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Compensating Balance

While at work, I listen to podcasts to help pass the time, and I've been listening to two different programs which discuss financial matters. Recently I've noticed a drastic difference between their basic philosophy on money. One program is all about eliminating debt. His strategy is reduce your budget as much as possible, save $1000 for an emergency, then begin paying off debts from smallest to largest using every penny you can. When you pay off one, you use the payments you were paying to it to start on the next debt, continuing until you have no debt except the house. This makes a lot of sense to me, but the more I begin to think about it, the other guys philosophy makes a lot of sense as well. He used the term "compensating balance" yesterday and it got me thinking. His approach is to weigh all your debts/investments by rate of return. So, if for instance you had 30k left to pay on your home loan which is at 6%, and you recieved a 30k inheritance, you would instead of paying off the house, put the 30k in an investment which will make more than 6%, and come out ahead, while always keeping that 30k seperate in case you needed to pay off your house. Now of course the one issue here is that most investments that would make over 6% tend to have risk involved, so there is a chance that you could lose the initial 30k. He is saying that having the 30k in another account is essentially the same as having the house payed off, because you are gaining interest overall instead of paying interest, making the 30k a compensating balance for what you owe on the house. Also if you do deductions on your taxes the overall rate you are paying on a 6% homeloan could be around 4% making a better investment even easier to find.

When I think about both strategies, it seems that the first strategy is geared for the vast majority of Americans who can't seem to control there credit card spending and budgeting. The second strategy, it seems, would lend itself to someone who is very thoughtful in planning there money situation. I have student loans which are very low interest, and a loan for Andrea's car from her grandma which is no interest, so it would seem that paying them early would have little value over putting the money in a higher rate of return account. Of course since her grandma was nice enough to loan us money at no interest I may repay that one early just on moral grounds.
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Mutual Funds

Up until now I have been investing in one stock that I've been fairly confident about, that stock being Apple Computer. I watch the news and updates on the company pretty closely and know when all the new announcements are scheduled and have a pretty good idea on what their strategy in the market is. Of course having all the eggs in one basket is not the best idea, so I need to start diversifying. I don't know nearly as much about any other individual company, so I decided to look into mutual funds. A couple of years ago I had a 401k when I worked for a bank, and it was fairly easy to choose which funds to allocate my money into as they only had 15 or so categorized by their purpose(growth, stability, large cap, small cap, etc). But on the open market there are hundreds of not thousands of funds to choose from. I've been reading up on the subject and Vanguard seems to be a well thought of mutual fund company for their low operating costs, and the fact that there is no-load on the funds(no fees). For the novice investor choosing the right fund seems daunting, almost just a random choice. There are sites that compare past performance and other factors, but there are so many different factors to compare, that it is hard to get a good comparison and come out with one fund being "better" in the ways that matter to you. In the end I chose one fund for the time being. It is diversified in many of the large companies I had considered buying individual stock in such as GE, Citigroup, IBM, and of course many others. In time, I'm sure I'll learn which numbers mean the most for the goals I'm trying to attain, and be able to discern which investments meet those goals. Until then I'll just have to keep reading.
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savINGs accounts

I recently came across an online ad for a bank called ING Direct. They are based in Holland, and are an online only bank. Their accounts are FDIC insured like a normal bank, but they save a large amount of overhead by not having physical branch locations to maintain. They have been operating since 2001, and from the buzz online seem to be growing quite rapidly. I had grown pretty tired of my current bank's savings account. I was getting around .6% interest which amounted to less than the change I find on the street on an average day. When I saw ING offered rates at 3.75% with no minimum balance or fees, it seemed like a pretty sweet deal. I've had my account with them for a short while, and since then they increased the rate to 3.8%, and there is a special deal for deposits from jan-march to earn 4.75%. While I realise that I could earn more through other investment avenues, having a cash buffer in savings that you can access fairly quickly is a must. So far I haven't seen any downsides to the account, minus a short wait when money is transfered from or to the account for processing.
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A wisper from the void

I suppose it is about time that I began writing in this journal. I was thinking today of doing some sort of financial based blog. While making preparations for buying our first home, I have been doing a great deal of reading on financial matters. The point of this blog would not be to create a source for financial information at first, but as a chronicle of my education in financial matters. Others could comment on questions I may pose, and hopefully insightful discussion would flow from there.

Eventually I want a site specifically designed for the purpose, but for now perhaps I'll start in this journal just to play with the idea. The topic I researched today was short selling. The basic premise involves borrowing stock from a third party, selling it at current market value in hopes that the stock will drop in value at a future date, you then buy the stock back at the lower value, and return it to the initial lender. It's not generally a practice that a small time investor can pursue, but I thought it was an interesting concept. After all, the stock market is a gamble in general, this method just involving a bit more risk.
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Weekend in Bend

Andrea and I spent the weekend in Bend for her cousin Steve's birthday. I enjoyed the trip, even though we didn't really do all that much. It was nice just to go somewhere, and to have a change of scenery for a bit. We went to the Outback steakhouse for dinner friday night. Then on Saturday went to a barbecue birthday party at her aunts house.

Andrea is going to get her food handlers card today, I'm excited for her even though it's a small thing.

I'm trying to finish up a storyboard for a dvd project I'm working on, it should help me get the laptop paid off.
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(no subject)

Goodbye Andrea,

You taught me so much.
You brought so much joy into my life.
You made me realise how special a person can be.

I hope you find happyness someday.

Love,
Joel
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(no subject)

Something must be wrong with me, I went to bed at 2am, then woke up at 7:15. I'm tired as hell, but can't fall back asleep. I was tired all yesterday as well.
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