February 28, 2009

Strategy to fight Foreclosure : Produce the Note

I just caught an interesting video from ABC news about a way to fight or at least delay a foreclosure. They discuss it here: ABC News: Homeowners' Rallying Cry: Produce the Note
The idea is to ask the lender who is doing the foreclosure to produce the original mortgage note that you signed. The lender should have the original mortgage, but in many cases loans are bought and resold and bundled into securities and sold around so its possible they misplaced the actual note. If you simply ask them officially to produce the note then they may not have the note or at least could take some time to find it.

If you're in foreclosure and want to try and keep the home or at least buy some time then this seems like a good strategy to look into. Here's a detailed how-to article from Consumer Warning Network explaining you can request a lender 'produce the note'.

February 27, 2009

Best of Blog posts for the week February 27th

Jim at Bargaineering makes a good point with IRS Tax Payment Plan: Don’t Pay Taxes With A Credit Card

In The Foreclosure Crisis: Location, Location, Location fivecentnickel discusses how most foreclosures are in a few states.

Trent at The Simple Dollar does A Walkthrough and Cost Breakdown of Brewing Your Own Beer

Check out PFBlogs.org

I just got Free By 50 added to PFBlogs.org.

PFBlogs.org is an aggregator of personal finance related blogs. Basically that means its a one stop shop for a lot of personal finance blogs. If you're looking for personal finance articles then you can go straight to PFBlogs.org and see all the recent articles published by numerous personal finance blogs.

You can also look at articles just for Personal Finance, Real Estate or Investing.

There are a LOT of articles at PFBlogs.orgs so give it a look.

House Price Index (HPI) at OFHEO

Recently in a reply to my "Historical home prices by state" article Commenter Johnny pointed out:

I have found similar information on this site to be of great use:

The "House Price Index" is published by the govt and is calculated by state, region, and nationally. It is primarily used to track 4-quarter appreciation. The OFHEO site will allow you to compare states and regions, and you can download historical data going back to the 70s.
Its a nice tip on another source of housing values.

Like Johnny said, the House Price Index (HPI) at the Office of Federal Housing Enterprise Oversight has detail on quarterly housing values for every state and major metropolitan area.

The front page of the HPI site has a graph showing nation wide 4 quarter % change in values. Plus there is a map showing in color the varying % changes by individual state from Q4 2007 to Q4 2008. Most states had "less than 1%" appreciation and most of those were negative. For example you can drill down on the map by clicking on Texas and it will take you to a graph of the four quarter appreciation % rates from 1991 to 2008 for Texas.

Looks like another good resource for information. I'd also remind you about the S&P Case-Shiller home price indices that I previously wrote about.

A word of caution: Any index or high level value is only good for ballpark references. Your individual home's value may have increased or decreased more or less than the overall trend for your city or state.

February 26, 2009

40% of us need to go buy some life insurance

About 40% of Americans either have no life insurance at all or have lower coverage than needed.

Too many Americans have no life insurance at all. From this study: "Twenty-four million U.S. households (22 percent) have no life insurance protection at all." Then this article says that one in 3 Americans has no life insurance. In addition to many families not having any insurance many families have too little. The study also found that 40 percent of people with insurance felt they were undercovered and that the gap in coverage averaged $200,000.

For those who are undercovered there are a number of reasons they don't go buy more. 3/4 of the people felt insurance was too expensive. 1/2 feel its difficult to decide how much coverage is necessary, 1/2 admit they simply procrastinate and 1 in 5 underinsured people don't buy more coverage because they consider it unpleasant to think about dying. Consider if you pass away and your family is left with little or no income and debts and bills to pay. Are any of these reasons people gave good enough reasons to risk letting that happen to their families? Not in my book.

If you are uninsured or underinsured then you should make a priority to go purchase life insurance and/or increase your policy.

Basic steps to take to insure yourself adequately:

Step 1: Figure out how much insurance you need for each adult. Basically you need to make sure your family is covered in the case of a death. Its ideal for the amount to cover them indefinitely. At minimum you should make sure that the life of dependents is covered adequately. If both spouses work then both should be insured. If one spouse stays at home then they should be insured to cover potential child care costs and other costs that would happen if they weren't around. If you have difficulty figuring an exact amount to get then don't let paralysis over the decision keep you from buying. You can start by simply getting $250,000 or take your salary and multiply by 10. This may not be the perfect amount but it will get you started. Having $250,000 in insurance or 10x your salary is better than having no insurance and procrastinating over indecision on how much to have.

Step 2: Decide on type of insurance and policy length. I definitely prefer Term life policy over a cash value or whole life. I've yet to see anything that convinces me that whole life insurance is a good deal and the premiums are pretty high. For the policy length this will depend on your life situation. If you're younger with young children then a longer term would be better. ON the other hand if you're in your 40-50's and have teenage or grown children then a shorter term would be OK.

Step 3: Shop around. If you're working and your employer offers a group policy then you can check into that to see how their rates are. You can also do some web surfing and find some online quotes. Quick Quote gives quotes from multiple vendors without asking for all your contact info (so they won't be calling, writing or otherwise harassing you).

What if you can't afford it?

I know for many people its easier said than done to go out and spend $250-$500 extra each year on insurance. If you find yourself without extra money to spend on insurance then start by looking at everything else you spend on and honestly prioritize them compared to life insurance. Dont' look at it as $300 being a lot of money, but look at it as where can you cut $25 a month in less important things.

Say you currently have $250k policy and would really like to up it to $500k. Your $250k coverage runs $180 a year but $500k coverage would be $120 more. Thats $15 a month. The cost of a subscription to HBO or eating out lunch 1-3 times a month will be $15 a month. Are a couple meals out more or less important than adequate insurance?

As I discussed before in How much does term life insurance cost?, term insurance is relatively affordable. Someone in their 30's can get 20 year term policy for $500,000 for as little as $245 a year. But if you can't afford that then consider a lower amount or a shorter term.

If you need to stretch your insurance dollars further then you could consider getting a shorter term policy. A 20 year term is generally better but I'd rather have adequate coverage for 10 years than be underinsured for 20 years. If you can only afford 10 year term today then I'd go with that and then look to trying to expand your coverage to 20 year term in the future as soon as you can afford it.

February 25, 2009

Make $100 at SaveYourself.com

SaveYourself.com has an offer from TD Ameritrade to give you $100 if you deposit $100 a month for 12 months. If you simply use this as an alternative savings account for the minimum $1200 then you'll get over 8% annual interest rate. If you had $1200 sitting in a typical bank account for a year or in a CD you might get 2-3% interest today which equates to $24-$36. But if you instead open a TD Ameritrade account at SaveYourself you'll get $100. The money in the SaveYourself account is FDIC insured and if in their money market you'll get 0.5% interest as well.

There are a few restrictions and requirements on the account. So make sure to read all the details when signing up. You can't open the account as an IRA account and the money has to stay in the account the whole time. So if this is money you expect to need within the next 12 months then I'd instead keep it in a regular high yield savings account. But if you've got $1200 and would probably put it in a CD or otherwise don't expect to need it for a year then the $100 bonus from the SaveYourself account can end up netting a good return.

February 24, 2009

Using reviews to improve your shopping around

Shopping around is a great way to save money. But if we focus too much on the cost of an item then we may pay less to get a poor product. Saving money and getting a worse product may cost you more in the long run. So for this reason when I shop around I always try to get reviews on the products.

Here are some good resources for getting general product reviews:

Epinions : The Epinions website is a database of reviews on products and services written by users like you and me. Its a good source of independent reviews on a variety of topics and more popular items can have hundreds of reviews. They also have reviews of many services and reviews for stores in general.

Amazon.com: Amazon's website allows users to reviews products. There are usually a few reviews for most items. Even if I'm not buying at Amazon I still like to check out the reviews they have there. Of course Amazon is selling those items but you don't need to buy at Amazon to make good use of their reviews.

Google searches: If I'm buying a product I'll do a Google search with the keyword of the product and 'review'. For example if I'm looking at cars I might search Google for "toyota camry review". Google can help you find reviews on more obscure products.

You can also look to specialty sources for information. If you're buying a car then check out Edmunds.com for reviews. If you're buying a computer then look at PCMag.com. Information on local restaurants or services can be found on Yelp.com or Citysearch.com. If you're planning on traveling then Tripadvisor.com has a lot of hotel reviews. JD Power and associates has general satisfaction surveys on various categories and they are a good source of high level information on brands and companies.

Thus far I've focused on online sources of information. You can also find information in your local library. Consumer Reports magazine is a good source of unbiased professional reviews of various products. I'd recommend their website but most of the content there seems to be exclusive to subscription members.

There are a ton of sources for reviews on all sorts of products, services and companies. Whatever review source you use, just make sure that you do some research first before making a purchase to help ensure that you're getting a quality item or service.

February 23, 2009

Dealing with health insurance denials.

A few years back I went to the emergency room for something that really didn't require emergency treatment. I have to admit that I panicked at the sight of my own blood. It was a little embarrassing after the fact. I was even more annoyed with myself after the insurance company denied the claim and I had to pay the bill myself. You see my insurance at the time didn't cover emergency room visits that they didn't deem an actual emergency and honestly this visit wasn't one.

It is certainly possible that you too could get denied by your insurance company for an insurance claim. It was a little bit tough to find solid data on the rates of claim denial. I found this reference that said that "final coverage denial rate for physician recommendations within eight categories of care was at most 3 percent and much less for most categories of care".

Denials can be made for a variety of reasons. Sometimes denials are simply the result of clerical errors.
It seems that it is more common for them to rely on paperwork and to not be computerized and forms change multiple hands so I feel the healthcare system is prone to clerical error. Denials can be due to rules or policies. Maybe you didn't fill out a form correctly or the doctor missed a step. If you attempt to get insurance that is explicitly not covered then you'll be denied. Certain procedures may be viewed as medically unnecessary. These are a matter of debate between the doctors and maybe your doctor thinks something is needed and the insurance company doctor disagrees. There are also cases of denials with no specified reason. Lastly it is possible that the denial is simply a matter of the insurance company just trying to save themselves the money, and in this case they generally give a bogus reason.

Before you get treatment there are 2 key things I'd do to try and avoid denials :

1. Know your policy: Ideally you should consult your insurance policy information before you get treatment so that you know what they do and do not cover. Pay special attention to rules about seeing specialists, visiting the emergency room and know the limits on your treatment. For example if your policy says they only cover 20 chiropractor visits a year then going over that limit will be denied. Or if you have to talk to your primary physician first before visiting a specialist then make sure to do so. If you're ill or injured then its hard to sit down and read all the small print in your insurance plan, so it is best to do this before you actually need treatment so you'll be familiar with the plan in advance.

2. Verify coverage first: If you need expensive treatment then try and get confirmation from the insurance company before treatment is started. Ask your first doctor to confirm if they know the treatment is covered or not.

Unless the policy explicitly states the treatment wasn't covered then you should pursue challenging the denial.

Here are two guides to dealing with a denied health insurance claim:

Appealing a denied medical insurance claim: 10 steps from Bankrate When Your Insurance Company Wont Pay: 12 Tips from About.com. These guides discuss everything from initially challenging the denial, getting paperwork in order, appealing with the insurance company and then maybe even going to your state department of insurance or a lawyer.

Healthcare can be very expensive and getting a claim denied could cost you a lot. Its a good idea to take the time to learn about your policy in advance so you can try and avoid getting uncovered services. If you are denied through no fault of yours then it is well worth your while to pursue challenge of the denial.

Further references :

February 21, 2009

Restaurant.com $25 certificate for $2 until Feb. 28th

For the rest of the month Restaurant.com is offering 80% off:

Now Save 80% Off with every order of $25 Gift Certificates. Use code DINE and pay $2 thru 2/28/09.

Info on Restaurant.com certificates:

I have used these at my steak house in the past and they worked great. Unfortunately though the steak house stopped taking the certificates. If you're interested in getting a certificate then first check the Restaurant.com site and see what restaurants in your area take the certificates. Second be sure to check out the rules and limitations for the gift certificates. For example a restaurant may require a minimum purchase of $50 to use the $25 certificate and a mandatory 18% gratuity. The rules differ for each restaurant so pay close attention to them. Lastly I wouldn't recommend buying them unless you plan to use them shortly. The restaurants that accept the certificates can change over time.

For more on saving money at restaurants see my older posts:

February 20, 2009

Is job loss insurance worth paying for?

With the economy the way it is, things like unemployment are frequent topics. If you become unemployed through no fault of your own then you can qualify for government unemployment insurance. However unemployment insurance may not t pay a significant portion of many peoples previous paychecks. Apparently there are private forms of unemployment as well which function as a kind of insurance similar to disability insurance.

A private company that offers such insurance is PayCheck Guardian. I couldn't readily find other companies that offer such insurance, but there may be others out there. Looking at the Paycheck Guardian website they make it pretty easy to find their coverage rates and basic details.
The rates for their insurance are : $50 a month for $750 of coverage, $60 a month for $1000 coverage and $70 a month for $1500 coverage. The coverage lasts 4 months. You do have to work 4 months after signing up in order to be eligible. This stops people from hearing about a layoff next week and signing up for the insurance just because they know they'll be laid off shortly. I'm not sure if there are other requirements to qualify or anything so you'd have to dig deeper into the contract to see all the details.

Financially is this a good deal?

For their basic coverage, you're looking at paying $600 a year for $3,000 potential benefit. If we make a guesstimation that there is a 1 in 10 chance of being laid off within a year period. I don't have a good number for that and couldn't readily find statistics about the chance of becoming unemployed in a given time period. But I think 1 in 10 is an OK guess at least for ballpark assumption work. So if the rate of becoming unemployed is 10% then for every 10 people making $600 in annual payments the pay out rate is $3000. The insurance company is taking in roughly $6000 for every $3000 they pay out. Another way to look at it is that the insurance you're paying $600 for is really only worth about $300. The plans with higher coverage work out in similar fashion.

Financially speaking I don't think this kind of insurance is a good buy.

Will they pay claims?

I'd also wonder how easy it is to actually get a payout from this company. I tried finding reviews about them on the web and I couldn't find much of anything. I was able to find that the company operates as Producers Financial Network and they have a BBB rating of A+ with no negative customer complaints in 3 years. They also previously operated as Mortgage Safety Plan. I looked and can't find reviews of that company either. I don't find anything bad about this company. But its hard to say, there isn't much of any review type materials. I would think the BBB rating is a good sign though. I don't see any evidence to think they won't pay claims but its not clear if they've been around enough to be tested much.

What should you do instead then?

A good emergency fund should be your self insurance against unemployment. In today's economy I'd try to build up 6-12 months of living expenses. That may be easier said than done but you have to start somewhere. Diverting $50-$70 a month of your income into an insurance plan will only make it harder to get that emergency fund built.

Other info:
Your Money : Job Loss Insurance
Job Loss Insurance Gains Attention as Recession Grows
Should You Buy Job Loss Mortgage Insurance?

Best of Blog posts for the week February 20th

Bargaineering looks at How Accurate Are Credit Estimators?

February 19, 2009

Should you buy credit card insurance?

No, you should not buy credit card insurance.

The other day I got a mailing from American Express offering to enroll me in a protection plan. I bet that the credit card companies are advertising these plans more and seeing more interest in them due to peoples fears about the economy. Of course they seem to push them normally as well. You've probably seen these ads with your monthly statements advertising these plans.

The exact details of the plans all vary a little bit. Basically credit card insurance is a form of insurance offered by the credit card companies so that your credit card payments will be deferred if you suffer a job loss, illness or death. Basically they seem to just suspend interest and minimum payments. You still owe the balance of the debt in most cases. In the case of death they may pay off the balance up to a limit.

The insurance is about 0.8 - 0.9% of your balance. The Amex cost was 85 cents per $100. My Citibank credit card offers such insurance. They say: "It's free for the first 30 days, then only $.85 per $100 on your New Balance each month." So if you have a $10,000 balance then thats $85 a month. My Discover Card offers their payment protection plan for "as little as 89¢ per $100." I have another card I don't use much and it offers the protection for 83 cents.

The idea of insuring your credit cards seems like a good thing especially if you have a large payment that would be hard to handle in the case of job loss or illness. The cost of these plans offered by the credit card companies is not worth it.

If you are unable to make payments then the worst the credit card companies can do is harass you for payment and then eventually discharge the debt which will hurt your credit. They will not take your home or otherwise be able to get settlement of the debt. If you pass away then your estate may owe the bill, but they can not go after your relatives to collect a debt. You don' have to worry about burdening your relatives with an obligation to pay credit card debt if you pass away. In general the worst thing that happens if you can't pay credit card bills is that your credit rating may get hurt some. But this is not life threatening and there are a lot of other higher priority things to insure first.

If you're concerned about a job loss or medical issue that could keep you from paying your credit cards then I'd self insure and look for other forms of insurance. Instead of putting money into a credit card insurance program you could pay extra towards your credit card balance or set some money aside in your emergency fund. You can also make sure you are covered in the possibility of disability or death by having short term disability, long term disability and life insurance.

Stay away from credit card protection insurance plans, their rates are too high and they are not a good deal.

February 17, 2009

Car Depreciation

When you buy a car it will lose value over time. Most people know that a new car will lose a significant amount of its resale value the minute you drive it off the lot because it is now 'used' rather than 'new'. How much do cars depreciate and how can you figure the amount of depreciation?

Cars will vary in depreciation rates depending on the brand and model. More attractive brands which are more dependable will depreciate less. So theres no one answer about depreciation rates but you could use average depreciation to get a ballpark idea.

Rough Ballpark

Roughly speaking you can assume a car will lose 20-30% of its value in the first year. In subsequent years it will lose 10-20% in later years. As a very rough guess on depreciation you could use 25% for year 1 and 15% for later years.

Online Calculators
Another way to estimate depreciation is to use a calculator. Here is a simple car depreciation calculator which will estimate rough amounts of deprecation at low, medium and high levels. Here's another car depreciation calculator.

More specific estimates

Each model of car will depreciate differently.

If you currently have an older car then you can find out the estimated market value on the Edmunds.com site. Their True Market Value estimate is a realistic measure of what you can buy/sell a used car for.

Or if you're looking to buy a new car you could look at the Total Cost of Ownership estimates. This will give you an idea of how the car will probably depreciate in the near future. For example you can look up the TCO for a 2008 Toyota Camry at the Edmunds site. In the table it shows the depreciation for years 1-5 as : $3763, $2237, $1969, $1746 and $1567 respectively. With a purchase cost of $21,130 that equates to 18%, 10.5%, 9%, 8%, 7%. In 5 years it depreciates $11,282 or 53%. Thats a relatively low depreciation rate. ON the other hand if you look at a 2008 Ford Focus with a cost of $12,067 the depreciation for years 1-5 is $4058, $1340, $1180, $1045, $938. That equals 33%, 11%, 9.8%, 8.6%, 7.7%. The total depreciation is $8,561 over 5 years for 71% total depreciation. As you can see the amount of depreciation differs a lot between those two 2008 model cars.

Mileage and Condition matter a lot

Of course not every used car is the same. My Toyota has a lot of miles on it so the value is lower. My wife's car is in very good shape so its value may be higher than other cars of the same model. When you're looking at depreciation you should also consider the mileage on the car, the wear and tear and the kinds of options it has. Its a decent rule of thumb to assume cars will have about 12,000 miles per year. If the car has fewer miles it will be worth a bit more and higher mileage cars will be worth less. The used car appraisal that Edmunds does usually adds or subtracts 8¢ per mile so you could use that as a rough guide for the impact of mileage above or below 12,000 annually.
Can Cars Appreciate??
Usually cars simply go down in value over time. However, classic cars can potentially appreciate in value. Once a car is 20-30 years old or so it may have value as a collector item. Of course not every 30 year old car is going to have appeal. If you have a 1964 Mustang then it will probably gradually appreciate in value. Classic cars may very well appreciate but in general but I would not count on any appreciation for a car unless you know it has good demand as a classic vehicle.

Other resources:

Photo by Sammmm_

February 13, 2009

Best of Blog posts for the week February 13th

BripBrap has 10 ways to stop worrying so much about money which is advice I know I can use right now and I suspect many many other people out there could benefit from now as well.

Trent at TheSimpleDollar talks light bulbs: The Light Bulb Showdown: LEDs vs. CFLs vs. Incandescent Bulbs - What’s the Best Deal Now … And In The Future?

My Money Blog discusses the performance of 401k accounts for typical investers with : 401(k) Failures: Over Last 20 Years, The Average Investor Did Worse Than Cash Note that this is about how well people managed their investments. You shouldn't read it as meaning a 401k is a bad thing. A 401k with an employer match is a great investment.

The Digerati Life compares Zecco vs TradeKing: Which Online Stock Brokerage Account To Choose?

FMF has some good solid advice from Wealth Pilgrim with Five Steps to Saving & Securing Your Retirement – That Work!

Possible tax credit of $1,500 towards home energy improvements

The stimulus bill is currently winding its way through congress. It hasn't passed yet but it appears to be making progress. The bill includes a variety of spending proposals and tax cuts all aimed at stimulating the economy in some way or another. One item I saw mention of that interested me was a $1,500 tax credit towards home energy improvements.

This news article 'Billions in tax cuts for families and businesses' from the AP on Yahoo says: "Existing homeowners could get a tax credit of up to $1,500 by making their homes more energy-efficient in 2009 or 2010. Numerous projects would qualify, such as installing energy-efficient windows, doors, furnaces, and air conditioners, or adding insulation. Homeowners can get back 30 percent of their expenses, up to $1,500."

Keep in mind that the bill isn't law yet so this is subject to change or removal.

As written the bill is going to give 30% of your energy efficient improvements up to $1,500 tax credit.

This could be a pretty good deal for the homeowner. Personally I've been thinking of getting a heat pump installed to help cut our home heating costs and also give us air conditioning. Right now we've only got an electric furnace and no AC. I'm not sure what a heatpump would cost us exactly but I'm guessing its in the $4,000 to $7,000 range. Since a heatpump could cut my heating bill 30-40% over my current electric furnace I think this could be a good long term investment. If I could take a $1,500 tax credit it would be even more attractive.

The heat pump is only one option. It might make most sense to get some more insulation installed and do some weatherization of our house first. Those improvements are relatively cheap and can get you the biggest savings per dollar spent.

I'll keep an eye on this credit and if it does go through then I will need to investigate and find out the most cost effective home heating energy savings options.

February 12, 2009

Do you need Long Term Disability (LTD) insurance?

Long Term Disability (LTD) insurance is insurance that will pay you a monthly benefit if you become disabled and are unable to work. Many employers offer this as a benefit. If you're lucky enough to have the employer pay for it then you are already covered. Some employers will offer it as an optional benefit with group rates that the employees can opt into. Other employers will not offer it as a benefit at all. If you can afford it then I'd recommend getting it.

Why is LTD important?

If you become disabled you may not be able to work. You'll not be able to contribute to the support of your family.

The Council for Disability Awareness has a number of statistics about disabilities. A few notable items they cite are:

  • An illness or accident will keep 1 in 5 workers out of work for at least a year before the age of 65.
    Life and Health Insurance Foundation for Education, November 2005
  • One in 7 workers can expect to be disabled for five years or more before retirement.
    "Commissioners Disability Table, 1998," Health Insurance Association of America, the New York Times, February 2000
  • The average long-term disability absence lasts 2.5 years.
    Commissioner’s Individual Disability Table A

So the chances of having a long term disability during your life time are not small.

With the chances of being disabled 1/5 or 20% that is a little more likely than the chances of dying between the ages of 25 and 65. People consider life insurance mandatory but think LTD is optional, but its as likely or more likely that you'll be disabled than that you'll die.

This brings us to :

Can you afford LTD?

If you are already struggling to make your bills then I'd consider LTD more of an optional item. Pay up your emergency fund and pay off the credit cards first. Food, clothing, shelter all take top priority of course. I'd put medical insurance above LTD too. But once you get your basic bases covered then its time to make sure you're covered for things like life insurance or LTD.

If you have any discretionary spending and have your finances under control then LTD is certainly something you should try and get.

What if you're self employed or your employer doesn't offer it?

If you are on your own and can't get a policy through work then you are faced with finding an individual LTD policy. Group policies are what you will get via your employer if they offer one. It seems that LTD is a lot easier to afford if you are in a group policy. According to Insure.com the average group policy is $234 a year in 2007 and the typical individual policy is 5-10 times the cost of group rates. This makes it much more difficult to afford LTD if you're buying it on your own.

Social Security Disability might help some.

If you are paying into Social Security then you also receive the benefit of disability insurance. If you have a long term disability then you can apply for a disability. It can be difficult to get a disability approved by Social Security and the claims and approval process can take a long time.
Backlogs for social security disability claims can be hundreds of days and nationally the average is over 1.5 years.

If you are approved then the amount of the benefit will be a fraction of your current income. You can use the Social Security quick estimator to find out an estimate of the disability benefits. As an example I checked the benefits for a 35 year old making $40,000 and it was $1,310 a month or about 39% of their income, but it will vary depending on age and income.

So I wouldn't count on social security to heavily. Getting a claim approved can take a long time and if you are approved the benefit is not extremely high.

February 11, 2009

Is a Kindle a frugal purchase?

Every time I go to the Amazon page it seems you see something throw in your face about their Kindle. Honestly it makes me wish I could 'opt out' of their hyperactive Kindle promotional campaign. But still I'm a fan of electronics gadgets and the Kindle is pretty neat. It lets you store 100's of books that you download directly from Amazon on their wireless network. I personally love how it reminds me of a Star Trek Tricorder. However as neato a gadget as it is, the new Kindle 2 costs $359 to buy. That is quite a lot more than the $1-2 which I usually spend on used books. The books for the Kindle do come at a discount price over new print copies so theoretically you could end up saving money in the long run with a Kindle. I decided to take a closer look at the Kindle to see if it can save you money or not.

New Print Books

First lets look at a few somewhat randomly selected popular new titles. I grabbed the following books off the front page of the Kindle section on Amazon.

Here are the titles and their costs for traditional new and used print versions:

THE PLUTO FILES = $12.99 used, $16.29 new
Kill for Me = $7.72 used, 11.55 new
Up To No Good = $12.88 used, $16.32 new
The 4 Day Diet = used $14.30, new $14.97

Average used prices $11.97, Average new price $14.78

Savings with Kindle : $4.83 versus new, $2.02 versus used

At least when looking at this small sample it looks like the Kindle will save you about $2 over used versions or little less than $5 versus new copy when buying newly published books.

Older print books
Personally most of the books I read are not brand new books. A lot of the books I read were written years or decades ago. How does the Kindle do when you're buying older print books?

To test this I selected a few of my favorite titles and then checked the Kindle price versus new and used on Amazon

The Grapes of Wrath = Kindle $9.99, $2.5 used up to $11.05 new
The Hitchhiker's Guide to the Galaxy = Kindle $6.39, $0.01 used up to $15.6 new
Ringworld's Children = Kindle $6.39, $2.33 used, $7.99 new
Children of Dune = Kindle $7.19, $16.49 new, $0.64 used
Battlefield Earth = Kindle $6.39, $2.99 used, $29.99 new

Totals : Kindle $36.39, Used $8.47 + $19.95 s/h = $28.42, New $81.12 + s/h

For older print books the Kindle price is $7.97 more expensive then buying used and at least $44.73 less expensive than buying new. On average thats $1.59 more expensive per title for used and $8.95 less expensive per title for new. Note that the savings on new versions is a bit skewed by that rather pricey $30 new copy of Battlefield Earth. If you remove that from the averages then the savings per new title is $5.28 per new title.

Books aren't the only thing you can get with a Kindle. They also advertise the ability to get newspapers and magazines delivered to your Kindle. Lets look at how the prices on news print stacks up for a Kindle.


U.S.News & World Report $1.49 on Kindle
Note that they say the Kindle version "contains most articles found in the print edition, but will not include all images"

Or you can get a print subscription of 50 issues for $19.99 or $0.40 an issue

Time $1.49 each on Kindle
Again you get "most articles" and "not include all images" on Kindle

Or you can get the print subscription for 84 issues for $20 or $0.24 an issue

For magazines it looks like the Kindle is typically over $1 more per magazine edition than the print versions.

USA TODAY $11.99 / month
Kindle offers "most articles" and "will not include all images"

Or you can get the print subscription for 12 weeks for $30 or $10 a month

The New York Times the Kindle is $13.99 a month
"Also, some features such as the crossword puzzle, box scores and classifieds are not currently available."

Home delivery on the West coast is Daily Delivery (7 Days) for "just" $6.70 per week or $26.80 a month.
Or there is also an Online version including crossword for $14.95 a month

The Kindle is about $2 more a month for USA Today. With the NY Times though you can save money with the Kindle. The online version is $1 more a month and the print version can be up to $12.80 more a month.

So with newspapers it depends, they can be a bit cheaper or a bit more expensive.

Cost comparisons in summary

New print books: Kindle saves you $2 per title versus used or $4-5 versus new
Old print books : Kindle costs you over $1 more per older title versus used copies or saves $5-8 per new.
Magazines: Kindle magazines are over $1 more each
Newspapers: Kindle subscriptions to newspapers can be more or less expensive depending on the title in question.

Keep in mind that I'm only comparing the Kindle to buying print books off of Amazon. You of course might find the same books cheaper elsewhere like at a local used bookstore or thrift store.

Also when you buy print books you can resell them after you read them for a fraction of the purchase price. I can normally trade in my used books at the local bookstore for half credit towards another books.

What is the pay back / break even point for a Kindle? Ok so now we know how much roughly you might save per book if you have a Kindle. How many books do you need to buy to make up the purchase cost of the Kindle itself? The Kindle 2 costs $359 to buy. I am going to assume that the Kindle will last you roughly 5 years before it breaks down or becomes obsolete. So you'll have to save at least $71.80 per year in book costs. That equates to about 14 new recently published books or 35 used recent titles.

To have any chance of breaking even on a Kindle purchase you'd have to buy at least 15 new books or over 35 used copies a year. That a pretty large number of books.

To be fair there is something to be said for the convenience factor of a Kindle. The Kindle is lightweight and portable. I've got a few bookshelves full of books at home that a thin little kindle could replace completely.

Overall I would say that the Kindle is usually not a particularly frugal purchase. You only save a few dollars per new title and the Kindle is often more expensive per title than used books. Magazines on the Kindle are overpriced and newspapers are hit or miss. I'm sure there are some exceptions where people might make good use of a Kindle and save a few bucks on books over their existing book buying habits. But the Kindle is still not likely to be their most frugal option.

Your more frugal options than a Kindle:

  • Buy used books and then resell them on eBay or at the local bookstore when you're done with them.
  • Use a service such as PaperbackSwap.com
  • Last but not least, simply get all your books virtually free at the good old local library.

One last point, Amazon is fudging numbers a little.

To me there seems to be a little bit of exaggeration by Amazon on Kindle book savings.
When you look at Amazon Kindle stuff they seem to show the list price of the new book and compare that to the Kindle price. So for example with the book The 4 Day Diet they show the list price as $24.99 and compare that to the Kindle price of $9.99 So you look at that and it seems that the Kindle is saving you $15 on that one book. But if you then go and look up the price for that same book on Amazon in print version its $14.97. So you're really only saving maybe $5 for the title. Why wouldn't Amazon use their own prices for print books when they're comparing Kindle prices? The only reason I can see is that they're purposefully trying to inflate the book savings for a Kindle. I think it is a bit disingenuous on the part of Amazon.

February 10, 2009

How does the 12 month increase in unemployment compare to history?

From January 2008 to January 2009 the 12 month increase in unemployment rate was 2.7%. That is a pretty big jump in the unemployment rate for a 12 month period. How does this compare to other previous increases in our history?

You can get historical unemployment data via the database on the Bureau of Labor Statistics website. I pulled the monthly unemployment rate going back to 1948 and then compared 12 month periods.

Below are the higher 12 month increases in unemployment.

July 1981 to July 1982 : from 7.2% to 9.8% =2.6%
May 1975 to May 1975: from 5.1% to 9% = 3.9%
Dec. 1969 to Dec. 1970: from 3.5% to 6.1% = 2.6%
Apr. 1957 to Apr. 1958 : from 3.9% to 7.4% = 3.5%
Aug. 1953 to Aug. 1954 : from 2.7% to 6% = 3.3%
Oct. 1948 to Oct. 1949 : from 3.7% to 7.9% = 4.2%

You can see that there are 4 other 12 month periods in the past 60 years when we had larger increases in unemployment. However its been over 26 years since we seen unemployment rate increase over 2% in a 12 month period. The last such spike was in 1981-1982.

February 9, 2009

Using an IRA to invest in real estate

Did you know you could use an IRA to buy a rental property? You actually can. An IRA can be used to invest in many things besides the standard stocks and bonds. Usually brokerage companies only offer the typical mutual funds, individual stocks, bonds and CD forms of investment for IRAs. To invest in other things like private company ownership or real estate you will have to find an IRA management company that supports such investments. These are usually referred to as 'self directed IRAs'. One company that offers such self directed IRAs that can be used to buy real estate is PENSCO Trust company. I'm sure there are many others out there. PENSCO's site discusses the basics of investing in real estate with a self directed IRA.

A few major points to keep in mind:

  • You can not buy property from a disqualified person, which generally means yourself and family members.
  • You can not guarantee a loan yourself and any loan must be in the name of the IRA. This makes getting mortgages for real estate investments difficult. Some banks may offer such loans but they require higher down payments and this is probably going to fetch higher interest.
  • If you do have leverage then you'll have to pay tax on the leveraged portion.

To keep things easy you can buy real estate outright without a loan but that would require a pretty sizable initial IRA balance in order to afford a property 100%.

Since self directed IRAs are not common there isn't a lot of information out there and not a lot of companies that offer it. It would be important to research the options extensively in advance so you fully understand how it works and you know what you're getting into.

Be aware that fees could be relatively high. PENSCO's fees seem to run $375 annually and up. With that kind of fee schedule it would only be practical if you have a relatively high amount in the account. If you have under $15,000 then the $375 would account for over 2.5% fees. But if your balance is more like $200,000 then the fees would be well under 1% which is a decent rate compared to the expenses you might pay on a mutual fund.

Using a self directed IRA to invest in real estate is a complex venture. This is not for the novice. Its probably not a good idea for most people to be frank. Note that I'm only touching on this topic briefly to give an overview of the topic. If you want to find out more then I'd recommend further research and consulting with a tax professional. A misstep with your IRA could cause you to pay taxes and fees for disqualified distributions.

If you wish to invest in real estate via your retirement savings then also consider simply using a standard brokerage IRA account and buying individual REITs, ETFs or mutual funds that invest in real estate. This is a much more simple method of investing in real estate and would be much easier to diversify.

Other resources:
IRA lender.
Invest Your IRA in Real Estate? - Kiplinger.com

February 8, 2009

Details on the Hyundai Assurance program

You have probably seen commercials or otherwise heard about the Hyundai Assurance program. That is the name for the Hyundai program where they offer to buy back your car if you lose your job within the first year. Considering the number of new layoffs and the high unemployment this benefit should help a good number of people. It appears the program is helping Hyundai's sales. They saw their sales increase 14% in January when other car makers saw drops of 30-50%.

The TV commercials don't give much detail on the program so I figured I'd check out all the fine print. Here is a brochure in PDF form.

The key details are :
• Available on all new Hyundai vehicles.
• Available to everyone regardless of age, health, or employment history.
12 months complimentary on every new Hyundai vehicle financed or leased.
• Covers up to $7,500 in negative equity

They cover you in case of : Involuntary unemployment, Physical disability, Loss of driver’s license due to medical impairment, International employment transfer, Self-employed personal bankruptcy and Accidental death

Ok so right away there are a few specifics that limit the program. Its only for New cars so you can't get a used or certified car. You are covered for 12 months up to $7500 negative equity. The biggest detail here is that it is for a new vehicle that is financed or leased.
Another detail in their explanation of how it works: "You must have made at least two scheduled payments and be current on your loan or lease in order to qualify for benefit approval."

Given the information they have online about the program, this appears to be a legit deal without any major negative strings attached. They cover you for a 12 month period and buy back your car if you lose your job. The only strings I see are that the limit is $7500 and you have to make 2 payments first and it only last 12 months. None of these are major limitations to the deal.

A possible hidden 'gotcha' is that the car has to be financed or leased from Hyundai. There are a couple reasons this might be bad. First if you get financing on a car from Hyundai then you don't get their rebate incentive. This is typical that a new car maker will offer $1000 cash back or X% financing. Its not both so you get to pick one or the other. If you finance a new Hyundai then you miss out on the cash rebate which could be $1000 to $2000 range. Second I don't see any specific interest rates advertised on the Hyundai site for most vehicles. The local Hyundai dealers also dont' have rates advertised. The incentive deals including financing at Hyundai only list interest for a couple models. Its possible Hyundai interest rates for some vehicles are above market rates that you could get at your bank or credit union. I don't think this is likely to be the case but you should make sure you check interest rates available at other sources to make sure that Hyundai's rates are competitive enough. A 1% interest rate on a $20,000 car could cost over $500 in extra interest over a 5 year loan.

How exactly would this deal end up working?

Here is an example of how it might function: Lets say I go buy a new 2009 Hyundai Sonata tomorrow. I end up paying $20,000. I get a 7.5% rate for 60 months and my payments are about $400 a month. Everything is fine for 6 months and I make my first 6 payments but then my employer unexpectedly goes bankrupt and I am unemployed. At this point the car is now only worth $15,000 due to the significant amount of deprecation new cars have during the first year. I still owe $18,319 on my loan. Since the car is worth less than I owe at this point I would have negative equity. In this case the negative equity would be the value of $15,000 less the loan balance $18,319 or 15000 - 18319 = $3,319. Normally if I couldn't make the payments and they had to reposes the car I'd end up with bad credit. But with the Hyundai Assurance program they'd take back the car and the assurance program would pay for the negative equity of $3,319 and you'd walk away without a negative impact to your credit.

What is it really worth and how can Hyundai do this?

Hyundai is actually contracting with a 3rd party named WalkAway to basically buy a form of insurance. Most most people will not lose their jobs in the next year. If someone does lose their job then the amount Hyundai might lose is roughly equal to the average 1st year depreciation less the payments already made to the loan.

A rough guesstimation of the cost of this program: On average people will make 6 months payments which would equate to roughly 7.5% of the purchase price. So if the 1st year depreciation is 30% then they're roughly out 22.5% of the value of each car returned. But only maybe 5-10% of the buyers are likely to lose their jobs or other wise not be able to pay. So the cost premium here is in the ballpark of 1-2% of the vehicle purchase price. This is roughly equivalent to a $200 - $400 of insurance for a typical $20,000 car. Keep in mind this is a vary rough ballpark guess on my part.

If you are going to buy a new car then the Hyundai Assurance program seems like a good deal.

If you have specific reason to worry about losing your job then I'd generally recommend against running out and buying a new car. In any case I think buying a late model used car is your best deal in general.

February 7, 2009

List of things you CAN NOT deduct from your taxes

According to IRS publication 529 you can NOT deduct any of the items in the list below. There are some exceptions for these items but in general these items are not deductible from your taxes. See the full IRS document for the details.

  • Adoption expenses.

  • Broker's commissions that you paid in connection with your IRA or other investment property.

  • Burial or funeral expenses, including the cost of a cemetery lot.

  • Campaign expenses.

  • Capital expenses.

  • Check-writing fees.

  • Club dues.

  • Commuting expenses.

  • Fees and licenses, such as car licenses, marriage licenses, and dog tags.

  • Fines and penalties, such as parking tickets.

  • Health spa expenses.

  • Hobby losses—but see Hobby expenses, earlier.

  • Home repairs, insurance, and rent.

  • Home security system.

  • Illegal bribes and kickbacks—see Bribes and kickbacks in chapter 11 of Publication 535.

  • Investment-related seminars.

  • Life insurance premiums.

  • Lobbying expenses.

  • Losses from the sale of your home, furniture, personal car, etc.

  • Lost or misplaced cash or property.

  • Lunches with co-workers.

  • Meals while working late.

  • Medical expenses as business expenses.

  • Personal disability insurance premiums.

  • Personal legal expenses.

  • Personal, living, or family expenses.

  • Political contributions.

  • Professional accreditation fees.

  • Professional reputation, expenses to improve.

  • Relief fund contributions.

  • Residential telephone line.

  • Stockholders' meeting, expenses of attending.

  • Tax-exempt income, expenses of earning or collecting.

  • The value of wages never received or lost vacation time.

  • Travel expenses for another individual.

  • Voluntary unemployment benefit fund contributions.

  • Wristwatches.

February 6, 2009

Best of Blog posts for the week February 6th

Jim at Bargaineering talks about Cash4Gold and its not good Cash4Gold: How NOT To Sell Gold
he also has the rarely seen argument Timeshares Are Good Investments (a devil's advocate post).

Jim at Bargaineering also has a Lending Club $100 Giveaway fivecentnickel also has one: Lending Club $100 Giveaway

My How Much Should You Spend on on an Engagement Ring? article was featured in weeks Free Money Finance March Madness, Round 1, Posts 33-36 competition. I was in game #17 against the nicely written article 10 Things I Have Learned About Money.

For more of the competition see Free Money Finance March Madness, Round 1, Posts 29-32
and Free Money Finance March Madness, Round 1, Posts 25-28

My Money Blog looks at the asset allocation of blended retirement funds with What’s Inside Your Target Date or LifeCycle Retirement Fund?

Small Businesses - what is considered 'small' and whats their impact?

The media and and government will talk a lot about small businesses. The impact of taxes on small businesses came up during the previous presidential election. Today the economic stimulus and its impact for small businesses is another topic of discussion. With all this talk about small businesses its good to know what the government considers to qualify as a small business.

According to the Small Business Administration a small business can have up to 500 employees. They publish a detailed table of standards that give different limits for different kinds of businesses. From their FAQ, here is the basic run down on the maximums:

  • 500 employees for most manufacturing and mining industries
  • 100 employees for all wholesale trade industries
  • $6.5 million for most retail and service industries
  • $31 million for most general & heavy construction industries
  • $13 million for all special trade contractors
  • $0.75 million for most agricultural industries

Five hundred employees seems pretty big to me. When I think of 'small business' I personally think of the family ran restaurant, or the used book store, the independent painting contractor or the local corner convenience store. When I think of 'small' businesses I think of businesses with a few employees. Maybe that is just my perception though. In any case the government definition of 'small' differs a lot from my picture and can include businesses with up to 500 employees.

What impact do 'small' businesses have?

The SBA report "Small Business Economy for 2006" says that small businesses account for about 50% of the private sector workforce That is a pretty big impact on employment.

In another publication, "The Small Business Share of GDP,1998-2004" the SBA states that small businesses account for 50% of our country's GDP.

The census has stats for 2004 showing the breakdown of employment and revenue figures for different size businesses. If you look at those numbers a bit closer you find that 89% of all businesses are under 20 employees. Those businesses employ about 21.1 million people which is 18.4% of the workforce. Their payroll is $659 billion or 15.5% of the total payroll. Revenue for those firms not available yet for 2004 but in 2002 it was $3.12 trillion or 14.2% of the total revenue of all firms.

If you look at the firms with less than 100 employees then they employ 36% of the total workforce.

If you break down the small businesses tracked by the government then you'll see that those businesses with under 20 employees account for only about 20% of the total economic impact. The bigger 'small' businesses that are 20-500 employees in size account for 30% of total economic impact.

If you look at just the number of employees and the size of the businesses then you can see how the total work force is split between company size:

Businesses over 500 people which are too big for the government class of 'small business' account for nearly 50% of employment and over 50% of payroll and business revenue.

February 5, 2009

Cash4Gold = ripoff

Cash4Gold had a commercial during the super bowl. They seem to advertise a lot. The other day the TV happened to be on the Inside Edition program and they were doing a story on Cash4Gold. Here is an online version of the Inside Edition story on Cash4Gold. They had gold items professionally appraised at $975 to $1200. Then they got initial offers from local dealers of $1153, $1100, $676 & $700 but the dealers were willing to raise their offers if initially refused. Then they send the same gold to Cash4Gold and the offer is $209 and change. Cash4Gold offered 1/3 of what any of the local dealers did. After the offer was declined they doubled it. But that still comes in hundreds less than any of the local dealers. According to Inside Edition the Better Business Bureau has given Cash4Gold an 'F' rating. However, I was only able to find a BBB site with a C+ rating.

Also see:
Cash 4 Gold: Scam! Real Tips for Selling Your Gold Jewelry
10 Confessions Of A Cash4Gold Employee
Rob Cockerham writes article critical of Cash4Gold, gets offered cash to kill story
So, will Cash4Gold offer me cash to kill this story?

p.s. Dear Cash4Gold marketing dept., I will take $100,000 worth of gold (by your measure) to remove this article entirely.
p.p.s. Just kidding.

Downside of individual bonds: simple interest

Here is a point I found in the Wall Street Jones blog article Should You Buy Municipal Bonds Individually or in a Fund?

They point out "If you own small lots of individual munis, you earn simple interest – not interest-on-interest. Say you hold a muni with a 5% yield to maturity. If you put your semi-annual coupon payments into a bank account yielding 0.5%, then your true yield over time will fall well short of the stated yield to maturity. A mutual fund, on the other hand, invests in bulk so it can plow the interest earned by its bonds directly into more bonds at market yields."

Individual bonds pay simple interest whereas bond funds can get you compound interest.

So why is simple interest so bad? Lets look at an example.

Consider if you've got $10,000 to invest. You could buy a single bond or a bond fund.

Option 1: Single Bond
Lets say you buy Municipal a bond with a coupon of 5% and face value of $10,000. The maturity date is 10 years from now. It pays you $500 every year. But you don't make that 5% interest rate on your interest payments. You get a $500 payment every year and then you'll have to find somewhere else to put that $500. If you put your bond interest into a high yield savings account making 2% then at the end of 10 years you would have a total of $15,474 and change including the principal.

Option 2: Bond fund.
If on the other hand you put your $10,000 into a bond fund then you can easily pump your $500 dividend yields back into the bond fund. Lets say every year you take your yield and buy more of the fund in question. If you have a $20 annual fee to buy the fund but it yields a consistent 5% then at the end of 10 years you'd have $16,819 total.

With simple interest the individual bond would net you $5,474 in interest and the compounding interest of the bond fund would net $6,819 interest. That's a $1,345 difference simply due to compounding.

Note that the bond fund is not going to yield a steady 5% every year for 10 years and I'm just using that assumption to make the example easy. One big negative for bond funds is that the rate will fluctuate which can be good or bad.

February 4, 2009

Historical values of the Prime Rate 1955 to 2008

The Federal reserve has historical data on the bank prime rate going back to 1955.

Investopedia defines the bank prime rate as "The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank's best customers consist of large corporations."

The prime rate is a fairly good indicator of interest rates in general. Often if you apply for a variable rate loan it will be based on the prime rate + X%. For example a home equity loan may be cited as prime + 0.74% if you have very good credit.

From the data at the Fed site I made graphs of the historical rates over history. First lets look at the rates from 1955 to 2008.

Yeah the rates hit 20% range in the 1980's. The maximum was 21.5% in December 1980. The average rate was about 10.1% and the median rate was 9%. The minimum rate was 3.25% recorded on Dec. 2008 as well as back in August 1955.

Now lets chart just the last 20 years:

In this period the average rate was 7.2%, the median was 7.5%, the maximum was 11.5% and the low was 3.25%.

February 3, 2009

Four FREE video games at Amazon

Here is a link for 3 free video game downloads from Amazon.com. The 4th game Big Kahuna Reef is at a separate link. The game descriptions are below. I'm assuming these are limited time offers and they seem to only be available to U.S. residents.

Build a Lot
"Send the housing market through the roof as you build, buy, and sell houses in the new strategy game, Build-a-lot. You can flip houses for quick cash or sit back and watch the rental income pile up. Become a real estate mogul as you visit scenic towns, earn huge profits and perform special favors for the colorful local mayors. Can you build a new cinema for the local movie star? Install a bowling alley in the Mayor's Mansion?"

Jewel Quest 2

"In Jewel Quest II, join Professor Pack on the ultimate jewel matching quest across the world's richest continent. Rearrange precious relics to turn tiles into gold as you advance through relentlessly challenging puzzles. The wilds of the safari, the history of the Zimbabwe ruins and the majesty of Victoria Falls await your discovery as you play through 180 impressive levels."

The Scruffs

"The Scruffs need your help to save their beloved family home from being sold. Grandpa Scruff has a solution - a scavenger hunt to recover his valuable artifacts. But in a surprising twist, Grandpa Scruff reveals that he's been hiding something else - a shocking family secret! Help the Scruffs uncover the secret that will change their lives forever by finding lost items and putting together the clues they need. The Scruffs - laugh at their witty family banter and fall in love with their charm."

Big Kahuna Reef

Go Hawaiian in this gorgeous underwater adventure! Discover Sea Turtles and other aquatic life as you break open boxes in this classic style matching game, questing for the Mask of the Tiki. Using the revolutionary Mouse Party, you can play with multiple players on the same computer through an almost infinite number of levels, thanks to the included level editor. As you play, you will uncover greater challenges including the Skeleton Fish of Kamehameha. Lead on Kahuna...your quest awaits!

I found out about these from this FatWallet post.

S&P 500 historical price data

Here are some resources for data on S&P 500 price history:

This article S&P 500 Price Growth : 1927 - Aug 2008 some nice charts showing growth of the S&P versus constant growth rates. Note the price charts don't include the dividends.

Yahoo Finance has index listings for S&P500 with historical data going back to 1950.

The article The S&P 500 at Your Fingertips from Political Calculations has a nice handy calculator that lets you compare the growth of the S&P between two specified dates. It will give you the annualized rates of change with or without dividend reinvestment between two dates.

Or you can just go straight to Standard and Poors and find numbers there. They have such info as Annual Price Appreciation from 1980 or S&P 500 Historical Average Price to Earnings Ratio. plus data on dividends.

February 2, 2009

Comparing 1972 spending to 2005 spending

How much have our spending habits changed in the past 35 years? I decided to look back to 1970's and compare to this decade. I used consumer spending report for 1972-1973 and then compared that to consumer spending in 2005.

First of all lets look at the numbers and how much we spent in the '70's. Total average household income in the period was $11,419. In the table below I list the spending in major categories and the % of income that category represents.


Spending % income
Food $ 1,596 14.0%
Alcohol $ 110 1.0%
Housing $ 2,551 22.3%
Apparel & service $ 647 5.7%
Transportatin $ 1,597 14.0%
Healthcare $ 528 4.6%
Entertainment $ 708 6.2%
Personal care & serv $ 165 1.4%
Read and educat $ 153 1.3%
Tobacco $ 130 1.1%
Misc $ 86 0.8%
Cash contribution $ 508 4.4%
Personal insur, pens $ 734 6.4%

Now lets look at the spending in the same categories for 2005. The household income was $58,712. The table for 2005 is below:

Spending % income
Food $ 5,931 10.1%
Alcohol $ 426 0.7%
Housing $ 15,167 25.8%
Apparel & service $ 1,886 3.2%
Transportatin $ 8,344 14.2%
Healthcare $ 2,664 4.5%
Entertainment $ 2,388 4.1%
Personal care & serv $ 541 0.9%
Read and educat $ 1,066 1.8%
Tobacco $ 319 0.5%
Misc $ 808 1.4%
Cash contribution $ 1,663 2.8%
Personal insur, pens $ 5,204 8.9%

Graphically we can compare the spending for the 1970's to 2005 by looking at how the pie is split up:

You'll likely notice that some of the % values have changed a fair amount.

Major spending categories that have decreased from the 1970's:

Food -3.9%
Apparel & service -2.5%
Entertainment -2.1%
Cash contribution -1.6%
Tobacco -0.6%
Personal care & serv -0.5%
Alcohol -0.2%

One major reason for decreases in many of these categories is that the average household had 3 people in the 70's and only 2.5 people in 2005. So while in the 70's you were buying food, clothing, entertainment,etc for 3 people in the 2000's you would only be buying those things for 2.5 people on average. Also, inflation has been low for many of these items. Food and apparel have not seen high inflation since the 1970's. Looking closer at food prices, they have not increased as fast as wages. If you look at the old statistical abstract and dig into the 1970's they have specific food prices listed, you can compare to the Food prices for 2006.

Here are some basic food prices for 1970 and 2006 and the % increase:

1970 2006 % increase
hamburger 1lb $ 0.66 $ 2.26 242%
flour 1lb $ 0.12 $ 0.32 171%
eggs 1dz $ 0.61 $ 1.54 151%
milk 1 gallon $ 1.32 $ 3.00 127%
potatoes 1lb $ 0.09 $ 0.52 478%
bananas 1lb $ 0.16 $ 0.50 214%
tomatoes 1lb $ 0.42 $ 1.64 290%
coffee 1lb $ 0.91 $ 3.11 242%

So while wages increased +400% in the time period, most of these food prices increased +150-300%.

Spending Categories that have increased from the 1970's to today:

Housing 3.5%
Personal insur, pens 2.4%
Misc 0.6%
Read and educat 0.5%
Transportatin 0.2%

Housing costs have increased as a direct reflection of housing expenses. Keep in mind though that size of the average home has increased over the decades. Personal insurance and pensions have gone up due to the decline in business pension funds. More people put money into 401k's and IRAs now compared to in the 70's when most employers had pension funds as part of compensation.

Transportation as a % of income spending has not increased significant however the average household now has 2 cars whereas in the 70's there were only 1.25 cars per home. So while we're spending about the same on transportation as a % we're driving more cars.

Interestingly we have not had a significant change in spending on healthcare as a % of income per household. This may be a reflection of fewer people in households and the fact that a larger % of Americans are uninsured.

Spending on vices has decreased. IN the 70's we spent 2.1% of our income on alcohol and tobacco but by 2005 that had decreased to 1.2%. Part of that is decrease in the amount of smokers in the country. In the 60's and 70's about 40% of the adult population smoked but by 2006 the rate dropped to 20.6%. Also it appears that alcohol consumption has dropped about 10% from 1970 to 2006.

Additional References:
Vehicle data
Census Statistical Abstracts 1951-1994

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