Comparing Costs: Should I Drive or Fly?

I am debating how to get home for the Christmas holidays. My choices are a) to fly, or b) to drive.

When I was in college I made the nine hour drive home to Alabama at least once or twice a year all by myself. I didn't hate it, but I do remember sporadic awful times of boredom, struggling not to fall asleep at the wheel, and the occasional speeding ticket.

It's a long, boring, straight shot down I-20 for about 8 of the 9 hours, and I was often driving the last part at night (due to either classes or my inability to get up and on the road in good time). As soon as I got my first job out of school, flying home for the holidays went straight on my budget.

And oh how I have loved it. It's an easy direct two hour flight (plus one hour at the airport) - and yes, it only takes one hour at the airport. I fly Southwest out of Lovefield (a smaller airport in Dallas), and it's very quick and convenient to where I live. I got a Southwest Rapid Rewards membership, too, and I generally accumulate one free flight a year.

I love flying Southwest out of Lovefield. The baggage checkers out front are so funny and jovial and actually seem to remember me even though I only fly a few times a year. The staff is always pleasant, I've never had a problem getting quickly checked in and through security, and I only recall two instances of a delayed flight in all my years (during which wait I made lots of friends at the airport bar, and it was actually a great experience).

Plus during the holidays the flight attendants are even more festive than usual - I've gotten multiple free drinks and enjoyed several renditions of Christmas classics over the loud speaker. I swear I don't have any vested interest in the airline, but it really is a great way to travel.

So here are the numbers:

$271 Air fare
$40 Taxi to and from airport (I might be able to get a ride...)
$0 Checked bag fee
$5 Tip for the baggage checkers
$7 Magazines to read on the plane
$10 Snacks at airport
$333 Total Cost to Fly

$172 Fuel
$13 Meals on the road
$10 Snacks/beverages on the road
$8 Book(s) on tape
$203 Total Cost to Drive

I'm not factoring in the cost of putting over $1,300 extra miles on my car, but the basic question is whether $130 in savings is worth 12 hours of my life in my car.

I'm thinking it's not.

Non-financial pros for flying:

• The 12 hours I'd save are hours that would be spent with my family, who I don't see often.


• In addition, the 6 hours in the airport/plane could be spent reading, sleeping, meditating, meeting someone new, or even enjoying a glass of wine - as opposed to driving and endlessly surfing the radio.


• Spending 4 hours in flight is less risky from a liability and personal injury standpoint than spending 18 hours driving.

The only non-financial pros for driving that I can see is the potential for flexibility in my travel plans. What do you guys think?

True Investors Don't Buy Mutual Funds

The value of diversification in a portfolio is heralded constantly in the investment world; nobody really ever argues against it. Along those lines, mutual funds (particularly index funds and ETFs) have been championed for their ability to offer easy diversification to smaller investors.

I learned in a finance class in college that experts generally agree it takes a minimum of 50 stocks to create a diversified portfolio. Without mutual funds you might need at least $50,000 to build that diversified portfolio (assuming that it doesn't make sense to invest less than $1K per stock in order to minimize transaction costs).

But by investing in a mutual fund you get to purchase tiny slivers of hundreds or even thousands of stocks without incurring hundreds or thousands of trading fees. You get the benefits of diversification for a fraction of the cost!

For this reason most investors use these funds as the basis of their portfolio, including myself. I have a Scottrade account with which I trade individual stocks "for fun" and only with a small percentage of my overall portfolio. The majority of my "real" investments - including my retirement savings - are in Vanguard funds.

But consider this excerpt from Investopedia article "Think Like Warren Buffett:"

While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due diligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.

Buffett's stance on taking time to properly allocate your funds is furthered with his comment that it's not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

I think this is a very significant point that should be considered by all investors. If you really have no knowledge or interest in finance and investing then a simple index fund may be the best thing for you. It also might be the best place to start for most people, especially if you have limited capital to invest.

But if you've got significant money to invest and you are educated in matters of investing (and an argument can be made that all of us should be), then could you be better off by condensing your holdings to a collection of fewer stocks - and bonds - that you have personally evaluated and selected?

In reality, you aren't an "investor" in the true sense of the word if all you do is dump your money blindly into mutual funds. A true investor can and does evaluate businesses on a fundamental level. They make informed decisions about where to invest their limited resources. They evaluate performance based on expectations and the earning potential of that business or industry.

In short, a true investor knows what she owns and why. Do you?

Saving Money This Holiday Season

I've come up with several ways to save some serious bucks this holiday season. They may not all work for you, but here are some ideas:

• I'm returning the $200 formal gown I bought to wear to a ball that my employer is requiring me to attend. I'm wearing an old prom dress instead (I also get to return the $80 spanx I needed to pull off the slinky new gown).


• I am driving 8 hours to see my grandparents in Louisiana this Thanksgiving, even though I have flown every year since I graduated from college. It will only cost me about $80 in gas compared to a $300 flight.


• I'm also driving home to Alabama for Christmas for around $300 savings.


• I'm also spending extra days at home this holiday season, which will save me money on food and entertainment this season.


• I'm saying "no" to at least 2 charity parties that I have gone to in each of the last few years. Savings is roughly $200 (sorry kids).


• Due in large part to the previous point, I will not be needing quite so many manicures/pedicures as I usually get this time of year. Savings = $150


• I'm not buying any extra or holiday-themed (and therefore overpriced) foods, decorations, flatware, scented goods, gifts/ornaments or anything else this year.


• As I'm not dating anybody in particular (I don't think...) I will save significantly on Christmas gifts this year. Also, I'm going to scrimp on my family and not feel bad since I've been relatively lavish in years past. Savings = $250

The reality is that most of this savings revolves aroung the Giving portion of my budget. I have noticed my giving has declined by about 50% year-to-date compared to 2008 (charitable giving, gifts for others, political donations, and donations to my alma maters).

Expensive Day and Night

Tonight will not be a cheap evening for me.

I'm meeting a friend from out of town for sushi at this hip new place where I will probably spend $50 for two drinks, my half of an appetizer, and one specialty roll. My friend lives in south Texas where they don't have trendy sushi restaurants, so this is her guilty pleasure when she visits.

I will then be paying $15 for a cab to take me to a charity party for which I just paid $50 for a ticket online.

Luckily drinks will be free at this event, so my only costs for the remainder of the evening will probably be $15 for a cab ride home (unless I can catch a ride with a friend...).

Dinner/Drinks - $50
Charity Event - $50
Cabs - $30

This in addition to the fact that I just spent roughly $300 over my lunch break when I made the mistake of going to the mall (via Nordstrom) to get a sandwich at this place I like in the food court.

$75 - this Spanx thing I need to wear with my clingy formal dress at a ball in November
$130 - this really classy and unique work blouse that will go with most any skirt or pair of pants
$75 - two versatile DKNY tanks (one black, one dark pink) that will be perfect under a suit jacket or sweater - and even by themselves around the house.
$7.95 - the sandwich, plus a bottle of water

Everything I bought was 40% off except for the spanx. And I didn't buy the fantastic Burberry jacket that I tried on (which would beautifully fill a seriously gaping coat hole in my wardrobe). She told me it might go on sale next week though. In which case I might just have to find my way back to the store...

Tis the season.

Shield Your Assets - Protection from Creditors, Lawsuits, Taxes, Heirs

Protecting ones assets isn't discussed as often as accumulating them, investing them, and even distributing them to charities or heirs. But it's one of the most important aspects of financial planning.

There are various people and entities from whom you might want to shield your assets: creditors, lawsuits, any taxing authority, even your spouse (or future ex-spouse). Whatever your purpose, there are many strategies to help you protect your assets.

Note: We are talking about legal and ethical methods of asset protection here. Other methods will not be discussed and are not endorsed, such as setting up offshore accounts for purposes of tax evasion; giving away assets in order to qualify for medicaid or other government assistance; or hiding assets from your spouse for purposes of leaving him/her in the cold after a divorce.

Insurance Policies
Insurance policies are a relatively simple and common way to protect a person's biggest asset - his or her earning potential. You can purchase disability insurance or long term care insurance to protect yourself in case you lose your ability to work. Or you can purchase a variety of life insurance products which will protect your loved ones by providing them a lump sum or annual annuity upon your death.

Tax Sheltered Accounts
Individual Retirement Accounts, 401ks, pension plans, 529 plans and many other types of accounts enable investors to legally shield certain investments from the tax collector. These can be powerful tools, especially when utilized over a long period of time. Plus they are often legally protected from creditors even in the event of bankruptcy.

Similarly, homesteads provide large income tax deductions and in many states are protected from creditors in case of bankruptcy.

Trusts
Trusts can also be used to shield assets from taxes, creditors, and lawsuits, but in addition they can protect your assets from your own family members.

Often the head of a family will set up a trust or trusts for the benefit of the children (and/or for his future widow) with very specific rules about when and how that money can be accessed. This can help protect the estate from the financial ignorance or apathy of the heirs, from any addictions they might have, from their creditors and lawsuits, and it also may have the added bonus of keeping that money in the family in case of a divorce on the part of a beneficiary.

On a personal note I have decided to quit taking distributions from a trust that was set up for my benefit by my grandfather in order to keep those assets sheltered. I used to take out enough each year to max a Roth IRA and for other purposes, but now I've realized that while that strategy might be a good tax strategy, once I take money out I can never put it back in - and it becomes accessible by my creditors, by my tenants if they ever sue me and win, and by any future spouse I may acquire and subsequently divorce.

Contracts
Any number of contracts can protect both parties in legal arrangements. A Pre-nuptial agreement, for instance, can protect assets you accumulated prior to marriage in case of divorce. It can also ensure any inheritances you receive during the marriage are yours alone.

Business Entities
Corporations, LLC's, Partnerships, and other business entities can function like trusts to get assets out of your estate and, therefore, protect them from estate taxes, spendthrift family members, creditors, litigious rivals, and even from personal bankruptcy.

My New Conservative Asset Allocation

My asset allocation has changed dramatically over the last month, due to certain decisions made on my behalf by the trustee of my largest investment account. I was consulted in advance about the potential changes, and I said that I was fine with whatever they decided.

So my portfolio just got a lot more conservative.

I have about $175K left in a trust which was originally set up solely for my educational benefit; I won't control those funds until I turn 35. Throughout my entire life they've been invested 100% in Vanguard stock index funds, but recently my grandfather had a change of heart that he decided should trickle down to those accounts (most of which are still being tapped for college by my cousins and siblings).

But in addition to that I have nearly $50K in retirement funds I've saved on my own, in addition to $15K of other investments and $15K in cash. Not to mention $130K in real estate equity.

My previous total portfolio allocation if you add up all those investments was:

• Stocks - 58%


• Bonds - 2%


• Cash - 5%


• Real Estate Equity/REITs - 35%

Now that they've moved 50% of the trust into cash, it looks like this:

• Stocks - 35%


• Bonds - 2%


• Cash - 28%


• Real Estate Equity/REITs - 35%

Honestly I'm fine with this new allocation. Not only is it pretty balanced with a third in RE, stocks, and cash, I may end up tapping the trust to pay for a wedding and/or a car and/or a new rental property within the next 5 years, so part of it may as well be in cash.

Besides I'm focusing on my retirement accounts as my primary long term investments, and the allocation in those is 15% bonds and 85% stocks (about a third of which are international). That's all I can really control at this time (RE is what it is, and the trust isn't officially mine), so that's all I worry about. In a few short years as I continue to add to retirement accounts, that allocation will take over.

Deducting Charitable Gifts - More Complicated Than You Think

For a charitable gift to be deducted from your income for tax purposes, many rules must be taken into account.

First of all the Donee must be a qualified Public Charity, Private Operating Foundation or a certain kind of Other Private Nonoperating Foundation. Any gifts to other people or organizations, however charitable in nature, do not qualify for a tax deduction.

Second, the Donor must have "donative intent," meaning they knowingly chose to donate and knew what they were doing and the value of the gift; the Donee must accept the gift; and there must be a lack of consideration from the Donee (i.e. the Donor doesn't benefit from the gift).

You can deduct travel costs associated with charitable work ($0.14 per mile for auto), but you cannot deduct the cost of your time or any services you provide.

Now that we've got the definitions settled, let's consider the tax implications of charitable giving.

Qualified gifts may consist of:

• Cash,


• Ordinary income property (property that would give rise to ordinary income if sold),


• Short-term capital gain property (such as inventory), and


• Long term capital gain property, which is further divided into the following categories: Intangibles, Tangible Property (related use to the charitable organization), Tangible Property (unrelated use to the charitable organization), and Real Property.

The type of property donated affects the deduction that you can take.

Gifts to Public Charities & Private Operating Foundations
The general rule is that a Donor can deduct the lesser of the adjusted basis or the Fair Market Value of any charitable gifts given - but only up to 50% of his or her Adjusted Gross Income in any given year. Any amount given in excess of that ceiling can be carried forward for 5 additional years and deducted against future income.

However if the gift consists of Intangibles, Tangible related-use property, or real property, then the rule is different. In those cases you can deduct the FMV of the gift up to only 30% of AGI. Or the Donor can make a "Basis Election" in which case he or she can deduct their basis in the gift (as opposed to the FMV) up to 50% of AGI.

Gifts to Other Private Nonoperating Foundations
The AGI ceiling in this case is 30% for cash and Ordinary Income and Short Term Capital Gain property. The AGI limit is 20% for gifts of all types of Long Term Capital Gain Property whether or not the Basis Election is made.


And there you have it.