I was reading the January 7, 2008 post of “I will teach you to be rich.”  I agree with Ramit that buying your first home is a huge step and should not be taken lightly, especially in high-cost areas like San Francisco, where buying an average residence can run over a million dollars.  However, there is a distinction drawn between your personal residence and investment real estate.  Purchasing a home has many benefits: it puts a roof over your head, you can deduct mortgage interest, and you are building home equity (hopefully with a traditional mortgage).  However, too many people view a personal residence as an investment property, when it really is for personal consumption.  Bankers, when reviewing a person’s net worth, typically exclude the value of the primary residence.  Why?  Because your home is the roof over your head; it is not a liquid investment or a cash-generating investment property. 

Unfortunately, a lot of people failed to take this into account in the recent real estate bubble.  Several of my friends made very costly renovations to their homes.  One older couple sunk over $200,000 drawn from their home equity line of credit to expand their living room and add another bedroom.  They didn’t need the space, but wanted to make the home improvements in order to sell their home for a premium amount when they retired.  Of course, the real estate agent that they invited over convinced them that they could command such a high selling price with the renovations.  Needless to say, since that time, the market has softened considerably, and it is highly doubtful that they will reach that desired selling price before retiring in the next 3 years.  Another friend, with her then-husband, spent large sums of money, partially financed by credit cards and a home equity line of credit, to convert their townhouse into a “smart house” complete with an array of electronic voices that greet you upon entry.  Basically, they overimproved the property for the neighborhood.  Although my friend is getting the home in the divorce settlement, she is “house poor,” with a lot of equity but little liquid savings.

 Contrast a personal residence home with investment real estate.  Although many of the so-called real estate gurus on those endless infomercials (e,g, Carlton Sheets), oversimplify matters, investing in real estate can be very profitable IF you choose the right deal, i.e., you buy a property with a high rate of return, positive cash flow to you and a steady tenant.  Real estate markets are regional: buying commercial property in most parts of California will yield far less in return than properties in parts of the South or Midwest.  However, with the help of commercial real estate websites like www.loopnet.com and national real estate brokerage firms like Marcus and Millchap, an investor in California can find a nice strip mall in Tennessee or a warehouse in North Carolina yielding 8 to 10 percent.  I do not live in the South but have had good luck with several commercial properties in Tennessee and Alabama, not only with the positive cash flow but also the ultimate selling price.  In future posts, I will talk more about commercial real estate investing. 

In a recent CNBC special, “Warren Buffett, the Billionaire Next Door: Going Global,” hosted by Becky Quick, Buffet explains his simple philosophy when deciding to acquire companies for Berkshire Hathaway Inc.:  he likes companies with “durable competitive advantage.”  These companies possess enormous competitive strength that will endure over decades.  Some of the companies in Berksire’s stable are Benjamin Moore Paints (founded in 1883), Fruit of the Loom (founded over 150 years ago), and See’s Candies (founded in 1921). 

In one of the interview segments, Buffet points to a picture of the Berkshire Hathaway textile mills, the company that he bought in the 1960s and now the namesake of his investment company.  Buffet recalled that the Berkshire textile mils had great workers, working equipment, and produced cloth and linings for clothing, an essential need.  The critical problem with the Berkshire textile factory?  No competitive durable advantage, which doomed the textile factory.  Buffet explained that industries like textiles, which have high labor costs and turn out a basic commodity product, don’t have competitive durable advantage.  When is the last time you bought an article of clothing that wasn’t made outside the United States?

Buffet summed it up by saying that you always should be looking for the “chinks in the armor” of a company, i.e., something that will make the company vulnerable in the next 10 to 20 years, such as high labor costs.  Buffet says that after World War II, the Berkshire textile business was as profitable as today’s pharmaceutical companies, but because it lacked a competitive advantage, the company is no longer in business.  Buffet’s philosophy is stunningly simple.  However, for today’s average investor, picking and holding a stock of a company that is a good solid business, but unglamorous, is surprisingly more difficult than falling for the stock du jour, whether it be tech, financials, or home builders.  Has anyone come close to emulating Buffet? 

Starting a small business can be a complex, stressful process.  The homework that I have done so far has been limited to talking to other businesspeople and seeking out potential mentors.  However, there are plenty of other resources available at your fingertips.  A May 2, 2007, Article in the New York Times, “Small Business 101: How to Get Started” by Barbara Whitaker, provides some good advice for the budding entrepreneur.  A sobering statistic: a new business only has a 50-50 percent chance of surviving 5 years.   So, how do you start a successful new business?  Whitaker has simple advice from the experts: education, careful planning and adequate cash flow.  She recommends checking out the following websites for advice on operations, business plans, start-up costs, and understanding of your particular industry:

• www.sba.gov (Small Business Administration )
• www.work.com (how-to segments on issues facing small businesses)
• www.e-venturing.com (topics ranging from finance/accounting to humand resources and operations)
• www.startupNation.com (video segments and entrepreneur forums)
• www.bplans.com (has over 100 sample business plans).

Whitaker also recommends going to the Census Bureau and Fedstats for business plan information on demographics, income, and economic indicators in the area where you plan to open your business.  The overall advice: plan, plan, plan in order to maximize your chances that your business will succeed.

One of my favorite personal finance blogs, www.getrichslowly.org, wrote about one of my favorite high interest rate savings accounts, ING Direct.  I’ve had an account at ING Direct for several years and I love it.  It’s simple to use and has a great rate.  When you set up an account, you link it with an existing checking account.  You can actually link it to multiple accounts, allowing you to transfer money between two accounts.  The APY is currently 4.1%.  There is no minimum balance or any fees.  You can also set up automatic withdrawals to keep your savings plan on track.  To make it better, there is now an Electric Orange checking account with a 3.15% APY.  Your Orange savings account can be linked to your Electric Orange checking account for instant access through fee-free ATM’s.  Normally, a transfer from your Orange savings account to your regular bank’s checking account can take 2-3 days.

 J.D. on GetRichSlowly.com wrote that he heard about a 6.25% APY checking account being offered by a Portland bank.  To get this rate, you need to meet the following requirements each month:

• Use your check card 12 times or more.
• Have one of the following occur monthly on your account: direct deposit, ACH deposit/withdrawal, automatic bill payment.
• Receive your statements electronically.
• Log in to online banking at least once per month.

If you do not meet these requirements each month, then the rate becomes 0.1% APY.  Even though this account offers a higher rate than ING Direct, I still feel that I like the ING Direct account better. 

The main problem I have with the Portland bank account is that it incentivizes you to combine your savings account with your checking account.  To get the good rate, you will need to use your check card 12 times a month.  I’ve never liked check cards.  I actually asked my bank to give me only a debit card without the check card feature.  The reason I don’t like check cards is that they can be used just like a credit card.  Unlike a regular credit card, the money is deducted immediately from your account when you make a purchase.  If you have to use your check card 12 times a month, that’s 12 opportunities to have your card number stolen.  If someone steals your card number, not only can they drain your checking account, they can drain your savings as well.  It’s all one account.  I know that the banks advertise that you have similar protections to a credit card.  However, when someone steals your credit card, you don’t have to pay the extra charges.  When someone uses your check card fraudulently, you’ve already lost the funds and have to fight to get your money back.  Do you really want to tie your rainy day funds to a check card?

Reading other blogs like www.consumerismcommentary.com, I noticed that reducing food expense was a popular new year’s resolution.  As I discovered over the holidays, spending on food, even when you eat in, can consume a large chunk of your monthly budget.  For example, I was shocked at the fact that we went to at least five different stores, from Costco to Trader Joes to Safeway, just to purchase all of the ingredients for Christmas dinner.  The total amount we spent exceeded $100.00 for one meal.  Granted, we had people over for the meal, but of course they brought even more food.  In the end, we had tons of leftovers that we had to toss several days after Christmas.  When I asked my husband, who does the shopping, what he estimated that we spent just on groceries on a monthly basis, he replied ”about $500.00.”  Needless to say,  I think that we could probably cut down on that figure.  So, for one of our 2008 New Year’s Resolutions, we resolve to spend only $350.00 per month.  With the reduced spending, that yields a savings of $150.00 per month, which we will have automatically deducted from our checking account into our INGdirect savings account.  Here’s the hard part: how do we do this without resorting to rice and beans?  Once I looked over our grocery receipts, however, I found an easy candidate for the chopping block - stop going to Costco.  Don’t get me wrong; I think that Costco epitomizes brilliant retailing.  Where else can you buy a head of lettuce (or four), a 5 carat diamond ring, and the latest 72 inch high-definition TV all in one trip?  The problem is, everytime we go, inevitably, we pick up a four week supply of salad, avocados, spinach dip, and other oversized bags and boxes of impulse food items like the mini quiches and barbeque chicken wings.  Even with only four or five items in the cart (which almost never happens), we never get out of there for less than $50.00.  For a huge family, Costco might make sense.  But for two people, no matter how fun it might be to go, it does not make economic sense to buy huge quantities of perishables that go bad in one week before we’ve even had a chance to open the wrapper.  So, we’ll see how this resolution holds up.  I think it will be easier for me to avoid Costco, just because I dread the parking lot nightmare in front of the store.   

If you’re cheap like we are, you may not have gotten yourself a shiny new widescreen HDTV yet.  We’re trying to preserve our capital for our business.  When they are cheap enough, I’ll eventually succumb to the lure of watching the Superbowl on a huge TV.  For now, I’m going to have to mooch off my buddy and watch the game at his house.  For those of you still sticking to good old analog TV, make sure you take advantage of the government coupon giveaway for a digital TV converter.  Starting today, the government is handing out “$40 off” coupons for a digital converter.  You’ll need a converter in order to receive over-the-air broadcasts of digital TV.  The converter turns the digital signal into an analog signal that your analog TV will understand.  If you subscribe to cable or satellite, you won’t need a converter.  Your existing set top box will continue to feed the signal to your TV.

You can get up to two coupons per household.  The first 22 million coupons will go to anyone that requests one.  After that, you’ll have to swear that you do not subscribe to cable or satellite.  The coupons will probably be given out in February or March, about the time the converters are expected to hit the stores.  The converters are expected to cost between $50 and $70.  Your coupon will be good for 90 days after they are issued.  Even if you subscribe to cable or satellite, you may want a coupon.  If you have a second TV that still uses over the air signals, you’ll need a converter for it.

To request your coupon(s), go to https://www.dtv2009.gov/.  It might take a couple of tries.  My request didn’t go through the first time.  You’ll get a confirmation number if you’re successful.  Even you don’t need a coupon, you may want to request one for your less technically savvy relatives.

One of my New Year’s resolutions is to get rid of the clutter in my home office.  Going through a pile of old papers today, I came across an article from the March 28, 2004, edition of Parade Magazine “Getting Yourself Back on Track,” by Dianne Hales.  The article discusses breaking the self-defeating behaviors that underachievers engage in, such as procrastinating, missing deadlines, and other habits that undermine our chances for success.  This kind of behavior, not surprisingly, is extremely common, as one out of four adults routinely engage in this kind of behavior.  Hales notes that underachievers feel that they have little control over their circumstances, so they may not be as motivated as high achievers to take action to improve their lives.  Instead of tackling a difficult task, they curl up in ball, make excuses, and seek comfort in some form.  In her article, Hales provides a quiz to see whether we are sabotaging ourselves:

-Do you procrastinate and constantly put things off?

-Do you miss deadlines?

-Do you hold back rather than engage fully in your life?

-Do you try to get by with the least possible amount of effort?

-Do you quit things just as you begin to succeed at them?

-Are you stuck in what you thought would be a temporary situation?

-Do you blame others or bad luck when you don’t succeed?

It’s a simple quiz, but can reveal a lot about your behavioral tendencies.  I know that in the past year, I have been guilty of procrastinating on tasks such as reorganizing my home office and seeking additional funding for my start-up.  Both are very different things to accomplish, but critical to my future success.  So, as you make your list of 2008 resolutions, keep in mind that the very human tendency to put off tackling difficult goals may be the very obstacle we need to move past in order to move forward.