Because your money should work for you

After about 3 years of spotty service, our old Bissell finally bit the dust. Actually it bit the dust about a year ago, I just got tired of trying to fix the thing every two weeks.

I think for most people buying a vacuum is not a big deal, but we are cat owners so pet hair is a big problem for us. On top of that I didn’t want to buy a cheap vacuum that would fall apart after a few years like our bissell did. Thanks to a clever marketing campaign, the Dyson DC17 Animal was at the top of our list.

I didn’t worry about less than positive reviews at Consumer Reports since our last vacuum was rated highly and yet still turned out to be junk. What I did look at were the many positive reviews at Amazon, which in the end persuaded me to go ahead an make the purchase. So far I am glad I did.

The first impression of this vacuum is good. I was surprised by the weight. It’s quite heavy for plastic, but it feels sturdy, which is a good thing. When I first vacuumed I was not really surprised with the amount of hair and dirt it pulled up. For the price I expected it to clean really well, especially since our old vacuum didn’t work that well anymore.

What I was surprised at was how well it cleaned our apartments every single week since the first cleaning. Our cats track liter out of the cat box and shed like crazy. So seeing mounds of dirt and clutter in the dust bin makes me believe this thing is really working.

A few of the things I really like about the Dyson DC17:

The low reach floor tool is great for getting under tables and couches without having to move them. It’s also great for cleaning under our bed, which is near impossible to move easily thanks to its size and weight. And since the cats hide under there, we were finally able to clean up a big source of dust and hair.

The rotating bar is easy to turn off, simply push the button next to the power switch. The kitty litter box is in the bathroom, and normally trying to vacuum the litter off the tile floor caused litter to spray everywhere, which meant getting a broom and dust pan out to clean up. Not so with the Dyson. We simply hit the button to turn the spinning bottom off and then vacuum. It works great. I can imagine this would be great for someone with hardwood floors too.

I also feel like the air coming out of the vacuum is cleaner than normal. I think this is the HEPA filter at work sucking the small particles out the carpet. Maybe it’s my imagination, but I still like it.

A few of the things I don’t like about the Dyson DC17:

The reason we bought this model over a standard model was the name “animal.” We figured since we have pets we should get the vacuum made for pets. As far as I can tell though, the only difference between this model and the non-animal models is the worthless mini-turbine brush. The brush seems to be suction driven, and has proven to be no match for the cat hair lodged in our couch. A better method has been to use either the brush tool or the stair tool, both of which are standard I think, to clean the couches.

I am also not fond of the telescoping reach wand. The solid section is pretty long, which makes vacuuming in close up areas like in a window sill slightly awkward. It’s not a deal breaker, but it is a minor gripe.

Recommendation:

If you are in need of a good vacuum, and I think everyone is, and you have the money to spend, I think the Dyson DC17 is a great buy. I don’t know if the other versions of the DC17 are cheaper than the animal, but if they are it might be smart to consider one of those over this one. Like I said, I have found the mini-turbine head attachment to be close to useless.   

Other than that, this vacuum is great. And when looking at the price, don’t forget that there are no filters to replace ever. Our Bissell vacuum had 4 different filters that would have cost about $50 total to replace, and we were supposed to replace them every 6 months to keep it cleaning well. So over the course of a few years this vacuum could actually save you money if you normally stick to the filter replacement schedule.

Every Friday Free From Money reviews a book you might find useful for your personal or professional life

“Things that matter most must never be at the mercy of things that matter least”

Johann Wolfgang von Goethe

The 80/20 Principle, aka The Pareto Principle, is a theory originally formed based on the observation that 20% of a country’s population produces 80% of the wealth.

In this book, author Richard Koch argues that the Pareto Principle can be applied to many different situations in both business and in our private lives.

Here is a brief walkthrough of The 80/20 Principle:

Part One: Overture

Most systems have an imbalance in them where a minority of causes or inputs create a majority of the results or output. This is caused by small fluctuations in seemingly minor events, similar to chaos theory. Feedback loops keep a system moving in one direction until hitting a tipping point, at which point small efforts make a big difference.

There are two ways to apply the 80/20 principle: 80/20 thinking and 80/20 analysis. Thinking 80/20 requires you to investigate the facts and quantify the output. The analysis provides insight from the collection of thoughts. One point to remember when reading. First, the fact that 80 and 20 add up to 100 is a coincidence. The point is that a small amount of input creates a majority of the results. It could be that 20% of your effort only creates 70% of the output, or maybe it creates 90%.

Part Two: Corporate Success Needn’t Be a Mystery

In this section the author explores how to apply the 80/20 principle to a business. Generally a business will want to focus on the few areas where it can excel, in those areas where it has a competitive advantage.

Segmentation - understanding each portion of your business and how it affects profitability through revenue and margins, is key to the business analysis. The most profitable areas are the areas where you should focus your effort. The author pushes for business simplicity; a focus on key areas can help your business excel by cutting waste. In addition to finding the 20% of the business that fuels the most profits, its important to find the core customers and provide exceptional service to them.

Overall thinking 80/20 means you begin to move towards high-value uses, high-value assets, and high-value customers. We need to realize that change will happen, equilibrium is an illusion. Take a look at Microsoft Windows. After over a decade of domination, Mac OS X and Linux are slowly building up steam and bringing a serious challenge. When Michael Dell suggested Apple pay back share holders, he never thought that Apple would have the resurgence that it did by leveraging their success with the iPod.

Part Three: Work Less, Earn and Enjoy More

Brining the 80/20 principle into your personal life means recognizing that very few events contribute to our overall happiness. We should try to leverage those good times, and focus less on the low value times. The same goes for productivity. It’s difficult to be productive all hours of the day, so you should do high value activities in the times you are most productive.

Applying the 80 principle to your career is similar to applying it in a business. Finding the appropriate career requires doing something that you are both good at and that you enjoy doing. When you do this you will likely excel above your peers and be rewarded for your contribution. The author outlines his thoughts on the 10 rules to career success, as well as 4 ways to leverage your time to create the most rewards.

Recommendation:

The 80/20 Principle is a mixed bag. I think it is definitely a step in the right direction for someone looking for an analysis framework. But I feel like some of the ideas in the book are dangerous to follow.

For instance, the author suggests that if an investment is successful you should double and redouble your bet. This kind of leverage can be good for your profits, but it can also be disastrous for your portfolio should your analysis prove to be wrong. If you are a business you might find out that just because an area of business was profitable doesn’t mean that you should bet the farm on it. The banks that have gone under from bad mortgage debt are proof of that.

In the chapter on time management the author makes the ludicrous statement that Warren Buffet became rich by doing a limited amount of analysis and being lazy with his investment portfolio, since there is very low turnover compared to most trader’s portfolios. Anyone who knows about Warren Buffet’s investment style knows that his investment method, while simple, is far from easy or “lazy.” I think these kinds of beliefs can get people into trouble.

There also seems to be very limited application of the 80/20 principle itself. There are only so many ways that you can tell a reader that small inputs create large output. Overall I think this book is worth reading, but it’s probably better to skim through it. You can actually start putting the 80/20 principle to work right away. Reading 20% of this book will probably give you an 80% understanding of the principle.

The 80/20 Principle is a part of the Personal MBA reading list under Finance & Analysis.

I just wanted to wish everyone a happy New Year. Hopefully 2008 was your best year ever, and hopefully 2009 will be even better!

Everyday I find myself on the train for an hour and a half, which equates to a whole lot of reading time. So I have decided to undertake a significant challenge this year and read 52 books in 52 weeks. I will also review these books, which you will see on the site as well as on Amazon.

The majority of books I plan to read come from the Personal MBA reading list. I will also throw in a bunch of personal finance and investment books since those are major topics of discussion here.

Overall I hope that reading will start to generate more posting ideas, as well as enhance my own knowledge for both my personal and professional life. At the end of the year I will create a list of my favorites, and give some recommendations for anyone with certain goals.

Wish me luck!

Christmas? What? Didn’t that just pass a few days ago? Why should I worry about Christmas day now, especially a Christmas that’s almost a full year away?

I’m glad you asked. If you’re like a lot of people, you probably wanted to spend more money on Christmas gifts than what you actually had saved. If you’re like a lot of people you probably went ahead and paid for your gifts on a credit card with the intention of paying it off “soon.” Hopefully soon is next paycheck. Hopefully you don’t intend to keep paying for Christmas gifts over the next few months.

Whatever you plan to do with your credit card, next year we’re going to do Christmas different. Next year we are going to have enough money to pay for all of the gifts we buy for everyone. The key is to start saving now.

First things first - you are going to need a place to keep that money until next year. Preferably that someplace safe earns a decent interest rate, and is someplace you don’t look often, like your normal bank account.

An ING savings account is an ideal place to put that money. I don’t have any affiliation with ING, I just happen to use their savings and checking accounts and I have been very happy with their products and service so far. If you need help getting started with ING, I previously wrote about using ING sub-accounts.

Once you have your account opened and named ‘Christmas Account’ (for good measure, this isn’t really necessary), we can get started with the savings. You will need to figure out how much you spent this year on gifts. Make sure you factor in everything you spent, including wrapping materials, bags, and Christmas cards. Don’t forget about any gifts you bought for coworkers or other people who may slip out of your spending memory. We want to make sure we have an accurate number for next year.

Now divide that number by 24, and you will have the amount of money you need to save every paycheck for next year’s gift giving. This assumes you get paid twice a month. If you were paid every other week you would divide by 26.

Here’s an example. If you spent $500 this year on gifts, you would divide $500 by 24, which gives you about $21 a paycheck. Not too bad, right? And over the course of a year, you might earn a little bit of interest on the side, instead of paying interest on a credit card.

Every time you get paid, put the necessary amount of money into that account first thing. Don’t touch it for anything. Better yet, set up an automatic savings plan that will pull that money out of your account automatically so you don’t have to worry about it. Think of that payment as a bill that you need to pay. When December rolls around and you have enough money to buy everyone gifts without resorting to the credit card, you’ll be glad you did.

One More Idea

If you got stuff this year that was nice, but maybe isn’t stuff you want to keep, consider re-gifting it next year. Get a sticky note out, write down who gave you the gift in question, and put it away until next year.

When the time comes, pull it out, look at the sticky so you don’t give the gift back to the same person, and give it to someone you think will enjoy the gift. You’ve saved yourself from having more things around that you don’t need, you saved a small space in a landfill, and you are saving yourself some money.

Multimedia is increasingly being stored on computers. Audio on the computer has been around for years. Digital cameras have drastically overthrown film in popularity. So does it matter how you store those files on your computer? I think it does. Lossless compression formats, while larger, are often superior to their lossy counterparts.

But what does lossless mean?

When files are stored on your computer, the digital bits are typically compressed to take up less space. A lossless compression will keep all bits and squeeze them together. Think about a deck of common playing cards all laying face up so you could read the numbers and suits. If you were going to store those cards, you wouldn’t store them laying side by side face up. You would pick them up, stack them on top of each other, and store them. This is a lossless compression. When you are ready to view the cards again you would simply take them out and line them up again. All of the data, the faces of the cards, would still be there for you to see.

Now if you were short on room and you couldn’t store a full deck of cards, you might discard some of the cards. At first you would get rid of the instruction card, then maybe the jokers. That would save you a little bit of room. This is how a lossy compression works. It takes the information that it thinks you probably won’t need, and gets rid of it permanently.

What type of file formats are available?

Photos and music are the two big media types that people store on their computers. Movies and video are becoming more popular, especially with Apple’s iTunes store becoming more popular. But the limited ability to get video from a PC to a big screen television limits the usefulness of keeping video on your computer.

audio

For music fans there is a wide variety of lossless audio codecs. The two big ones though are FLAC and Apple Lossless. If you are using iTunes and an iPod then Apple Lossless is your go to file format. If you are using a program other than iTunes for ripping your CDs and playing music I highly suggest using the open source FLAC. For more about lossless audio codecs, check out my prior post Protect and Backup Your Music Collection.

photos

The major type of lossless photo format is RAW, which is a family of formats used by camera makers for storing the RAW information on a file before being formated. Most cameras take a picture and then process it in-camera to pop out a jpeg. The theory behind RAW is that a home computer has much more processing power than a computer, so processing a photo on the computer should produce a better picture than doing it in-camera. If your camera can shoot in RAW it can be a great way to create quality photos. If you mess up a shot due to an incorrect exposure or an incorrect white balance, it can often be saved in post processing.

And without further ado, here are the top 5 reasons you should be using lossless formats to store data on your computer:

1. Hard Drive Space is Cheap

New hard drives holding a terabyte of data can be found for close to a hundred dollars. One terabyte is 1,000 gigabytes. That’s a lot of data. If one song stored in Apple Lossless averages around 25 megabytes, a one terabyte drive can hold 40,000 songs. Compared to the cost to actually acquire that much music, the storage space is fairly insignificant.

For photos, if your camera is capable of shooting in RAW, a 12 megapixel RAW photo is about 15 megabytes. If you shoot mostly in RAW you could shoot over 66,000 photos before you fill up a 1 TB drive. If you’re using jpegs (not a lossless format) it’s going to take a long time before you fill up that much space.

2. There’s a Huge Difference in Quality

mp3 files are compared by their bit rate. The most common rates are 128 kbps (kilobits per second), 256 bps, and 320 kbps. 320 kbps is typically considered the best bit rate by most. Newer formats, such as AAC, store files in a similar file size, but promise better performance from similar compression ratios. Lossless audio files on the other hand are using bit rates close to 1000 kbps.

For most picture takers, jpeg will be the only file format you ever use or need, since most consumer cameras only use jpeg. The problem with jpeg is the the loss of quality every time you edit the photo. So if you’re using the jpeg file format and doing a lot of editing you should try to save your files in another format such as TIFF or PSD.

3. Digital Media Lasts Forever

Once you store your files on a hard drive, they could theoretically last forever with proper backup. If one hard drive fails, you can quickly recover your files from a backup drive and have everything ready almost instantly.

I have heard stories of people losing precious photos of loved ones in fires. A 1 TB external hard drive takes up almost no room and could be left at a friend or family members house as an off-site backup to prevent against loss in a fire. You could also keep it in a safe deposit box, a small fire proof safe, or even back up online using a service like Amazon’s S3. Compare this to trying to store a copy of 66,000 actual photos. I don’t know anyone that would let me keep that much stuff at their house, just in case.

The same can be said for CDs. If you were to lose your CDs in a fire, it could be very costly to replace them. A more likely scenario is someone stealing your CDs out of your car. A solution to this is to rip all of your CDs using a lossless format, and then if your CDs are stolen or damaged they can be easily replaced.

4. It Can Save You Time

Technology is always advancing. There is always going to be new software that can do something better. In the audio world mp3 is a standard file format, even though other lossy codecs like AAC can sound better. If you choose to follow these types of things, you could spend a lot of time ripping and re-ripping your CD collection for better sound. Or suppose you upgrade your music player and decide that you want to re-encode all of your CDs. If you had maintained one master collection on your computer’s hard drive, upgrading would be as easy as making a second lossy copy of your lossless files. Unfortunately that does require you to maintain two separate libraries, but as we saw above, space is cheap.

5. The Best Tools All Use Lossless

Common music software like winamp, iTunes, or Windows Media Player, all have support for lossless files. Even the iPod can use Apple Lossless, although you may be better off maintaining a lossy copy of your library since hard drive space on the iPod is significantly more expensive, or even impossible to get if you’re looking at something like an iPod Touch or an iPhone.

For photos, if you have a camera that uses RAW files, you probably received a converter tool that can read and edit RAW files. If you are on a Mac, iPhoto can store and edit RAW files also, so there’s no need to upgrade to an expensive tool like Adobe Lightroom or Apple Aperture. Unless you want to of course.

So there are 5 good reasons you should start using Lossless formats to store your digital files. As storage gets cheaper, and especially as online bandwidth gets cheaper, you will see increasing quality in your digital files. It may seem a little strange that a personal finance author is encouraging you to spend money on hard drives to store your digital files. But for me the cost of storage is worth the peace of mind and convenience of having all of my files stored on my computer.

Stay tuned though, in the works is 5 reasons you shouldn’t use lossless file formats. I’ll update with a link when that’s ready.

Yesterday we took one of our cats to the vet because she has been wheezing like she had a hairball that wouldn’t come up. It started about 3 months ago, and we didn’t think much of it at first. We switched her over to a hairball control food, which helped a little at first, but not much. Long story short, she actually has cat asthma.

Unfortunately, and I feel terrible about this, she has an infection in her lungs since we let it go too long. So on top of spending money on the asthma medication, we are now spending money on antibiotics to cure her infection. Overall we spent over $300 yesterday on the exam fees, x-ray fees, and medication. In two weeks we will spend another $200 to have her x-rayed again to see if the infection is gone and to see if her lungs look better.

So in the course of two weeks we will have spent over $500 on our cat. I really hope she gets well enough that we don’t need to continue with the asthma medication. On the other hand, after hearing from friends and family with dogs, $500 seems fairly cheap for a problem.

If you’re thinking about getting an animal remember that they can get expensive when things go wrong. I love our cats, but I have to admit that when we got them I didn’t ever think about spending more than $100 on them at a time for vaccinations or a routine check up. But the happiness that they bring is completely worth it.

One year ago today I wrote my first post for Free From Money. Here we are one year later. I haven’t written nearly as much as I would have liked, and my traffic is still practically nonexistent, but there’s always 2009, right?   

I thought I would go back and look at a few of my favorite posts from the past year. First up is my favorite: Understanding Compound Interest, What They Don’t Teach You in School. Knowing how compound interest works is absolutely essential to getting ahead financially. Knowing how to use it is key to having your money work for you. Not knowing how compound interest works can get you in over your head in debts that never go away.

Next up is Break the Credit Dependence Cycle: Using ING Sub-Accounts. Variable expenses like Christmas shopping or back to school shopping come every year, yet many people don’t prepare for them by putting a little bit of money away every month so that they’ll have enough when they need it. On a longer cycle, things like cars and computers need to be replaced. Instead of financing them, start saving now so you can buy them cash when the time comes. Again, compound interest is your friend when you start saving over a period of years.

A more recent post was Getting Paid Less at a New Job. I have been at my new job for about 3 months now, and so far I love it. I have also taken advantage of a pretax commuter card, which has saved me money on BART, and you may have noticed more book reviews recently. But the fact remains that I am not really getting paid much more than I did before when you take into account the increased commuting hours and the cost to ride the train every day.

On the home side is my post on Saving Money on Food: Four Ideas for Grocery Shopping. Food makes up the second largest part of our budget, after rent. Not only can eating at home can save you a tremendous amount of money versus eating out, it can also help you lose weight since you can control your portions and your ingredients.

Last up is my thesis post Will Stocks Always Go Up? Conventional media tells us that stocks always go up in the long run, and that anyone with a long term view for investing should be buying stocks like they’re being discontinued. I’m really not so sure, and this post lays out the basis of my thesis for the next 10 years or so. I have drastically cut back the percentage of our portfolio investing in stocks, and it’s going to take a lot for me to raise it.

So there are 5 good posts from the past year. Here’s hoping that 2009 has 50 good posts for you to read through. If anyone has any suggestions on the site, or a topic they would like to know more about, please leave a comment or shoot me an email to let me know. Thanks for reading my site!

Rich

Edit:

Whoops! I forgot to adjust the time on this post before I hit the publish button. Free From Money won’t be one year old for 2 more days. But close enough I guess.

Every Friday Free From Money reviews a book you might find useful

Over the past few years commodities have earned a reputation as being high flyers for investment portfolios, mostly due to the belief that developing countries are going to use more and more resources. In this book author Jeffery Christian attempts to dispel the rumors that exist in the commodities markets, as well as offering thoughts on how to make money whether markets are going up or down.

Here is a quick walk through Commodities Rising:

Chapter 1: The Commodities Rush Is On

The first chapter sets the stage for the rest of the book, explaining why the author felt a need to write this book. Since 2003 there has been a large run up in the price of commodities, thanks to increased demand from both developing economies and from increased investor demand. Investors have piled into commodities in the past few years for various reasons which are explained in later chapters.   

Chapter 2: Myth of the Commodities Super Cycle and the Chinese Consumer Giant

The super cycle theory puts forth that there will be an extended run in commodities, potentially lasting for over a decade thanks to the rapid development of countries like China, India, and Russia. Furthermore, new production of in-demand commodities can’t come on fast enough, which will drive prices even higher.

The reality, according to the author, is that these countries are not using raw materials nearly as fast as the investment community believes. On top of that, despite the rapid growth in incomes, per-capita incomes in the developing countries is still extremely low. In 2007 China’s per-capita GDP was $5,400 a year, versus over $45,800 per year in the U.S. These are not the kind of numbers that you would expect to support gold at over $1k an ounce

Chapter 3: Commodities and the Global Economy

Chapter 3 examines the relationship between commodity prices and economic indicators. Commodities are often used as an indicator of inflation expectations and economic activity levels, whether those relationships are valid or not. The author jokes that gold has forcasted 13 of the past 3 bouts of inflation, and that commodity prices have a complex relationship with economic output levels that go beyond a simple ratio or formula.

Chapter 4: Commodities as an Asset Class

Ever since David Swensen revealed the secret to his returns on the Yale endowment portfolio, commodities have become known as an acceptable asset class for a well-diversified portfolio. Commodities have a low correlation with other assets like stocks and bonds, which has the potential to smooth out returns in a portfolio.

Chapter 5: Commodity Investment Vehicles

There are many ways to invest in commodities, including forwards and futures, ETFs, mutual funds, and hedge funds. Chapter 5 briefly covers these investment vehicles, and gives some of the pros and cons of using them. For example an investor can gain more leverage using futures, or they may prefer to hold the physical asset if they are investing in precious metals.

Chapter 6: Commodity Strategies

Once you’ve learned what tools you can use for investing, you will need to learn some techniques for applying them. A few ideas are covered, including using the Commitment of Traders Report to get market insight, using principal protected accounts and structured products, and why you shouldn’t use ratios as a trading tool.

Chapters 7 - 11

The next 5 chapters describe the different types of commodities that are typically invested in, including precious metals, base metals, energy commodities, and agriculture. Each section contains a brief history of the commodity, historical price movements, a look at the supply and demand factors, and the common ways people invest. Precious metals, for instance, are often held by investors in physical form. Natural gas traders on the other hand will probably not want to store a highly explosive gas in their backyard, and thus futures, options, and equity investments tend to be a more practical route.

These chapters could be very useful for someone just getting started in commodities but is unsure where exactly they should start.

Chapter 12: The Fundamentals Still Apply

No matter what hype you hear on the news or in the financial press, prices are still driven by basic supply and demand. There may be short term swings one way or another due to speculation, but in the end understanding market dynamics is the key to long term success. This chapter attempts to help you clarify what you should think about when looking at supply and demand. For instance, does a particular supply number include recycled materials?

Recommendation:

If you’re considering adding commodities to your investment portfolio then Commodities Rising should be on your reading list. Taking a few hours to read this book could save you thousands of dollars, no matter what side of the trade you decide to take.

Once you’ve become familiar with the basic hedging strategies suggested in this book you will likely want to find out more from another more advanced book. But this book should get you going in the right direction.

In bad economic times, I hope we can all remember the things that really count. Money comes and goes, but family and friends will be there for you no matter what. Happy holidays!