Archive for January, 2012

Gift-CardsNormally you should not buy gift cards for friends and family, unless you are getting an bonus or incent. Gift cards generally tend to be an insult to money. You take good old fashion money (taken virtually everywhere) and convert it into something that has less actual fair market value immediately. If you wanted to liquidate that gift card into the lower fair market value of cash, it also time and effort. Gift cards are basically scam, but of course there are times when you should think about buying them:

Reason to Buy #1. You are getting a discount, additional credit, reward for purchasing the gift card.
Most years when Chipotle is running the Buy $25 gift card, get 1 burrito for Free offer, I partake. I know that I will use $25 in a reasonable timeframe and a burrito at $6.50 is about a 26% return on your investment. If you are like me and you will end up using that gift card in less than 6 months – 26% return is unmatched.

mer_kohls_giftcard_162x105Gift cards can also offer gas incentives at many grocery stores, but be careful you are not buying gift cards that have a fair market value below the gas incentive. For instances, you can purchase Kohl’s gift cards 12% off at, so buying them to save effectively 4%-8% – is not a deal at all.

One of the most popular articles on this website is “How to Save 18.8% to 22.6% at Home Depot or Lowes,” which specifically talks about buying gift cards at their real market value can save a basic homeowner  $100s or even $1000s a year.

Reason to Buy #2. You are specifically targeting a company for a friend or family member.
Maybe you have an family member or friend that share a connection to a particular restaurant or retailer. This is an acceptable reason to buy of a gift-card, but be aware if you give a $100 gift card to Kohl’s to a girlfriend – you effectively paid $12 for that little piece of plastic (because fair market is only $88 or less). 

Let’s not overlook the fact that these retailers should be offering you incentives. Gift cards usually have non-users (people who lose or forget about balances on gift cards) that eventually result in profits for those companies. Also the time value of money comes into a play when you find out the average gift card holder of xyz company holds their card for <x> number of days, weeks, months, years; on average before use. If that company is borrowing at 7% and they get $50 million in gift card sales, they have a lot of cash on hand they potentially do not have to finance. And finally, for most people –your consumption will increase if you hold a gift card and if someone wanted a statistical advantage against me to cause me to consume more – I want a REAL incentive for them to get that advantage.

Making extra payments on your mortgage? Is prepaying your mortgage the right move? Do you save any money when you prepay?

I am not talking about “paying down your mortgage.” I am talking about prepaying your due payments for your mortgage. For example it is currently January and I’m talking about prepaying  for March – December. Why would I want to do this? Simple – Save money.

Example: You have loan for $100,000 @ 4% – and let’s assume your payment is $740 a month (15 year). You prepay an 10 months of payments (rest of 2012) – then stop paying for this year.

Monthly interest rate: Roughly .328%

You gave your December payment 10 months early,
You gave your November payment 9 months early,
You gave your October payment 8 months early,

It is my opinion that since you have effectively given that money in advance,  you should not pay interest on that lump sum you handed over. It is my belief that the balance of the loan should go down by $740 for each payment and you should be mark as “completed for payment” for the months you paid in the bank’s system.  So I believe it should works  as follows:

You prepay 10 months (March – December) of $740 on your $100,000 loan. No payments are due for the rest of the year and the balance INSTANTLY becomes:  $92,600.

You then accrue interest on that loan,  building your balance back up. Chart below shows.

How Mortgage Prepayment Should Work

Leaving your balance at $95,682.50 for the year (numbers are rough because of percentage is not 100% accurate, but you get the idea).

Sadly this is not how most banks treat this action of prepayment.

Total InterestBank’s will usually hold your payments INTEREST FREE until time of payment. Effectively they hold your money, earn interest, and make the payments when you normally would have made without prepayment. So much how much interest are they taking from you? Look at the chart to the right. $134.82 that the bank effectively steals from you from not adopting the logical way of applying the payments.

Now your balance would be $95,817.32 (+$134.82) instead of $95,682.50.

I recently called my personal bank to which the representative was fairly certain the money was held interest-free. I will also contact them a second time to see if I can make special arrangements.

Why does this matter? If your mortgage is properly setup, you can use your mortgage as sort of like a CD. You give the bank an extra $7400 and they give you back $134.82 for holding your money. If you always kept a 12 month prepayment on this loan above (when one is used, you replace) you would net roughly $296.57 every single year! Who’s saving’s account or CD is paying 4% yearly (or higher if your loan is on a higher interest rate).

Why is it “sort of like a CD?” Because you can stop prepaying and you get your money back over time. Sure with a  CD you can get the entire lump sum back, but it also has penalty.  With this method it would take you how ever many months you have prepaid to get back 100% of your money, but penalty free. Now I know the first comment or thought is this – “My interest is deductible” and I agree that if your itemizing, then this would only net you ( 1 – [margin tax rate] ) * interest saved, but this example of only a loan of $100k – so you might not be itemizing. Plus as you continue to pay your mortgage there will come a point where you suddenly start taking the standard deduction (most likely – and hopefully).

Just so we are clear with all of this – You are not giving the bank a dollar more, just allowing them to hold your money. If you have a fairly large sum in your savings/checking –why wouldn’t you take a little extra free money?

It is sad that most banks do not operate in a way that pays you for prepaying your mortgage and I think there is a real market for people who are looking for higher guaranteed return on their money. I understand there are complications with what I am proposing though – big ones. If you prepaid 50 payments on your mortgage and when to take out a Home Equity Line of Credit (HELOC) your balance would be artificially low. Suddenly your mortgage would be $37,000 smaller, allowing you to borrow too much and effectively cause a reverse amortization of your loan as the interest accrues. Simple solution to that, add back in prepayments for the balance used for calculating the HELOC.

Looks like I need to start a bank.

Netflix Stock SoarsNetflix added almost a million subscribers this quarter (990k to be exact), while increasing their fees by almost 60%. Those two factors combined to send Netflix up over 20% on the market today.  This of course coming a day after I post that the stock burned my personal portfolio when I sold out a while back.  Hindsight is 20/20.

Can Netflix really return to it’s glory days? Well that comes down to their international expansion and competition. The biggest threat to Netflix – Amazon.

Amazon has yet to become serious about taking a stance against Netflix, but it is very possible in the near future. I for one welcome Amazon’s competition. My personally feeling about all of this is – Red box can rent you a movie for around $1, why can’t I pay $2 to stream it? It’s surely worth $1 extra to save the gas and hassle and it must be worth them to sell the rights for more than they are getting with Redbox.

Speaking of Redbox – If they are located near you (when I say near, I mean about a mile or less), you can get a lot of movies for the price of a Netflix subscription.

Regardless, I applaud Netflix in seeing the future, which is streaming content. I’m not saying that they are going to win the streaming battle, but Reed Hastings and crew (along with most people with IQ above 110) know that their DVD service will not make a long-term thriving company. In the end I think the content will decide who wins, and competition between Amazon and Netflix might result in some pretty nice deals for consumers. More to come.

netflix stock

Personal Portfolio Update Janurary 2012

Occasionally I like to give updates of my current investments. Since I last updated, I took a large hit from Netflix. I sold out after feeling the pain and of course it rebounded. As it stands now I have $6,000 in my brokerage account which is –$640 since November.

Sure if I would have held Netflix I would have probably been up at least $1,000 or more, but the Netflix was showing some weakness and I didn’t feel comfortable with holding it as an investment. I stand by my decision to sell Netflix and you can be certain I’ll be avoiding this stock. On the bright-side I closed out before the end of the year for tax purposes.

Now let’s get to what I am currently holding.

Amazon (AMZN)– Option – Call $180, Expiration Jan 19th, 2013 — Quantity: 1
NVIDIA (NVDA) – Option – Call $10, Expiration Jan 19th, 2013 — Quantity: 1
Sprint (S) – Option – Call $1, Expiration Jan 19th, 2013 – Quantity: 10
Cash: Roughly $1000.

Amazon (AMZN), Current Price: $187.80 Amazon has a P/E of a shocking roughly 98. So why would I invest in it? Because I believe amazon is an industry leader and when the economy recovers, this stock is going to go crazy in my opinion (it has a BETA of 1.01 by the way). I don’t have the stats, but I have to believe that amazon is hitting a homerun with age groups 18-35, and I think over time this stock will continue to pull more people into it’s amazing “amazon prime” program. I can see Amazon’s P/E quickly turning into about 30-50 by mid 2013 (this is entirely speculation). Long and short though – I see a booming future for this company.


NVIDIA (NVDA), Current Price: $14.85
NVIDIA has been in a decline for the last year and is far off it’s 52 week high of roughly $26 a share, but it’s P/E is only 13.75 and to me that says “bargain.”  I think this stock could easily hit $20 or a more by the end of this year. I also think as a consumer, NVIDIA is a company that is here to stay.


Sprint (S), Current Price $2.20:
Here comes the hard one to defend. Sprint has a EPS of –$.84 and lost $301 million in 3rd Quarter 2011. That being said it lost $847 million the quarter before and close to a billion 2 out of the 3 quarters before that. All this company has to do is become profitable again, and this stock will be ridiculously underpriced. Could this company go under? Yes. Could the company turn things around with the iPhone – Yes. Sprint has three things going for it right now which are the iPhone, unlimited data, and being the best price. I personally use sprint and I noticed they out sourced a lot of their support lines – but if it helps get them in the black, I’m fine with the hassle. Will customers get mad and leave? Doubtful since most of them are like me – in search of the cheapest smartphone plan.


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