Tuesday, January 31, 2006

I’ve Got Gas … Bills That Are High

Author: Nick
Category: Money
Topics: ,

After reading about horrible gas bills being sent to fellow personal finance bloggers, I was fearing the worst when that monthly mailing from Washington Gas reared its ugly letterhead yesterday. I closed my eyes, ripped the envelope, pulled out the paper, and opened my eyes, ready for the shock of my life…

Then I flipped the paper over because it was in the envelope backwards.

Oh rabbits! $55.07! Chaos in the streets!

Okay, so I can still pay the monthly gas bill with money I find trapped in my belly button, but I was rather surprised because this was how much I paid for gas last month. As anyone living in the northern suburbs of Washington, D.C. can tell you, it’s been a lovely spring this winter. The average temperature has hovered in the 50s most days, and yesterday it hit 65! Our gas usage reflected this–a little more than half the usage in January compared to December. So then why is the bill about the same? Because the rates went up about 60%! Oh no they di’n’t!

So with the thermostat set just above chill, the windows reinforced with plastic and two inches of titanium, and the fire in the living room burning bright every night even though we don’t have a fireplace, where the heck else are a couple of warm-blooded homo sapiens supposed to save on home heating costs? I’ve come up with a few ideas, though I’m a little hesitant to try some of them…

Last Resorts For Beating Your Heating Bill

  • Forget the heat. Turn on the A/C! Why give in to the high cost of natural gas or heating oil when electricity is cheaper? Just crank the A/C dial to 35 and you’ll quickly find that the winter weather is nothing to complain about.
  • Gas company bills you? Bill them back! What nerve those jerks at the local gas company must have that they expect you to pay more just because gas is costing them more. So when it comes time to pay that ridiculous travesty of justice they call a bill, send a bill of your own right back to the gas company. Let’s see, $10 Being A Meanie Surcharge, $25 Ripping Me Off Service Fee, and $100 multiplied by the 31 days they didn’t call me last month to make sure I hadn’t frozen to death. Of course, don’t forget the $50 Funny Munny Tax; you can just send that directly to me. It helps keep the less fortunate warm … in my deluxe hot tub!
  • Switch to hydrogen for your energy needs. Hydrogen may not be a viable consumer energy source for a few years, but you can take advantage of this cheap, clean powerhouse today. All you need is a tank of hydrogen gas and a lighter. Bam! Instant whole-house heating solution!
  • Change your name. No, I’m not suggesting you dodge your gas bill and flee the country. Instead, change your name to something extremely long–say, 100 million characters long. This way, when the gas company sends you its bill or a credit card issuer mails you a pre-approved offer, they’ll need a good 10,000+ pages in their letters just to greet you. Simply plug that paper into your fireplace and you’ll never need a drop of heating fuel ever again!
  • Spontaneously combust. Hey, it’s been known to happen, so why can’t it happen to you? I’m sure you can find some instructions on doing this somewhere on the internet, and once you do, you’ll have an infinite supply of warmth, and all your friends will gather around you to tell ghost stories and toast s’mores.

On what I can assure you is a completely unrelated issue, I’ve added a short disclaimer to my profile. To summarize it, if you take any of the advice in Funny Munny–as awesome as that advice is–you’re on your own if it causes you to go bankrupt, melt, fly off the face of the planet, or experience some other form of unpleasantness. Should you have a pleasant experience because you took my advice, you’re asked to send me a check for TEN BAJILLION DOLLARS. Yes, that’s a one followed by however many zeros you can fit on the check. Or just send it to the gas company in my name.

Monday, January 30, 2006

Finance Carnivals for January 30, 2006

Author: Nick
Category: Money

Funny Munny is featured in two personal finance carnivals this week! That’s two more than last week! If my math is right, that’s a 50,000% increase!

Fat Pitch Financials hosts the 33rd Carnival of Personal Finance and includes my recent discussion on Frugality Frustration from which I am happy to say I have fully recovered.

Canadian Capitalist brings the 7th Carnival of Investing to Canadialand and features my award-winning series of articles on employee stocks. Yes, I did give that award to myself, but I was asleep at the time, so it’s all good.

Thursday, January 26, 2006

Personal Update: [30] Days Without A Financial Meltdown

Author: Nick
Category: Money
Topics: , , , ,

I’ve been so busy offering up some of the best financial content ever to grace the intrawebs that I’ve neglected to share our personal pocketbook progress. Let’s rectify that. Rectify!

I’ve updated our net worth data to include the latest figures fresh from the bucket of receipts and deposit slips on my desk. Somehow we went from $30,341 to $32,288 in one month. Where’d that $1900 increase come from? Well…

  • Savings up about $900. Between my paycheck and Tegan’s, we managed to sock away a bit of cash into our EmigrantDirect savings account. ED just bumped up their interest rate to 4.25% APY, so our money’s staying put for now. I considered transferring everything into our ING Direct account which has a 4.75% promotional rate on new money until mid-April, but since I don’t have the two accounts directly linked, the money would have a short stay in Bank of America Land (motto: “We thank you for your free money”). We might’ve ended up making a few dollars more rate-chasing, but I’m just not yet comfortable constantly moving around $20k like it’s a decorative vase. That said, I’ll probably put the next month’s worth of extra cash into ING for a bit.
  • 40l(k) up around $500. The automatic 8% payroll deductions and 50% employer match continues. As for my investments’ performance–up 1.35% since January 1st even with that rather nasty market bump last week. This doesn’t include the performance for today which was likely pretty spectacular thanks to some awesome 4th quarter earnings being reported by my employer. Yay for my ESPP!
  • Car loan down another $500. I don’t like this stupid loan. I’m tempted to just pay it off right now, but my money will make more being invested than it will avoiding the relatively low interest payments on the car. Still, I can’t wait until that “Debts” column goes to zero … and then I’ll want it to go higher again to reflect our eventual mortgage on our eventual house.

Despite suffering from Frugality Frustration, we’ve found a few new ways to save some more money or increase our quality of life at little or no cost.

  • Smarter grocery shopping. I’ve been taking my own advice to help cut costs around the house, especially in the food department. We’ve been planning out the week’s dinners on Sundays and then shopping only for what we know we’ll need. I was hoping to also plan breakfast and lunch, but we usually just stick with a few options for those meals, so I didn’t see as big of an opportunity planning those meals. As a result, our fridge isn’t quite so full of stuff that might expire before we get to it.
  • Smarter eating. Along with planning meals, we’re also wising up about our nutritional choices. We’ve dropped our meat-eating from six or seven days a week to four or five, and hopefully that will go down to three or four soon. The money we’ve saved on meat has been going to things that are better for us: delicious salads and soups, and even a few powerfully tasty yet inexpensive recipes.
  • Finally used our vision insurance. I’ve been paying a few cents a week for it for nearly two years now, so I figured it was time to put that vision insurance to use. Our provider gave us a nice variety of places around here where exams would be fully covered. We opted for the local LensCrafters and its “independent doctor of optometry.” The doctor was very pleasant and she told me I had 20-15 vision. Apparently I can see through walls my vision is so good–and this despite a decade of ridiculous computer use. Tegan, who wore glasses as a child but not since I’ve known her, was given a prescription for corrective lenses to be used as needed. It’s not a strong prescription at all, but we got it filled while we were there. We only paid a few bucks out of pocket for the part of the eyeglass frame that insurance didn’t cover, and Tegan reports a big improvement (especially in her videogame scores). As an added bonus, our bedroom life is better than ever now that she sometimes plays the role of the “sexy librarian.” Too much information? You bet!

I also have some goals for February ready to go…

  • Eye those grocery prices a little closer. I plan to put together a grocery price book to help track prices for our common purchases. Thanks to The Frugal Homemaker for this idea.
  • Plan our in-house food production. This mild winter already has us thinking about planting some porch produce in a couple of months. Jane Dough has me considering a miniature lemon tree or maybe a more practical lime or orange plant. Really, I’d love to ask our apartment management to consider opening this one patch of land on the property for a community garden, but who knows if that’ll ever happen. If you’re passing through the area this summer, you should be able to spot our apartment; it’ll be the one with the jungle on the balcony.
  • Don’t overspend, but still have a good time. Valentine’s Day is right around the corner, and while I hope to make it a special one for my wife, I’m going to do so without spending an insane amount of money on flowers that die in a week. I think she’d be perfectly happy if I just got her a ten-pound block of chocolate, but I’ll figure out something a little more romantic and less artery-clogging. The other big event for February is our annual trip to Katuscon, a Japanese anime convention in Washington, D.C. While we’re close enough to commute daily, we’d rather just stay in the hotel where the convention is being held for convenience and to spend more time with friends. We’ve got a few of those friends to room with us, so the room price will be fairly reasonable for a couple of nights. The real place we need to watch our wallets is in the convention itself with its vast vending rooms full of the latest anime products. We’ll probably also load up on food to take with us so that we only need to eat out for dinner. All in all, it’ll be a nice three-day vacation for just a few hundred dollars.

Uh-oh. Here comes the sexy librarian. I’ve gotta go … check out some books. Goodnight!

Wednesday, January 25, 2006

The Wonderful World of Employee Stocks, Part 4: Stock Options, And Why Thinking About Them Makes Me Squeal Like a Schoolgirl

Author: Nick
Category: Money
Topics: ,

Squeee! Stock options! Squeee!

I’m okay. I’m okay. And if you happen to be a Google employee with a bunch of company stock options, you’re probably much more than okay right now. That’s because, with a few magic words from your employer and some lucky market timing, these little things called “options” can make millionaires out of anyone fortunate enough to be entitled to them. Now chances are if you have time enough to spend reading my lowly blog that you’re probably not swimming in stock options, so this will be more of a “what if” for you. But maybe one day you’ll come up with an idea that makes your company billions and they’ll thank you with a handful of stock options. Then you’ll come back to this blog on its 30th anniversary to read up on what stock options are, and you might just invite me to visit you on the private island you’ll purchase with the money you make from selling your options.

Stock Options. Yup, That’s What This Is About. What, Are You Waiting For Me To Say Something Funny Here? Okay, Fine. Ummm … Cheese Doodles! Now Read The Article Already!

The basic theory behind stock options is pretty simple. When your employer gives you stock options, it is not really giving you stock. Instead, it’s your employer’s way of saying you will have the ability during some period in the future to exercise your option to purchase stock. The trick to stock options is that your employer sets the price at which you can purchase the stock, and if you choose to use your options to purchase the stock, you’re guaranteed to pay that price and no higher.

There are a few things to keep in mind if you ever find yourself with some options. First, your options are only valid for a limited time. If you don’t exercise them by the time they expire, you gain nothing, but you also lose nothing because you didn’t buy any stock. Second, unlike ESPPs with their built-in discounts, options do not automatically mean free money for you. It’s quite possible that the stock’s price will drop or stay below the purchase price your employer sets during the option period. Fortunately, as long as you know basic math, you won’t lose money if this happens; you’ll just have worthless options. Third, you might not be entitled to use all of your options when you first receive them. They may be gradually vested, meaning that you might be able to use some of them one year, some the next, and so on.

The stock shares you buy with options, unless they’re restricted (we’ll talk about this in a moment), entitle you to all the rights of being a regular shareholder for as long as you hold the stock. Vote in big decisions, check your stock’s price compulsively, or just brag to your friends that you own stock and are therefore so much cooler than they are.

Case Study: Exercising Your Options … In My Pants!

Let’s look at an example involving a sadly imaginary business. Say I own The Butt-Hugging White Pants Company and I’ve just hired you on to head our Shiny Gold Zipper Design Department. You’re the best in the field of shiny gold zipper design, so I want you to stick around for a good long time designing shiny gold zippers for us. So I pay you well and give you 800 stock options in the company. Those options are 25% vested each year for the next four years and each option entitles you to purchase one share of NYSE:BUTT for $10. The options are good for four years from the start of the first year of vesting. Good so far? Not really since you haven’t actually made any money yet. But hold on to your pants ’cause it’s about to get windy!

Year One of your four-year option period comes around. BUTT starts the year trading at $15 a share. You could exercise 25% of your 800 options to buy 200 shares for $2,000 ($10 x 200 shares) and then immediately sell them on the open market for $15 a share. You’ll make $1,000 if you do it this way, but you decide to hold on to your options. The third-quarter earnings go through the roof thanks to the discovery of a new shade of white denim that sells millions of pairs of pants in under a month. The stock price jumps to $30 a share and you decide to exercise those 200 vested options. You spend $2,000 to buy the stock and sell it for $6,000. You’re $4,000 richer, and after a week’s vacation in Hawaii, you come back to work and crank out the best darn shiny gold zippers ever made.

Unfortunately that new shade of white denim turned out to be poisonous and your company’s stock plummets in Year Two of your option period to about $12 a share. You could still exercise your newly vested 200 options and make $400, but you decide to hang on to your options going into Year Three.

Now equipped with your fantastic new shiny gold zippers, Butt-Hugging White Pants start selling fairly well again in Year Three. The stock price rises to $20 and you sell the 200 options left over from last year plus your 200 new options from Year Three. The 400 options at ten bucks a pop costs you $4,000, but you sell them for $8,000. You’re another $4,000 richer.

Year Four begins and you’ve got your final 200 options. The weather’s nice outside … a little too nice. Turns out that white denim was not only poisonous but it was also punching a big hole in the ozone layer. The entire country sees record highs, and while the only thing on people’s minds is looking good, the only things on their thighs are shorts and skirts. Our company sells pants only, so we have a slow sales year. The stock price sinks to around $5.25 a share heading to the end of Year Four.

At this point, you have a couple of options (and I’m not just talking about the 200 stock options you have left). On the one hand, you can do nothing with your options and they’ll expire at the end of the year. No money gained, but none lost. On the other hand, you can exercise your options and immediately sell your shares. You’ll only make $50 ($.25 x 200 shares), but at least you’ll be able to pay your bar tab at the end of the night. On the third hand (you three-handed freak!), you can exercise your options and hang on to the stocks for however long you like. While the options might expire at the end of the option period, you can use them and keep the stock indefinitely. Hopefully the weather will cool off next year and pants will begin selling again.

Sadly, you don’t get to choose from any of these options. Instead, you resign in shame after the President of the United States has a highly publicized painful zipper accident while traveling through Europe. You guessed it; he was wearing Butt-Hugging White Pants with your latest shiny gold zipper design. In this case, since you quit willingly, you forfeit your remaining options. But that’s okay, because the company never recovers from that incident and I’m soon fleeing the country when the SEC begins poking its nose into our, ahem, pants.

Other Fun Things To Know About Your Options

If you make so much as a penny with your options–surprise, you’ll pay taxes on your profits. Taxes on options can be worse than those on ESPPs because, under certain conditions, you may have to pay taxes twice on options you exercise. The first time will be when you originally use the options to buy stock. If the price your employer sets for your options is lower than the market price for the stock, you’ll typically pay regular compensation taxes on the difference. Once you sell your stock (if you decide to hold on to it), you’ll pay taxes again if the stock price went up since you bought it. Also, depending on the type of stock option, you may only have to pay long-term capital gains taxes if you hold the stock for a period of time.

Another tax note about options: these babies could throw you clear into Alternative Minimum Tax (AMT) Land. If you exercise a ton of options in a single year or the gap between the purchase price and sale price is fairly large, you might trigger the AMT. You can read more on the AMT and stock options in this article from The National Center For Employee Ownership.

One nasty trap to be on the lookout for is options that only allow you to purchase restricted stock. As the name suggests, there are restrictions on stock purchased with these options that could prevent you from selling your stock immediately or force you into selling it back to the company (possibly at a loss!) should you leave the company. Be very careful when playing with restricted stock options.

Finally, another event that might take place during your option period is known as repricing. If your company’s stock takes a tumble, it may reprice your options lower. Your options to buy shares at $10 a piece might allow you to buy stock for $5 a share if your company reprices the options. Companies sometimes do this so that a big employee incentive doesn’t become worthless and employees don’t start generating tons of resumes on the office copier. As simple as this might sound, there are rules restricting businesses from doing this whenever they feel like it.

Summary of Stock Options

Oh come on! Don’t tell me you skipped down to here again. But that means you missed a great story about pants and stock options! Okay, on with the summary.

  • Stock options let you buy stock later at a price decided earlier. When you exercise your options, you can buy stock for a price your employer sets ahead of time. Generally you’ll wait until the market price is higher than your purchase price, and then you’ll sell for a tidy profit. In the meantime, while you hold the stock, you have all the powers of a normal shareholder.
  • Options expire and can be vested over time. If you don’t exercise your options after a limited amount of time, you lose them but your wallet is left untouched. You might not be allowed to use all of your options right away; you could have to stay employed with your company for a while to get access to all of them.
  • When you make money, you pay taxes. Yup, same third bullet from the ESPP discussion. Be extra careful with options since they can be taxed at option exercise and stock sale time, and you might even trigger the dreaded AMT.
  • Watch out for restrictions and repricing. Restricted stock options can limit your ability to turn a quick profit with your options. In times of financial woe, your company may reprice your options so that they retain some of their value.

And that, ladies and gentlemen, is just about everything I know regarding employee stocks. Be sure to check out the other parts in this series if you missed them…

Part 1: Getting Started on Owning One Billionth of Your Company
Part 2: Getting Soppy Over ESOPs
Part 3: Don’t Poo-Poo Your ESPP

…and look for more delightfully informative series from Funny Munny soon.

Monday, January 23, 2006

The Wonderful World of Employee Stocks, Part 3: Don’t Poo-Poo Your ESPP

Author: Nick
Category: Money
Topics: ,

Oh how I wish my employer offered us an Employee Stock Purchase Plan (ESPP). I mean, an ESOP is better than nothing, but there are absolutely magical things about ESPPs that make me jiggle like a bucket of Jell-O just thinking about them. Today we’ll take a look at a few of the magical, jiggle-inspiring facets of ESPPs along with a few jiggle-stopping pitfalls to watch out for in your own ESPPs.

How ESPPs Differ From ESOPs

Comparing ESOPs to ESPPs is a bit like comparing apples to apples full of free money. We’ll get more into the free money side of ESPPs in a bit, but suffice it to say that ESOPs and ESPPs have a few basic characteristics in common. To start, any money you may have in either will grow or shrink depending on the success of your company, so employers hope that participating in either plan will encourage their workers to strive for peak productivity. So if you work hard enough to compensate for the other thousand slackers around you, your company’s stock will skyrocket, and you will hit it big. Right? Right. Moving on.

ESPPs involve more direct interaction with your company’s stock than ESOPs provide. Shares are typically purchased using money right out of your paycheck at the start of a plan period. Plan periods typically last a period of six months, but this doesn’t mean you have to actually own the stock for six months or that you have to sell it after the period is over. Instead of being a part of a big trust like an ESOP, you take direct ownership of the stock yourself in an ESPP. While the company will hang on to the stock for you, you are a shareholder with all the rights and privileges that come with that title. So feel free to vote your goldfish into the board of directors or start labeling company office supplies that you now “own.”

FREE MONEY! Now That I Have Your Attention…

…I’d like to talk to you about … free money! How much free money am I talking about? Well, it sorta depends on how you look at things. How does a 15%+ return on your investment sound? How about a 60%+ return? You technically get both of them depending on how your ESPP works, and here’s how.

Many ESPPs allow employees to purchase company stock at a discounted rate. While some companies have been dropping this discount lately, a 15% discount is not uncommon. The actual price you pay for the stock when you purchase it is not as simple as looking at your favorite newspaper’s stocks page on the first day of the plan period. A lot of companies will let you purchase the stock at its price (minus any discounts) on either the first day or last day of the period, whichever is cheaper. A few employers throw in some oddball modifications to this rule; if you’re lucky, you might only pay the lowest price on any Friday during the plan period or maybe even the lowest price a year or two into the future!

The real fun with ESPPs comes in when you do something that you’re really not supposed to when participating in an ESPP: selling your shares as soon as you purchase them. If you just bought a share of The Baggy Black Pants Company that sells on the open market for $20 and you get a 15% discount on your purchase, you spent $17 to buy something that is immediately worth $3 more. If you sell that share right away for $20, you just made 17.6% on your $17 investment.

Where does the 60%+ return come in to the picture? It depends on how your ESPP paycheck deductions work and how long your money is really tied up in the plan. If your plan period lasts six months and you contribute to it in weekly paycheck deductions, your money is really only tied up for an average of three months. Assuming you sell right away, and putting your discount into the equation, you stand to make 15% or more for a three-month investment; that’s a 60% annualized return on your money! If you take into account more complex Internal Rate of Return calculations, you might even be looking at a 93% return on investment. The best part: because of that 15% discount, that return is guaranteed and doesn’t depend the tiniest bit on the stock’s performance.

You can also play with ESPPs the way they were meant to be played with: hold on to the stock for some period of time longer than six seconds. Obviously this entails more risk, but some people see their discount as a sort of buffer that helps protect against a big loss.

Traps and Taxes

Earlier I hinted at the fact that immediately selling ESPP shares to cash in on the discount goes against the rules of ESPPs. While most companies don’t have regulations on how long you must hold on to your ESPP shares, flipping shares is supposedly not in the “spirit” of an ESPP. ESPPs are really designed to be vehicles of long-term growth that encourage employees to hold stock in their company. Despite this, there are plenty of people out there who continue to flip their shares for an immediate, guaranteed profit and they’ll keep doing so…

…Until the company gets tired of it. More and more, businesses are adding caveats to their ESPPs to discourage employees from immediately selling their purchased shares. RS of the Young Professionals Financial Blog shared some comments about IBM’s ESPP clause that kicks its employees out of the plan for the rest of the six-month period if they sell their shares immediately. Couple that fact with IBM’s less than thrilling 5% discount on its ESPP shares and you have a much less attractive plan. Still, taking into consideration the annualized return, even a 5% discount can return 20% or more per year.

As with the rest of the money we make in life, the federal government will always be there waiting (hopefully not right outside your office door) for its chunk. The tax implications for individuals participating in ESPPs can be a bit tricky, so I’ll leave the details to this very thorough article on the TurboTax website. To summarize, the money you make from the share price discount is generally considered additional compensation and you’ll pay taxes on it like regular income. If you hang on to your shares for a while and make a profit because the stock’s value increased, you may get away with paying just long-term capital gains taxes on those profits depending on how long you hold the stock. For many people, long-term capital gains are taxed at a lower rate than your boring old paycheck.

There are a couple other things to consider before running through your hallways at work shouting “Free money! Free money!” The first is that you may have to pay a commission on your stock sale. It’s probably going to be a flat rate, and if you’ve been putting enough out of your paycheck into the ESPP, it won’t be much compared to your net return. But if you think you’re going to make money getting a dollar taken out of your pay each week for six months, even a 15% discount can evaporate in the face of a $10 commission.

You should also watch out if your company messes around with the traditional rules of an ESPP. Especially in times of financial trouble, a company can pull some nasty tricks on you that will cheat you out of your discount and possibly part of your original investment. For example, while most ESPPs will issue the stock right away, some might take up to a couple weeks to do so. Sometimes a company will apply black-out dates preventing employees from immediately selling. In the meantime, the stock price drops and you’re out not only the free money but some of your own money, too. As advised in this article on ESPPs from Ask Tog, be sure that your ESPP issues stocks on the payout date and that there aren’t any rules that absolutely prohibit you from immediately selling them.

Summary of ESPPs

If you skipped down to hear without reading the rest of the article, you’re cheating! Go sit in the corner and think about what you’ve done. Then come back and read this summary anyway.

  • If you’re in an ESPP, then you own stock. None of this wussy fake-owning like in an ESOP. The stock is in your name, but your company will likely hold on to it for you until you’re ready to sell it.
  • ESPPs generally mean free money. Assuming you don’t have a really awful ESPP that gives its employees no discount on purchased shares, you make risk-free money just by buying and immediately selling. If your company has a plan like this and you’re not participating, you’re just silly.
  • When you make money, you pay taxes. This unofficial slogan of the IRS is just as true for your ESPP winnings. While the amount you pay can vary, you generally pay regular income tax on any money you make from the price discount and long-term capital gains tax if you hold on to your stock for a while.
  • Read the fine print of your ESPP. Some companies will temporarily throw you out of the ESPP if you immediately flip your shares after purchase. Other, shadier companies might pull tricks that could cost you your return on investment and then some! Be sure to know the rules of your ESPP before participating.

The series on employee stock plans comes to a close next time when the topic will be stock options. Be sure to exercise your option to check it out!