Tuesday, January 03, 2012

Penny Power 2011: How My Change Jar Stacked Up and Where It's Going

While the New Year's Day tradition of many is to nurse their raging hangovers, my ritual is a bit more tame and a lot less painful. I get up on NYD, make some coffee, turn on my satellite radio, then I dump out my loose change jar and count what's in it.

This jar contains the spare change I come by via whatever means (odd tip money, coins I find in the laundry, on the ground, etc.; the exception is quarters, which go back into the laundry...). I say, "do not pass up free money," which is what finding coins here and there represents. By themselves they're not much, not even added together, which is why I find a productive use for them all once per year: these tiny bits of lost and found capital get invested somehow. In 2011, the change jar ended up with $11.44 in it.

I've taken to plotting my financial moves in terms of whatever will result in the greatest increase in cash flow. I don't pay much attention to my net worth, nor will my future investing be for capital gains. The thinking behind this I'll have to save for a future post, but the basics of it is that I want to widen the spread between what is coming in versus what is going out month-to-month.

Right now I have various debts, one of which is a credit card that is currently at 0%. At first glance it would seem the choice of what to do with 2011's coin collection would be to invest in something paying any amount greater than zero. That would be to ignore the nature of a credit card balance payment, however, which is a percentage of the existing balance, calculated monthly. In this particular case, the percentage used is 1.5%. Thus, any amounts applied to the balance have the effect of reducing the monthly minimum by 1.5% per month going forward, which increases future free cash flow by an equal amount. In terms of cash flow, any alternative must pay at this rate at the least, but preferably more, to be the better alternative. Since most investment returns are expressed annually, the alternative must do better than this:

$11.44*.015 = $0.1716 monthly minimum payment reduction; $0.1716*12(months) = $2.0592 annual free cash flow increase; $2.0592/$11.44 = 18%.

Any alternative has to do at least 18% or better. There's only one dividend paying stock I'm paying attention to these days that can do that, American Capital Agency Corp (AGNC), which at the moment sports a dividend yield that clocks in at 19.9%.

It would seem I should go for some AGNC. I will not do this, however. AGNC's dividend could change. It may go higher, but because that company's returns depend on the Federal Reserve keeping interest rates very low, there's a good chance that their dividend will go down. There's also a very good chance that any cut in their dividend would take the relative yield well below 18%.

Applying these coins to my card balance, however, guarantees an 18% boost to my free cash flow in perpetuity, because once that balance is gone, it's gone forever (changes to other inputs and outputs notwithstanding, of course; I'm focusing on this event in and of itself here).

Had this particular card used the common monthly minimum divisor, 1%, the situation might have been different (the implied yield from applying these funds to such a card would have been 12%, a rate which can be easily and reliably beaten by alternatives). Being what it is though, it is the winner of my 2011 loose change collection.

The 2012 collection is already started, with the first few found coins clinking against the bottom of the jar. Keep your eyes peeled, there's free capital out there on the ground. Don't ignore it, it does add up. Find it, get it, and put it to work for you.

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