So I’ve made it out of Africa and my wallet can already feel it. With a week off to recover from two months on the road I’ve been spending a bit more liberally than I would otherwise.
Additionally it was my mom’s 60th Birthday celebration this past weekend and I ended up treating for a fair bit of the expenses related to staying out at an historic spa in the Portland area; the fabulous Ruby Spa at Edgefield Wineries. The experience was well worth it but I will need to put an end to my spending ASAP. While this spending was related to a milestone occasion, I will admit that I am often challenged from wanting to treat when I’m back at home. That is all fine and good when was coming home every 9 months to a year. Now that I’ve been back in Portland five times in one year that starts to add up.
The good news: that is what money is for at the end of the day. Unless I’m going way over the top I can feel okay in splurging from time to time. You aren’t just building your wealth for the bare necesities, right?
James & I look forward to checking into our expenses on the weekend when I’m back in DC and looking at what comes next for us DINKs.
Great. It looks like the Social Security fund is out of money. According to the Congressional Budget Office, the social security surplus will be about 3 billion in 2010, and that’s probably too high a figure. Obviously any social security reform would be highly controversial, and most likely working Americans wealth will take a big hit no matter how it is reformed.
Sometimes personal finance is all about managing psychology. For some reason, Americans tend to have a love affair with spending and the way we organize our money, accounts, etc. often facilities this.
So, if you are having a rough time talking yourself out of spending, you might consider changing how you’re holding onto your money.
1) If you’ve got a savings account transfer to a bank in a part of town you never go to. Don’t get on-line access to it. This will help reduce the opportunities to take money of the account for frivolous stuff.
2) Consider getting paper savings bonds instead of an electronic savings account. Paper bonds require you to sign and date the back one of each one – so its a total hassle to cash them in. Folks at the bank don’t really like to do it. Contrast this with how easy it is to get your money from a savings account, you just have to transfer it on-line.
3) Set up an automatic transfer into your 401k or savings account. If your company HR is taking the cash directly out of your paycheck, that’s one less opportunity you have to spend the money.
So, the main point here is if you have a rough time controlling costs you can always change your opportunity structures to minimize your freedom to spend irresponsibly. Saving properly is the first step in wealth building.
Being a personal finance aficionado is a bit like being a reformed alcoholic. A lot of people “hit rock bottom” before they really get interested in cleaning up their financial act.
So, if you’ve “hit rock bottom” and found the motivation to clean up your act, you might be wondering if you should pay down your debt or build up some emergency cash?
The answer is: do both.
Lets assume that you have, say, $15,000 spread out over various kinds of obligations. This might include, a bank overdraft account at 20%, maybe a couple of credit cards at 13% to 20%, a car loan at 6%, etc etc.
The thing to do in this scenario is sort your debts by how much you owe and your rate of interest on the debt. Next, figure out which of the debts which has the highest interest rate, and pay off like $1,000 of it. Then, consider socking away $500 to $1,000 to build up your emergency fund. Put this in a high yield money market account. After that, attack the rest of your debt. Knocking down that debt will allow you to start saving more, but putting money into an emergency fund gives you some security to fall back on.
People say you should pay off your highest interest rates first, but its more important that you come up with a system that works for your personal and cognitive style. For example if you need more rewards throughout the processes, its okay to pay off lower interest rate, lower balance debt if helps you stay motivated. Right so if you have an overdraft account that you owe $500 dollars on, but it carries less interest than your credit card, you could always pay that off $500 to get an early psychological win. Its true that paying off your highest interest rate debt is the most mathematically efficient way to dump the liability, but it does nothing for you if you are not psyched about the processes.
Paying off debt is a major drag. I had over $15,000 in credit cards at one point, and its not fun.
Sometimes we Americans may expect too much from our public officials. I’ve had a chance to digest the latest Geithner plan a little bit. Its looking more and more like a clever retread of last September’s famous “cash for trash” plan advanced by former secretary Paulson.
The plan, euphemistically called the Public-Private Investment Program (PPIP) or “Legacy Assets Plan”, has been billed as a way to mobilize private capital to help address the problem of toxic assets held by banks. The main idea of the plan is to set up a number of public/private partnerships to encourage market based valuation of “legacy assets”. The Federal Reserve and Treasury Department would subsidize the risk by guaranteeing up to 85% of the value of assets in question using Federally backed loans.
The main potential problem with the plan is that financial markets have demonstrated that these “legacy assets” are worth very little. If they had any real value at all, they would have been traded without government assistance. To make matters worse, most of the organizations who have an incentive to participate in these programs are the banks themselves. So, whats probably going to happen is the banks will create shell companies or use proxies to get involved in the program. They will then allow their subsidiaries to take the loss, thus jettisoning their worst “assets”. – From the banks standpoint, that’s the rational thing to do.
Of course, what this means is that the Treasury and the Federal Reserve will be on the hook for the balance of the losses. It could very well be a neat transfer of bad “assets” from the big banks to the public balance sheet. Hardly getting rid of the problem, this just makes Americans as a conglomerate on the hook financially. That means, yes, that it will come from our wealth-building activities be it work or investing.
If you haven’t seen it, here is an excellent video which gives one persons views on the downsides of the PPIP scheme. I’m leery of promoting videos from less well known sources, but this one seems well thought out.
Here is a piece from Nobel winning Economist Paul Krugman opposing the plan. Here is a collection of links from major press sources giving some initial reactions to the proposal.
Those AIG guys just can’t win. The TaxProf Blog has reviewed two analysis of the recent anti-AIG bonus legislation. According to some commentators, people receiving AIG money will still need to calculate their taxable income assuming the bonus was received. Considering that the Alternative Minimum Tax is implemented and accounting for the impact of state and federal obligations, some recipients will be effective taxed at 130%.
Essentially, they lose money even if the bonuses are accepted. Its damned if you do, damned if you don’t. Talk about taxes choking wealth!
In light of the long string of bailouts and Federal interventions on behalf of big business and the financial sector last September, some of you may have been wondering why Washington keeps getting involved, despite the mixed results?
Well, according to Simon Johnson’s recent piece in The Atlantic Monthly, the financial sector has effectively captured the Washington establishment, thus transforming the United States into an oligarchy.
Johnson’s thesis is not new. Its been around at least since the 1950s. The critical sociologist C.W. Mills wrote an influential essay entitled The Power Elite. In it Mills argued that ordinary citizens had fallen under the sway of powerful military, corporate and political elites.
The “US as Oligarchy” theory has some problems, but current events do make one wonder if perhaps there is some merit to perspective. But the real question we must ask is: How does this affect our wealth and personal finances?
The Wall Street Journal’s blog has a great interview with Scott Mitchell, CEO of affluence.org, a social networking site for people with over three million dollars in net worth. If you have some spare time, check out the interview. Its interesting for its quick glimpses into the world of the very rich. At the same time, join us on our goal of having more than $3 million in wealth ;)
There is a very good posting at a blog I read quite frequently called The Simple Dollar. The blogger there, Trent, discussed his families decision to get a car loan even though they had enough to pay for the car with cash.
For some reason, the decision stuck in my head. While I have tremendous amount of respect for Trent – his blog is one the most popular and successful personal finance sites on the web – so it raised an interesting question: should you take out a car loan, even if its a low interest one?
Just to recap, Trent bought a 2009 Toyota Prius and took out a car loan at 4% interest. His family was able to take advantage of some favorable legislation which allowed them to deduct sales and excise taxes on the purchase price of the auto. In terms of choosing a car, the Prius is a good pick. The car is tremendously popular and has very good gas mileage. So, the purchase was a smart buy.
However, I would not have made the same decision. Here is why:
1) Loans generally reduce your purchasing power. For example, a 4% payment on a 4 year car loan, assuming the purchase price was $20,000 – would be about $451.81. This is a pretty big monthly nut to crack.
2) The interest on car loans is generally not tax deductible. Its not like a student loan or a mortgage in which tax law allows you to deduct the interest. Payments on notes secured by automobiles are considered personal interest by the IRS and are therefore generally not deductible.
3) Consumer contracts can reduce your personal autonomy. A key factor about living debt free is autonomy. If you owe someone money, typically you are contractually bound to perform certain obligations – like make payments, but more importantly the realities of contracts between consumers and large institutions is they tend to favor the institutions. The legal arrangements allow institutions to raise fees, rates, sell your own personal information, seize your property for non-payment, etc. Of course its a philosophic question, but shouldn’t one goal of financial freedom be to minimize the impact of these kinds of arrangements in your life?
However, the decision to borrow at 4% does make good sense in at two regards. First, Trent notes that paying cash for the auto loan would reduce his potential alternative opportunities to put his cash savings to good use. For example one could find good investment opportunities in bonds that would yield more than 4% after taxes. Second, having money in the bank provides a degree of security that wouldn’t be there if cash was paid for the car. He may be able to invest it and get a better return, and in turn build his wealth instead of having it locked into an asset that loses value quickly as well as over time.
So, to quickly recap, should you take out a car loan, even if got a super low interest rate? Well, it depends on your personal situation, but I would not make the choice.
Okay, we blogged last week about the complexities associated with the AIG bailouts and subsequent bonus payments. Well, one of the executives in AIG’s financial services arm submitted his resignation letter. The letter was reprinted in the NY Times. Its a really poignant symbol of the whole tragedy the US economy has become.
Click here to read the letter. I think it will put the debacle in some context for you.
