A couple of weeks ago, I did something that really made me feel uncomfortable.

I applied for a credit card.

My wife and I have been using the same credit card for years. We did a little bit of balance-shifting when we were starving college students to take advantage of temporary zero-interest-transfers. We accumulated a bit of debt back then, which took us years to pay off. Since then, I have pretty much treated credit cards as loaded guns pointed directly at my wallet.

And since I keep my wallet in my front pocket (after an unfortunate pickpocketing incident as a kid), that makes me REALLY nervous.

A few years ago, I went ahead and accepted a credit card offer at Kohls while buying a new Dyson vacuum cleaner. It was on sale from $500 down to about $375, and the woman at the check-out counter told me that if I accepted the application, I’d get 25% that day’s purchase. I double-checked to make sure that she really meant I’d be getting nearly $100 off. She told me I was, so I went ahead and accepted the application.

We paid off the charge the following month, and I never used that card again. I can’t say I feel bad about that.

Based on some suggestions on financial blogs and at the Millionaire Mind seminar, I finally took the plunge to get a card with a reward plan. These come with a much steeper interest rates, but for people who pay off their balance (almost) every month, it’s a pretty good deal - particularly if you make certain to buy everything through the card. Effectively, it cuts about 1% to 2% off of our cost of living. With 1% - 2% cash back on every purchase, if we direct 95% of our costs through the card (not including the mortgage and a few other automatic payments we have made through our account), we should pick up over $20 a month in savings. Not much, but that’s nearly $250 a year extra that - if we are careful - could be put right back into savings.

But there’s a danger. And it’s a doozy.

We normally shop with check and debit card (except for online, where a credit card’s protection is critical). If we can’t afford it, we don’t buy it. It’s a simple way to live within our means. Credit cards add a layer of indirection to this. I’m nervous that it could get very, very easy to overspend the budget each month this way.

To combat this, we’re going to have to be merciless in our budgeting and tracking payments. Fun? Nope.  Budgeting is one of my least favorite thing to do, next to fixing the garbage disposal or cleaning bathrooms. Is it worth $20 a month? Maybe not. But since we’re being more aggressive with our investing, money management, and budgeting anyway, we can probably slip this one in as a side benefit.

Sometimes blogging gets promoted as an easy source of wealth. You run a bunch of virtual ads, post about your hobbies, the world beats a path to your door, and you find fat checks arriving at your doorstep every month.

If this is the case, I must be doing something wrong (and yes, I probably am). Both blogs are a source of personal satisfaction to me, and offer me a great outlet to share what I learn with others. And yes, I do see a small but steady amount amount of so-called “passive income” from them. And this is completely awesome, particularly for doing what I enjoy doing.

But is it easy money? Lots of money? Nope.

Duncan Riley has a great post about the myths of blogging at The Inquisitor called the “10 Myths of Blog Marketers Debunked.”

Addressing the “blogging is easy” myth, Riley writes:

Blogging isn’t easy. Just because you can type some words into Blogger doesn’t mean that somehow that’s going to make you millions. Successful bloggers all share the same traits: they work hard, really hard, and often work longer hours than most would in non-blogging jobs.

And can blogging make you rich? Probably not, says Riley:

Very rarely is this true. Very few one person blogs ever bring in big money. Most large blogs today have a team of writers, and even then in this economic climate, margins are starting to get tighter. See hard work for the success path.

Frankly, there’s an insane and ever-growing number of blogs out there, and a finite amount of advertising revenue possible. Even bringing in a reasonable amount of part-time income requires tons high-quality content, longevity, a focus that is neither too broad nor too narrow, excellent Search Engine Optimization (SEO), far more marketing work than 99% of bloggers are willing to devote to the effort, and a solid monetization strategy.

That being said - if you have a large enough niche to target, have something of value to offer to others, and are willing to devote the time necessary to make it work, blogging can be a viable supplemental income stream - or better. A few thousand dollars  - or even just a few hundred - each year can really pay off in the longer-term.

When I was getting ready to our first house, someone told me how much money could be saved if you were to pay double the principle each month. At 6.5%, a 30 year mortgage will cost you more than double (over 225%) of the actual cost of the mortgage. I was astonished at how little principle gets paid off in the first years of a mortgage loan. Discovering this, I figured that it was a no-brainer to do just pay extra towards the principle each month.

Nowadays - it doesn’t seem so simple.

First of all, if you can earn more in interest by investing that money, then things get more complicated. If you earn 10% rather than save 6.5%, that’s a 3.5% improvement, right? Add to the equation the fact that the interest on your home is tax deductible, and there is even less incentive to pay off the mortgage early.

My late stepfather brought up another factor. Having faced foreclosure as well as natural disaster befalling former homes, he had a very different attitude. He explained, “If something happens to your house, you are out your equity. If you are facing financial hard times and the bank begins foreclosure proceedings, they can foreclose on your house whether your owe $300,000 or just $3000 - and they get the whole house.” His suggestion at the time was to pay the standard mortgage payment each month, and to invest and save until you had enough to pay off the entire house in one lump sum.

Will this work for you? It really depends upon your confidence in investing, and your mortgage rate. Paying off debt is an awful lot like a guaranteed ROI equal to the interest rate (you are just saving x% rather than making x%). If you know you can do better, it may be worthwhile. If you understand tax laws and how much your house might allow you write off gains, it may be even more worthwhile (I really don’t, yet…)

If you don’t think you can beat it, can you refinance your debt so that it is more worthwhile?

This could be interesting news whether you are interested in e-publishing or just buying books in digital form:

Random House Increasing E-Book Inventory, Says Sales Have “Tripled”

E-Books are a great way to capture the “long tail” in the publishing business. Out-of-print books might not be worth putting through another print run, but once converted to digital form, it costs next to nothing to make them available for sale - and often at a discount.

The most interesting comment (to me) is the final sentence: ” Random House tells the AP their tiny e-book sales have tripled this year.” If reports are similar across the industry (and it sounds like it is), this could mean that e-books are finally starting to catch on.

Maybe it’s just me, but it seems these days more and more companies are not content to sell you a product. They want to sell you a plan that takes money out of your wallet month after month. I can’t blame them for trying - a constant stream of revenue like that can be worth a lot more than a single sale. So companies would rather rent or license things to you than sell them to you. Once you are on that subscription, they no longer need to encourage you to take action to sell you anything — they just need you to do nothing at all.

On top of that, they will up-sell you on small, additional services which add small amounts to your monthly bill each month. Over time, these will add up. Sure, it’s a mere $9 a month, but over the course of three years, you’ve spent $324 for something that you do not actually use.

Can you think of a better place you could have put that money?

Action:

At least once a year (January is good), or even as often as once a quarter,review your subscription services - the monthly or annual bills you have to pay. Pretend you are starting with a blank slate — that all of these services like cable TV, cell phones, magazines, utilities, online games, home delivery of food, and so forth are all vying for your business for the first time.

Break out and Include the little extra “premium” charges - like the extra TV channels you subscribe to that you may or may not ever watch. Do you use those extra services that much? Are they worth that much to you?

Multiply the costs by three years’ worth of payments. For monthly payments, multiply them by 36. Look carefully at that dollar value, and pretend that you have already canceled every single one of them already.

Now, which ones can get your business back? Chances are the electric bill, phone bill, and water bill will have pretty solid justifications for you to bring them back into your life, but are there optional surcharges tacked onto the bill that you can do without? Cut them.

Make each bill sell you its services all over again, without the pressure of a salesman or anything other than the stark 3-year cost. Are you interested in paying that again?

Now, the chances are that the bulk of your monthly bills will get back into your good graces. But by doing this exercise regularly, you may be able to trim the fat and cut off some unwanted access to your wallet that you may have granted over the years.

Great video of invester Jeremy Grantham:

Interesting points - he claims that equities (stocks) are now, for the first time in a couple of decades (at least since 1994), “reasonably cheap.” but that the market has the potential to make them “spectacularly cheap” in coming weeks. He also suggests that there’s no hurry to invest in equities right now - the bad news and earnings nightmares will persist for another year or so. But if you have a longer horizon - he suggests about seven years - this is the time where there is the potential to make a lot of money.

Tip o’ the ten-gallon hat to Upside Trader for this link.

A few months ago, I interviewed for a position as a programmer for a hedge fund. It involved a lot of hoop-jumping and a ton of interviews over the course of several months, and I didn’t end up getting the job. Considering the economic environment over the last three months, that might have been a pretty good thing. But one of the basic questions I was asked in one of the interviews was to explain the difference between a hedge fund and a mutual fund. Until this year, I wouldn’t have known the answer. All I knew, from tidbits seen in the news, is that they were regarded as being “risky.”

Most of us are familiar with mutual funds. We probably have some money invested in a mutual fund via a 401k plan. But our exposure to hedge funds is usually limited to what we hear on the news.

Hedge Funds are like mutual funds in that investors entrust their capital to a fund (and fund manager) to be professionally managed and invested across multiple vehicles. So you get diversification and professional management. Both can be good things.

The biggest difference with hedge funds is that they are not subject to the same regulations that mutual funds receive. Mutual funds can’t deviate from their charter - if your fund is a large cap equity fund, it can’t shift gears just because large cap equities are getting clobbered. They also can’t use some of the more creative or “exotic” vehicles and strategies out there, like shorting stocks or using options, or using greater leverage beyond just buying into their vehicle. They are also required to offer a greater transparency to their investors.

Hedge funds, on the other hand, don’t have these same restrictions. They can short stocks, use options, hedge long positions with options, whatever. They also have more freedom in how they charge fees to their investors, and they don’t have to show as much transparency into their operations to their investors. In fact, many guard their operations and transactions jealously as their “edge” in the market.

It is for these reasons hedge funds are considered “risky” and have restrictions placed upon them as to how many investors and / or the KINDS of investors they are allowed to take on. In many cases, if you aren’t already a wealthy (”accredited”) investor, you can’t participate. This is a little ironic, as typically hedge funds do much better than mutual funds in a market downturn, as they can do things like go short. The very origin of the name comes from the original hedge funds being “hedged” to protect capital, at a cost of slower upside movement (though that doesn’t necessarily apply today).

But the unregulated nature of these funds (and their fees), combined with the potential for hedge funds to wipe out in a spectacular manner, means that a potential investor should really do their homework and know what they are getting into when they put money into the fund. The government doesn’t want poor Grandma Maybelle having her retirement wiped out because she entrusted all her money to some shyster of a hedge fund manager.

Or into Long Term Capital Management, which was run by some of the best minds in the business.

Thus hedge funds’ reputation for being high-risk. I imagine if the floodgates were truly opened, there would probably be even more carnage. Or more regulation of hedge funds.

According to Morningstar (and this article), all but one of the 11,585 mutual funds they track but one is underwater this year.

Every Stock Mutual Fund But One Has Lost Money In 2008, Except One

Wow - do you feel the need to put your money in the one that isn’t losing money?

Hold on. The exception that has been flat this year has also been pretty flat for the last four years - it lost about 2/3rds of its value in the 2000 recession, and never recovered.

I guess they just shoved their cash under the ol’ mattress all this time or something.

A long time ago, in a college, we had a demonstration of wealth generation that I only vaguely remember. But it went a little bit like this:

Let’s say I can make notepads for a quarter (including my labor). And let’s say you can make pens for a quarter. I have a dollar in my pocket. I have, naturally, a lot of notepads, and you have a surplus of pens.

My notepads are great, but they are pretty useless without a writing instrument. So I offer to buy a pen from you for a dollar. You agree, accept my dollar, and give me a pen in trade. I now have a pen for use with my notepads, so I am happy. My life has improved.

Now you realize that pens without anything to write on are pretty useless, and because of your recent sale, you have a dollar to spend.  You offer to buy a notepad from me for a dollar. I agree, and you give me a dollar back - the same dollar I used to buy a pen in the first place.

Now I have the same money in my wallet that I had to start with, but I also have a pen worth a dollar, and I’ve traded away a notepad worth (to me) $0.25. You also have the same money in your wallet as you started with, but you also have a notepad worth a dollar, and have traded away a pen worth $0.25.

So each of us have generated $0.75 of value from… what?

Now, you could argue that we both traded $0.25 of effort, and so the net effect was no change, but that ignores the value of the “low cost provider.” If it would have cost me well more than a dollar to make my own pen, and cost you a lot more than a dollar to make your own notepad, then we both scored and gained value in our lives.

We all have different needs, wants, desires, values, talents, skills, and capabilities. That inefficiency and inequality brings incredible opportunity for us to contribute value to the lives of others, and to receive value in return. That discrepancy brings opportunity, and a chance for everyone to enjoy richer lives.

After all, I may complain about the price of a new car, but it is still far, far cheaper than having to make one myself from scratch. I sure am glad there are a bunch of companies out there for whom designing and manufacturing a car is no big deal. And I’m VERY happy to pay my garbage bill each month - the savings that gives me in my life is WELL worth the price. Particularly when you figure the time I’d have to spend getting that smell out of my built-from-scratch car!

And that’s really what the economy is about. Sometimes we get hung up on things like inflation, the stock market, the price of gasoline or pork bellies, and playing tug-of-war over dollars, euros, yen, or gold. That’s all well and good, but it does put the cart before the horse. That’s really just an abstraction of true wealth. A very convenient and useful abstraction, but still just a derivative.

This is something I try and keep in mind as the doomsayers predict the end of the economic world.

One of the big tricks salespeople use to try to convince their prospect to buy is to break down the cost into a very small, seemingly insignificant amount when spread out over time. For example, if you take a year to pay off that new $2100 vacuum cleaner, interest-free, its cost to you is less than $6 a day!

Great deal, huh? Well, maybe. How about applying that same mentality to investing?

Lets say you put only $6 a day - every day - into an investment account. And lets say you invest that account quarterly (4 times a year).  That comes out to “only” $2190 invested per year.

So what’s that come out to over 20 years? 30 years? 40 years?

Assuming about a 10% return (the historical average - which may be meaningless today, but we’ll pretend), let’s calculate how much you invested, how much it is worth, and how much money you made. And let’s pretend my calculations are not way off-base:

20 years - invested $43,800 - now worth $130,043 - made $86,243

30 years - invested $65,700 - now worth $373,483 - made $307,783

40 years - invested $87,600 - now worth $1,004,904 - made $917,304! Millionaire!

So if you are still pretty much starting out in your career, that “mere” $6 a day can make you a millionaire! It may not be quite as impressive in 40 years as it is today, due to inflation, but I’d take it!

But that is really extremely passive investing - throwing your money into an index fund, re-investing the dividends, and otherwise ignoring it beyond just buying and holding.

Now, educated investors that I know go for 12% to 16% as their “low risk / low reward” range for long-term investments. So lets see what would happen if you could pull off a sustained 15%…

20 years - invested $43,800 - now worth $236,604 - made $192,804

30 years - invested $65,700 - now worth $1,004,088 - made $938,388! Millionaire!

40 years - invested $87,600 - now worth $4,108,990 - made $4,021,390! Millionaire X 4!

So what’s the take-away?

First of all - it’s not expensive to invest. $6 a day doesn’t sound like a lot, does it? Over time, well-invested, it can be worth an incredible amount. You can play with those numbers and imagine what they’d look like if you doubled that amount, add it to your yield from your work’s 401k plan, and periodically through some larger lump-sums to it. (Hint: Doubling the amount yields about $473k, $2 million, and $8.22 million over 20,30, and 40 years respectively).

Secondly - it pays to become a more educated investor. The financial ‘advisers’ (read: salespeople) who are trying to sell you their funds will try to convince you that you just can’t beat the stock market average. If you are not an educated investor, then they are probably right. But would a few extra percentage points be worth spending some time and energy to learn?

By my calculations, it could be worth millions.