Hacking the Bank - A Personal Finance Blog

Facebook IPO: Investment or Hype?

If you follow the market at all, then you know that the Facebook IPO is today. Originally set to open between $28 and $35, Facebook (Ticker: FB) will actually open by selling 421 million shares at $38 per share. This means that Facebook will be raising a total of $16 billion and will give it a total value of over $100 billion since it’s not selling all of its shares. In comparison, when Google has its IPO in 2004, it only raised $1.67 billion.

Because Facebook is integrated into so many of our lives, it’s easy to see why there would be a lot of hype amongst investors. That fact, coupled with the normal frenzy that can accompany a “hot” tech IPO, and I suspect there’s danger lurking around the corner. Zynga and Groupon, both of which went public last year, are trading below their initial share prices. Facebook will also be debuting at a steep PE ratio (price-to-earning ratio) of 100. That definitely puts it at the top of the heap, which means it will require large growth to achieve the profits that are expected of it. However, this doesn’t necessarily mean it’s priced too high. Amazon has a $100B market cap also, and it trades at a P/E of 179.

If you remember IPOs of the late 1990s and early 2000s, then you’ll probably recognize that this IPO isn’t following the same hype-generating recipe. During these IPOs, companies underpriced initial offerings to build hype and see a significant “pop” in their share price. But this isn’t just an old play. Zillow popped by 79% and LinkedIn by 109%.

While I don’t give investment advice, I don’t think this is an IPO where you’re going to see a significant pop. However, if you do decide to buy today, and you do see a significant pop, I’d definitely consider selling and locking in those gains. If you want some non-investment perspective on the IPO, check out Forbes’ 10 reflections on Facebook’s IPO.

How a Second Grader Beats Wall Street Review

Written by Will · Leave a Comment

I read it a while ago, but I figured it’s about time I posted my review of Allan Roth’s How a Second Grader Beats Wall Street. The premise of the book is that investing is so simple that a second grader can understand it. Also, not only can a second grader understand it, but adults often mess things up because they’re tricked by Wall Street into making complex and risky investment decisions.

In general, Wall Street makes its money when people invest in risky or complex ways. Investors who buy individual stocks and constantly buy and sell help fuel the profits of Wall Street. Wall Street leads us to believe that investing is rocket-science, and without their guidance we will fail. Allan Roth urges the reader to “cut through the baloney that Wall Street wants us to believe and return to basic simplicity.”

Simply put, How a Second Grader Beats Wall Street proposes investing in a very simple portfolio of index funds. Small tweaks can then be made to this portfolio to fit personal circumstances. Emphasis on the “small”. The main reasons that Allan Roth lays our for his approach are:

You can’t predict what the stock market is going to do over the short-term.
If the people on Wall Street knew how to make guaranteed money, why would they tell you? They would just do it themselves over and over with their own money.
Fees significantly impact your long-term returns in a negative way.
Most people don’t construct their portfolio in a tax-efficient way.

To keep things very simple, the Second Grader portfolio is constructed using only three index funds. They’re all Vanguard index funds due to the low-fee philosophy than Vanguard pioneered and continues to follow. These three index funds are:

Vanguard Total Bond Market Index Fund (VBMFX)
Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)

How a Second Grader Beats Wall Street Review Roth explains his reasons for picking these specific index funds, and in Chapter 5 he goes over the statistics of why this portfolio outperforms the market. I actually keep a very similar allocation in my Roth IRA. I use the three index funds that Allan Roth proposed, and I additionally index in the Vanguard REIT Index Fund (VGSIX) to invest in real estate.

If you’re new to investing and are exploring asset allocations and simplified portfolios, then this is a great book to check out. If you’re an advanced investor who has read at least five other asset allocation books, then this book won’t provide you much except for reconfirming what you already know. However, whether you’re a new investor or a long-time investor, the book is still entertaining and the slant taken is engaging.

The Average American Household Credit Card Debt

Written by Will · Leave a Comment

When economic times are good, statistics like the average household credit card debt aren’t as interesting. People are employed and they’re able to get loans for just about anything they want. When the economy goes sour, that’s when consumers and policy makers alike become more concerned with data on the financial health of Americans. Luckily for us, the U.S. government is always compiling economic data to help influence policy decisions. Unfortunately, there is almost always a large lag between the period in which the data is collected, and when it’s released. To find out the hard data compiled on the average household credit card debt, I went directly to the Federal Reserve’s 2007 Survey of Consumer Finances and 2009 Survey of Consumer Finances Follow-up. The 2007 Survey is the normal survey conducted every three years, which was the source for most of the information posted below. The 2009 Survey was a follow-up that re-interviewed the original 2007 participants to see how their finances changed between 2007 and 2009.

General Debt of American Households
Average Household Credit Card Debt In 2007, the Survey of Consumer Finances reported that 77% of American families had some type of debt. I find debt to be interesting because its highest use is the middle class. The poorest families, below the 20th percentile of income, were least likely to have debt. Of these families, 52.6% held any form of debt, and only 28.8% had credit card debt. This stems from the fact that people in this income bracket are the least credit-worthy. Families with incomes in the 90th percentile are the second least likely to carry credit card debt, at 38.5% of families.

Average American Household Credit Card Debt
In 2007, the average American household that held credit card debt was $7,300. It’s clear that the credit card balances of some families is quite high because the median balance for families with credit card debt is $3,000. That means there are families with significant amounts of credit card debt that bring up that average. Balances held by high-income families, childless couples, and families headed by someone who is self-employed increased the most.

Average Credit Card Balance
In its 2007 Survey, the Federal Reserve found that 73% of families had a credit card. This statistics surprised me, because it means that 27% of American do not have a credit card. I’m guessing this 27% is composed of poor people who do not qualify, and Dave Ramsey fans who have cut theirs up. The Federal Reserve also found that 46% of families held credit card debt.

Average Credit Card Limit and Interest Rate
The median number of credit cards held by families in 2007 was two. That’s a far-cry from my wallet-busting 10+. However, two is probably all that someone genuinely needs. The median credit limit was $18,000, which means some people have some very high credit limits. I’m sure that the median limit has fallen since 2007. The median interest rate on the card with the highest balance (or newest card, if no balances) was 12.5%.

Overall this data is interesting, but there isn’t anything terribly shocking. I was surprised at the fact that the median credit card debt by those carrying a balance was only $3k. I guess Americans are more responsible than common media might lead us to believe. Good for us.

(Photo: 401K)

Costs of Raising a Child “Soaring”?

Written by Will · Leave a Comment

I recently saw on from CNBC article on Yahoo that was interesting for a variety of reasons. The article was written because the Department of Agriculture recently revealed that a middle-income family raising a child born in 2010 can expect to spend approximately $227k (in today’s dollars) for food, housing, and other living expenses. And this number doesn’t even factor in college or pregnancies.

The whole idea isn’t to scare you into not having children. Although, which such a high price tag, that may be some people’s first reaction. However, the high cost of raising children is absolutely something that should be understood. I don’t think that you should make decisions about children based on money, but I strongly believe that you should have a plan for a first couple of years of parenthood if you plan on having children. An emergency fund should be built for any complications, space requirements in the house and cars should be assessed, and determinations about careers and employment will need to be made.

Costs of Raising a Child Also staggering were the differences in lifestyle inflation based on incomes of the parents. It may sound obvious, but upper-middle-class families spent significantly more raising their children than less-well-off families. The USA report reveals that a family earning less than $57,600 would expect to spend $163k on a child; while parents earning more than $99,730 should expect to spend about $377k raising a child. Parents with incomes between those two levels spent $226k per child. I think we can assume that $163k covers the essentials, so parents earning more than $99,600 per year are spending $200k on non-essentials (trips to the movies, eating out, etc.).

However, what I found most interesting about this article, was that the author didn’t take the slant of “the costs of raising a child are very high”, but that “the costs of raising a child are soaring!” The article is titled The Inflation of Life – Cost of Raising a Child Has Soared, which one would usually take to indicate that the costs have increased at a pace greater than what was expected. The author states that “the cost of raising a child from birth to age 17 has surged 25 percent over the last 10 years.” I think that a 25% increase over 10 years is hardly a surge. That’s a compounded rate of approximately 2.3% per year, which is abut what someone should expect due to inflationary increases in food, medical, and other needs. It’s actually probably lower than I would have expected overall due to surging costs in healthcare, which I would imagine a child needs a decent amount of.

Whether you’re planning for children or simply interested in how the media sometimes sounds the alarm inappropriately, I think the article is interesting so I wanted to post it. If you’ve been thinking of having a child, does the high price tag give you pause?

(Photo courtesy of Flickr)

Personal Balance Sheet – April 2012

Written by Will · Leave a Comment

When it rains, occasionally it pours. Nope; it doesn’t always pour when it rains. But sometimes it does. And April was one of those times. Luckily, April showers bring May flowers, right? Okay, enough of the sayings because I’m beginning to confuse myself. Let’s start over…

April was a tough month financially. I moved into a new place, mostly in an effort to get a yard for my dog since I was previously in an apartment. Maybe I should add these expenses to the costs of raising a puppy. However, I’d be lying if I said that was the only reason. We also now have a washer & dryer (which we paid for) and a lovely patio (which we had to buy furniture for). The costs of buying new items for our apartment, as well as the double-rent we paid for half of the month, hit my finances a bit and caused me to make no progress in my balance sheet for the month of April. I also wasn’t able to keep up my savings pace in all areas. But I’m not worried at all. I knew the expenses were coming and I was prepared. Not a big deal. I’ll bounce back in May.

Personal Finance Balance Sheet April 2012

One positive thing that did happen is that I was finally able to open a Roth 401(k) at work. This essentially allows me to bypass the deposit limits of my normal Roth IRA account. I am contributing $250 per paycheck to this account. With my increased contribution and the $100 additional withholding I have signed myself up for, my cash flow from my job has definitely taken a hit. I’m going to need to make sure my side business keeps contributing to my bottom line.

Blog Related
I didn’t quite make my goal of five posts this month, but I made a couple of posts I’d been wanting to. I finally posted a Warby Parker review update and also a Plastic Jungle review based on my experience buying and selling. More interestingly, I posted a quick article on the S&P 500 breaking even, which surprised me. Lastly, I published my list of the best used cars under $8,000 as a follow-up to my popular list of the best used cars under $10,000. Hopefully there’s a little something in there for everyone.

Personal
With the move and work I didn’t spend the time necessary to continue to lose weight. I gained two pounds. Losing weight takes dedication, and I wasn’t dedicated during the month.