10,000
Adjusted Gross Income = $40,000

Then divide the Tax Paid by the Adjusted Gross Income ($10,000/$40,000 = 0.25) then multiply by 100 to convert the result to a percentage (0.25 * 100 = 25%)

Example Income Tax Rate = 25%

Example “Safe” Contribution:

If you now divide the Total of covered & repeatable items ($71) by your Income Tax Rate subtracted from one (1 – 0.25 = 0.75); so $71 divided by 0.75 = $95. The result ($95) is the amount greater than the covered repeatable amount that you can contribute with nearly complete safety.

It is likely that there will also be covered non-repeatable expenses in the coming year and taking a conservative guess at them will allow you to increase the safe contribution. You may even plan non-repeatable expenses; for example, the purchase of glasses or perhaps laser eye surgery. The cost of planned expenses can be directly added to the safe contribution figure.

Once you have a year or two of experience using your flexible spending account you can simply adjust your contribution up or down based on experience.

There’s really no excuse for not getting started.

Link to Other Topics in the Special Report: Cutting Expenses

Flexible Spending Accounts: Part 1 – Saving Money with Flexible Spending

If your employer offers a flexible spending account, and you aren’t using it, you’re literally giving money to the Internal Revenue Service unnecessarily.

Many employers offer flexible spending accounts in their benefits package. These accounts are structured by federal law to allow payment of most medical-related bills using “before tax” money.

Unfortunately, the law creating flexible spending accounts also requires money that is left in the account at the end of the benefit year to be forfeited by the employee. This feature scares off many would-be flexible spending account participants. They’re afraid of losing money.

There’s really no excuse for the law to require the forfeiture of excess money. Any reasonable person would allow the excess to roll over into the next benefit year.

Nevertheless, even if you don’t spend all the money in your flexible spending account you can still save money overall depending on your income tax rate.

For example, if your income tax rate is 30% and you contribute $1,000 to a flexible spending account; the $1,000 contribution in subtracted from your gross wages before tax is applied. Since your taxable income is $1,000 less, your income tax will be $300 less (30% of $1,000).

So, by contributing $1,000 to your flexible spending account you save $300 on your income tax return. If you end the benefit year having used only $800 leaving $200 forfeited in the account – you’ve still saved $100 net. The tax reduction gives you a fair amount of flexibility that increases as your tax rate increases.

If you contribute $1,000 and:

1. Your income tax rate is 35% then you have a net savings from your flexible spending account as long as the forfeited amount is less than $350.

2. Your income tax rate is 25% then you have a net savings from your flexible spending account as long as the forfeited amount is less than $250.

3. Your income tax rate is 15% then you have a net savings from your flexible spending account as long as the forfeited amount is less than $150.

4. Your income tax rate is 0% then you have no net savings under any circumstances.

Still, if you contribute $2,000 to a flexible spending account but have only $800 in qualified medical expenses then you have a net loss of $600 ($1,200 forfeited less $600 tax savings assuming a 30% tax rate); a very undesirable outcome.

Flexible spending accounts are an easy way to save money on your income taxes – even if you forfeit a smaller amount at the end of the benefit year.

The topic of the next post will be calculating a “safe” annual contribution to your flexible spending account.

Link to Other Topics in the Special Report: Cutting Expenses

Structuring Your Simple Portfolio: Part 5 – Simplicity in Rebalancing

Simplicity is the key to your success in investing to achieve a comfortable retirement without becoming a financial expert.

1. Simplicity in investment portfolio
2. Simplicity in account types
3. Simplicity in making account contributions
4. Simplicity in increasing annual contributions over time
5. Simplicity in rebalancing your portfolio

Simplicity in investment portfolio and simplicity in account types were discussed in Part 2 of this series. Simplicity in making account contributions were discussed in Part 3. Simplicity in increasing contributions was discussed in Part 4; and next up – simplicity in rebalancing your portfolio.


5. Simplicity in Rebalancing Your Portfolio

Target Year Mutual Fund
If your simple portfolio consists of one Target Year Mutual Fund, rebalancing your portfolio is as simple as it can get – you simply don’t do it. The managers of the Target Year Mutual Fund handle the asset allocation and rebalancing for you.

They take into account the number of years remaining until your fund’s target date by gradually increasing the percentage of bonds and decreasing the percentage of stocks held by the fund. All you have to do is keep adding new money to the account.

An Equity Fund and a Bond Fund
If your simple portfolio consists of an Equity Fund and a Bond Fund, rebalancing is a task you should do periodically.

In Part 2 of this series, I suggested an allocation of 60% to your Equity Fund and 40% to your Bond Fund. This is a very conservative asset allocation and if you use it you may choose to keep this allocation permanently.

Set up an annual rebalancing time. For example, rebalance your portfolio every year immediately after your birthday or immediately after Labor Day. It doesn’t matter what date you choose except that you should commit to a date and actually do the rebalancing on schedule year after year after year.

To do the rebalance simply:
1. Determine the value of both of your funds and their combined total value.

2. Calculate the percentage of the total represented by each fund.

3. Calculate the excess value in the fund that exceeds the target percentage.

4. Exchange the excess value into the fund that is below the target percentage.

Example:
1. Your scheduled rebalancing date is the day after Labor Day (no one knows why you chose that date). On that day your 401k account says that your Equity Fund is worth $35,000, your Bond fund is worth 30,000, and the total value of the 401k is $65,000.

2. $35,000 is 53.85% of $65,000 against your target asset allocation for the Equity Fund of 60%.

3. $30,000 is 46.15% of $65,000 against your target allocation for the Bond Fund of 40%.

4. 46.15% is 6.15% greater than your Bond Fund target allocation.

5. 6.15% of $65,000 is $4,000.

6. Move (exchange) $4,000 from your Bond Fund to your Equity Fund.

7. After rebalancing, you have $39,000 in your Equity Fund (60% of $65,000) and $26,000 in your Bond Fund (40% of $65,000).

8. That’s it – you’re done for this year. Do it again the day after Labor Day next year.

Investing for your retirement can be simple. In this series, we’ve explored two of the very simplest portfolio structures. If you have no interest in learning more about investing or no time to devote to such study, these simple portfolios will do an adequate job of accumulating a comfortable retirement nest egg over twenty or more years depending on your annual contribution amounts.

The sooner you get started, and the more you contribute each year, the better your results will be.

Link to Other Topics in the Special Report: Structuring Your Simple Portfolio