June 30, 2010

History of Labor Productivity

The BLS tracks labor productivity on a quarterly and annual basis.   The figures they give are the % change in productivity from one time period to the next.   

Below is a graph showing the change in productivity on an annual basis from 1949 to 2009:

As you can see productivity goes up the great majority of years and only a few years does productivity actually go down.   Less than one in 10 years are negative.

Long term from 1949 to 2009 the average increase is 2.3% and median is 2.4%.   The worst year was 1974 when a drop of -1.6% and the best year was 1950 with an increase of 6.7%.   Looking at the most recent 20 years from 1990 to 2009 the average is 2.4%, the median 2.3%, the worst year was 0.4% in 1995 and the best was 4.6% in 2002.

June 29, 2010

Is it OK to Walk Away from Your Home?

After the real estate bust and recession the foreclosure rate went up considerably.  A lot of people are losing their homes because of unemployment or other personal financial problems.   However many other people are purposefully walking away from their mortgages even though they could still afford the payments.   This second group is doing something called "strategic default".   These people walk away from their mortgage not because they can't afford it but simply because its in their own financial interest.

Is it "OK" to walk away?   Personally I think that really depends on the details.

Lets consider a couple different situations.

Smith Family

You buy a home in 2006 and stretch to make the payments. Your mortgage lender convinced you that you could afford it, convinced you not to put 20% down and instead do a 80/20 loan to avoid PMI.  The payments are 40% of your income at the time that you buy.  Your credit is only average and the loan was a 2 year interest only, no document ARM that started at 6.5% and has adjusted to 5.5%.   The mortgage lender was fined by the federal government for predatory business practices.  Several of the homes in your area were bought and flipped as part of a mortgage fraud scam which artificially fueled the increase in prices.   Your house should never have been valued as high as it was in the first place.  You are relatively young and have little in savings, you spent most of your savings 4 years ago to get into the home.   You've since had 2 kids and have developed a serious illness which means you can't work so you rely on 1 income of $40k and they cut back on overtime and the local unemployment rate is 12%.   Your mortgage payments are a difficult stretch for you to pay all your bills.  You have next to nothing in savings.  You're frugal and live well within your means.  etc.   Your current neighborhood has really gone down hill lately with many vacant homes and crime has increased.  You have job prospects in the next state with potential for a good pay raise.   You paid $355k for the house and it is currently worth only $290k.   Should the Smith family walk away?  

Jones Family

You and your spouse make a combined $180k.   You're in your 50's and your kids are grown up and moved out.   You purposefully bought the house with 0% down because you figured that the rising housing prices you'd make the maximum return on your investment if you leverage the low 6% mortgage 100%.   You have $370k in the bank, you own a vacation home outright and you have secure stable jobs with the federal government.   You plan to live in this house the rest of your lives.   You bought the home for $250k and it is now worth about $180k.   Should the Jones' walk away?

Two Very Different Situations

If you compare the Smith and Jones families then there are very considerable differences.    Its true that both families knowingly signed mortgages and bought homes they could afford at the time they bought them.  Both families are currently able to make their mortgage payments.   However the the circumstances that the Smiths and Jones bought their homes were very different.    The Smiths were misled by a crooked lender and fell pray to a fraudulently inflated local market.   The Jones intentionally leveraged their home in a speculative gamble.   The current financial situations of the two families is also very different.   The Jones could pay their mortgage off with cash and could carry their payments with no financial strain at all.   The Smiths are teetering on the brink of financial ruin and struggling to cover expenses.

Every situation is Unique

Obviously these are fairly contrived examples made to illustrate the point.   At one end you have the Smiths who are victims and in financial desperation and at the other end the Jones who gambled with a low down payment and are in great shape financially.  Defaulting on a debt is never a good thing, but sometimes it is the right decision.   If someone is in serious financial jeopardy than walking away from a home loan is appropriate.   On the other hand if someone is just looking to cut their losses or maximize their gains then balking on debt is not OK in my opinion.   And there is an infinite spectrum of individual situations with varying degrees everywhere in between.

Shouldn't the people at fault pay the most?    You could argue that every borrower ultimately signed on the line and accepted their debt so they are all responsible for their own actions.  You could also argue that the lenders as a whole were irresponsible and predatory and the banks ultimately bear the burden of responsibility for the real estate bust and borrowers are victims as a group.   I don't think either of these are completely right or wrong but that the answer lies somewhere in between.   Everyone involved in the mortgages is somewhat responsible and partially to blame for the situation. 

Whether its Right or Wrong, there are Consequences

If the Jones family decides to strategically default on their home to save them the $70k in negative equity then there are consequences to that choice.   First of all it will damage their credit which will cost them in other ways.   Depending on the laws of the state they live in they may be fully responsible for the short fall in equity and the lender may be able to come after them for that balance.  Normally the IRS would consider a cancelled debt to be taxable event but that is currently not being treated that way due to the Mortgage Forgiveness Debt Act and later extension.

Bottom Line:   Personally I don't think theres a single one size fits all answer here.  In some situations it is certainly not OK to walk away from a mortgage, but in some cases it is justified and makes sense.

June 28, 2010

Saving Money in Vegas : Ground transportation

I've been to Las Vegas enough times and used all of the common forms of ground transportation including taxi cabs, airport shuttles, rental cars, monorails, walking, and the city bus.   In most of my trips I've used a combination of taxi rides, walking and the monorail.

On our latest trip to Vegas my wife and I had a rental car and it turned out to be a pretty good option for us.   Usually in the past renting a car for me didn't seem as practical given the amount of travel I expected to do and the difficulty in navigating Vegas traffic.    But we were lucky that traffic wasn't bad cause if traffic gets snarled on the strip then you can spend a long time sitting while the pedestrians flow past your idled car.

There are a variety of transportation choices in Vegas.  Below I list the main alternatives and discuss some positives and downsides for each.


Usually taxi's are the easiest, quickest, most comfortable and most convenient way to travel around Vegas.   If you have a few people then taxis can even be a reasonably priced option.   In my experience a typical taxi fare is usually around $15-20 including tip. Short hops up and down the Strip could be as low as $10. Don't forget that tipping is customary. The taxi fares in Vegas are $3.30 minimum plus 20¢ per 1/12 mile and $30 per hour waiting. If you are picked up at the Airport then there is another $1.80 fee. Taxi trips in Vegas can add up but they are usually very convenient and its easy to catch a cab at most major casinos. However if its busy then there can be long lines at taxi stands or shortages of cabs.  I've waited as much as 45 minutes to an hour in the taxi line at the airport before.   I'd also be on the look out for the scams that some taxi drivers try on unsuspecting tourists.   Most common trick is to take the 'long way' to jack up the fare.  You usually do not want to take 'the tunnel' when leaving the airport to get to the strip unless theres a major traffic jam.   I've also seen one cabbie trying to play games with the meter.  So be aware of the route you should be going and watch the meter.  I really don't want to paint taxi drivers negatively as a group and in my experience 99% of the taxi drivers are honest.   If you want to get a taxi then be aware that you can only get a taxi at a designated taxi stand and hailing a taxi from the curb is not allowed in Vegas.

Car Rental

Rental cars in Vegas can be very practically priced. I did some quick searches on Hotwire for 4-5 day periods in July or September.  I found car rental rates in the $20-$35 range per day including taxes and fees.   Having a rental car can be a real convenience and give you freedom to do a lot of running around.    But heavy traffic on the Strip can make driving there a gigantic pain.   That reason alone is a good enough reason to avoid renting a car especially for someone unfamiliar with Vegas.   Parking is usually free and pretty plentiful almost everywhere in Vegas.   The garages near downtown seem to charge for parking now but you can often get validation at the casino.   Personally I'd avoid valet parking or you'll end up paying a lot in tips and it can take a while for the valet to retrieve your car.   Of course I'd avoid rental cars if you'll be drinking much and don't have a designated driver.    If you're planning any day trips outside Vegas then getting a rental car makes even more sense.   You can also get a rental car for 1 day to do your day trip and use other travel methods for the rest of your stay in the city.

Airport Shuttle

There is airport shuttle service too and from McCarran airport to the major hotel locations. Shuttle service at McCarran costs $6-$8 per trip to strip and downtown hotels. Unfortunately the shuttle service can be a long tripwith the shuttle making multiple stops at various hotels to drop off people at each stop.   If you have just 1 or 2 people then the shuttle can be the cheapest way to get to your hotel from the airport but for more people a taxi may be cheaper.

The Las Vegas Monorail

The monorail is a pretty easy and fairly practical option if you just want to go from one major strip hotel to another.   The monorail costs $5 per trip per ticket. Or you can get a 1 day pass for $12 or a 3 day pass for $28.    The Monorail travels parallel to the strip on the East side. There are stops at several major hotels going between the Sarah at the North and the MGM Grand to the South. One downside of the monorail is that you have to walk through the entire casino and hotel in order to get to the monorail station.   Since the hotels are huge getting to the monorail station at the rear of the property can be a 1/4 mile trip.  Walking is often better for short trips from one hotel to the next on the monorail   For example walking from Harrahs' to the Flamingo is about 1/4 mile along the strip.  But if you took the monorail you'd probably walk about 1/2 mile total to go to the back of each property to get too and from the monorail stations and spend $5 per person for the trip.  Keep in mind that if you have a number of people taking a trip then the cost of tickets can be more than a taxi ride.  

Free trams, shuttles and people movers

There are a number of free trams around Vegas. For example there is a small monorail that goes between Excalibur, Luxor


Walking is obviously free and also a nice way to work off some of the food consumed in Vegas buffets. However distances in Vegas can be deceiving and walking can talk a lot of time.  The hotels are huge and take up a lot of space and tourist maps may not be to scale.   It may look like going from The Venetian to Bellagio is just "a block away" but its actually a 2 mile round trip hike.   If you consider that you're already probably walking a half mile round trip just to get through the large casino from your room to the outside you're probably already walking enough as it is.   Wouldn't you rather spend your time on vacation having fun?  Also consider that Vegas can get very hot in the summer so walking a mile in 100+ degree heat in the middle of the summer can be pretty tough on you.    Another thing to be aware of when walking the strip are the vendors handing out sometimes pornographic pamphlets for adult oriented services.   But if you're up for a hike and like the atmosphere of the Strip then you can't beat the price of walking.

City Bus

The local mass transit in Vegas has regular bus service up and down the strip and to Fremont. They have a route named the Deuce that runs up and down the strip all the way to Fremont. Tickets for the Deuce route are $3. Or you can get a 24 hour all access pass for $7 or a 3 day all access pass for $15.   You will have to wait for the bus to show up but they are pretty frequent.   Buses can get crowded at peak times and you will have to know the routes and of course they only stop at the bus stops so you'll likely have to do some walking.

Other transportation I avoid

Town cars and limousines are pretty common in Vegas but neither are frugal options.   There are some companies that rent out exotic cars or scooters but both are not practical and are more of a novelty entertainment option.

How I Choose What Transportation to Use

1. Figure out all the trips you're going to take.
2. Find cheapest non-rental car option for each trip based on your needs.
3. Add up cost of each of the trips.  If rental car will not work for you then this is your answer.
4. If rental cars are an option then find cost of rental car for entire trip.

5. Compare cost of #3 and #4.  If rental car is cheaper then get a rental car.

Lets look at some examples:  

A family of four is going on a trip to Vegas for 4 days.   You're going to stay at the Circus Circus and you'd like to see several of the strip hotels, visit the Fremont Street Experience and the Liberace museum.  Spending one day walking up and down the strip is OK and you would take the bus to save money.   (Please bear in mind the prices given here are just meant for example sake and your actual travel costs will vary.)

Round trip form airport.   Taxi : $40, Shuttles : 4 x 2 x $6 = $48.
Round trip to Fremont.   Taxi : $50, Bus : $3 x 2 x 4 = $24
Round trip to Liberace museum.  Taxi : $40
Tour of Strip.   Monorail tickets : 4 x $12 = $48,  Bus : $7 x 4 = $28, Walking : free
All trips : Taxi : $40 + Bus : $24 + Taxi : $40 + walking free

Total cost = $104

Since there are four people you'll save money with the taxi instead of shuttles to get to and from the airport.   Going to Fremont is cheaper by bus than taxi however since its a long trip and the bus is pretty cheap.   The only practical option to get to the Liberace museum is the taxi.   When you visit the strip walking is free and you're willing to do that to save money.

Rental car = $132 plus gasoline

In this comparison the rental car will run you around $30 more than the other options.

Another example:

You and a friend are going to Vegas for 3 days.   You'll spend most of your time gambling in your hotel the Luxor and you expect you'll be doing some drinking and a couple nightclub in other strip hotels.  You don't plan any trips off the strip.  You've got 3 trips.   Round trip to and from the airport.  2 separate trips along the strip between casinos.

Round trip airport:   Taxi : $30, Shuttle : $6 x 2 x 2 = $24.
2x Visit strip casino : Taxi : $20, Monorail : $5 x 2 x 2 : $20

The airport shuttle is cheaper round trip to the strip than a taxi for 2 people.   For your visits of other strip casinos the taxi and monorail are about the same price so you choose to use taxis since they are a bit more convenient.  Since you'll be doing some drinking you don't think rental cars would be a good idea.

Total costs = $24 + $20 + 20 = $64

Images by ChrisYunker and http2007

June 27, 2010

Priceline Saved Me $80 / 15% Over Hotwire for Hotel

My wife and I are going to a nearby city for a few days in July with another relative.    We had to get two hotel rooms for a couple days for the trip.   I searched all around on the various online hotel booking sites and didn't find any super bargains.  

I really tried to find the best price I could and was willing to stay at a basic hotel as long as it wasn't a flea bag or similar.  Unfortunately the cheaper hotels were all very unattractive sounding from the reviews I found online.  They had pretty low recommendations and were 20 miles outside of town by the airport, on a very heavy traffic road with high noise or the type of place that rents by the hour.   I would have much preferred to get the hotel rooms for $60-$80 a night, but no dice.

I looked to Hotwire and found I could get a 3 star hotel in the area we wanted for $119 a night.  That seemed like the best value for an acceptable quality hotel.  I used another trick I've mentioned before is to use BetterBidding.com to help identify the hotels at Hotwire or Priceline.   There is only one 3 star hotel in the neighborhood in question so I was very sure I knew which hotel Hotwire was going to offer.  I was not 100% sure on the hotel in question but wouldn't have been disappointed if we ended up in another 3 star hotel.  The cost on Hotwire would have been 2 room x 2 nights x $119 for about $475 total plus about $75 in taxes for a total of almost $550.

Before I bought the Hotwire hotel I figured I'd give Priceline's "name your own price" option a shot too.   If you're not familiar with how Priceline works you specify the city, neighborhood and quality rating of hotel you're interested in and then make an offer on the price you want to pay.   You don't know what hotel you'll get or if they'll accept your offer.   If the offer is accepted you have your hotel reservation.  If they refuse the bid then you can expand your options to add other neighborhoods, raise your bid and/or add other quality levels.

I've never actually had success getting a bid with Priceline to work before.   But I figured it was worth a try.   First of all I decided to check and see if I could get a 3.5 star hotel in the same neighborhood of town for the $119 price.  I figured if I could get 3.5 star hotel for the same price then why not.   But that failed and Priceline didn't get an acceptance from any hotels.  

SO next I decided to expand the search to 3.5 and 3 star hotels in the neighborhood in question but then drop the price down to $100 per night.   This time it succeeded and I got the same hotel I had my eye on with Hotwire.    With $100 per night we're saving about $80 on the deal via Priceline over Hotwire. 

Basically the process I used was:

1. I got a price quote on Hotwire first for the level of quality hotel I wanted in the area I wanted.   The 3 star hotel was $119.
2. Then I tried Priceline  to see if I could get a higher rating hotel for the same price. 
3. I also then tried Priceline for the same quality of hotel or higher rating for a lower price.

You might be able to follow a similar process to play Priceline vs Hotwire to get a lower price on the same quality hotel or get a higher rating hotel for the same price.   Certainly doesn't hurt to try.

p.s. I also used Ebates to get a 2% cash back on my hotel. 

June 25, 2010

Best of blog posts for week of June 25th

Christian PF has a run down of 2010 Upcoming Tax Law Changes

Bargaineering raises an interesting discussion with Your Take: OK to Lie About Previous Salary in Interviews?

Bargaineering also takes a devils-advocate position with  5 Reasons to Skip College

My Money Blog asks : Deluxe Rent-a-Car of LAX: Worst Car Rental Agency Ever?
I'm glad I made the choice to pay a little extra and stick with Hertz for our recent vacation than risk one of the cheapo car rental companies like Delux at LAX.

Len Penzo argues Don't Be A Sucker: Why Private Schools Are Financial Rip Offs   I agree with him about 95-99%.   Usually private k-12 schools  are not worth the extra cost in a purely financial perspective.

Darwin Finance asks  With Rates This Low, Should You be Borrowing to Invest?

My Money Blog points out that   Google Voice Now Available To All In US

Our Frugal and Not So Frugal Vacation Spending

My wife and I took a vacation to Disneyland and Las Vegas.   We flew down to LA and then drove over to Las Vegas from there.  It was a great vacation and we enjoyed ourselves a lot.  Total cost of the trip was just over $2,500

Here is how our spending broke down:

Round Trip airfare : FREE using airline miles
Economy lot Parking at Airport : $70
Baggage fees : $20 x 4 = $80

Rental Car for 8 days: $329
Gasoline : $50
3 star Hotel 1 block from Disney in Anaheim, CA : 4 nights for $254

5 star Hotel in Vegas : 3 nights for $640
3 days at Disney : $245
Broadway show in Vegas : $183

Food : $432
Souvenirs : $77

Other uncategorized : $201
Gambling expenses:  (we won $9)

Total  : $2,552

Roundtrip airfare - FREE
We got the airfare to California for free since I used airline miles.   Normally we'd have to pay around $250 to $300 per ticket to fly down.   That means our airline miles saved us $500 to $600.

Rental Car - Spent a bit more for preferred company
We spent $329 for our rental car.  I booked it via Hertz online directly.    I paid a little more to go with Hertz specifically since I have had good service and no hassles with them in the past.  I've had problems with some other car rental companies in the past so I wanted to stick with Hertz.    I spent $50 more to go with Hertz rather than book a cheaper company and I pent about $100 more than if I'd used Hotwire to book and pay in advance.   I also saved a few bucks on the Hertz rental by using a discount code from American Express.   There are various discount codes available for Hertz.    I declined all of the optional insurance products that Hertz sells.  Liability insurance $12.95 / day, Loss Damage Waiver $15 / day and Personal accident / personal effects coverage $5.95 / day.   If I had bought all of those optional insurance products then I could have ended up paying another $270 or more.   I have liability coverage via my standard auto insurance and my American Express card provides damage waiver coverage.  

Hotel near Disney - Decent Value with Airline miles discount
We paid $254 total for our hotel in Anaheim.    The normal cost would have been $333 but I cashed in airline miles from American Airlines to save another $122.   But then we also got hit with a somewhat surprise $10 per night 'resort fee' during check in.   I can't remember if I noticed that fee when I got the reservation initially.  I shopped around a fair amount to compare hotels and find a good hotel that was close to the Disney park for a reasonable price.  The hotel we booked is usually about $110 a night.   The cheapest 3 star hotels in Anaheim run around $85 a night.  The cheapest hotels in the area are around $50 a night but those are less 2 star level or worse hotels which are not close to Disney.   We chose to go with a hotel close to Disney so we wouldn't have to deal with driving and parking or hotel shuttles.   Parking at Disney is $14 a day in the normal lot.  But the hotel wasn't as close to Disney as I thought.   When I reserved it, it looked like it was "next door" to Disney when you look on the map at Google but thats actually a 15-20 minute walk each way to the park entrances.   So we ended up paying $4 a day for shuttle tickets.

3 Days at Disney - Great Deal with a friends help

I have a friend who lives in Southern California and he gets a discount on Disneyland tickets via his employer.  My friend volunteered to buy the tickets for us so we could get a discount.   My friends discount price was just $245 for two 3 day park hopper tickets.   If we'd bought the same tickets ourselves we'd have paid about $370.   My friend saved us about $125.

5 Star Vegas Hotel - Splurged
For this item we totally splurged.   We spent about $640 for 3 night stay in a 5 star resort hotel.   You can easily get much cheaper hotels in Vegas that are perfectly fine.   We could have gotten a decent 3 star hotel on the Strip for as little as $100.    After we decided to splurge at the nice hotel I still shopped around.  I looked for prices at every online travel site I use (Orbitz, Hotels.com, Travelaxe, etc) and ultimately found the best price directly at the hotel.

Vegas Show - Great seats using employee discount
We went to the Lion King show when we were in Vegas.   Normal ticket prices are listed at $64 to $168.   I got our tickets via an employee discount from my work.  We spent $183 total so it was about $91.50 per ticket including tax/fee.   But the tickets we got were in the second row so they were the most expensive section in the theatre.  If I go straight to the website for the show and try to buy tickets in the same section we sat in then it costs $266 total for 2.  Or if I look at the cheapest tickets in the house at the back of the balcony section then those would have been $166.  Using my employee discount got great seats for the price of the cheap seats.

Baggage Fees - Spending for Convenience

We packed bags for the trip and so we ended up paying $20 each bag each way for a total of $80 extra fees.   The only way to avoid this fee would have been to cram all our clothes into carry on bags.   My wife and I both tend to over pack so thats not easy for us for a week long trip.   We chose to go ahead and just pay the extra baggage fees for $80 total

Parking at Airport - Best value

We parked in the economy lot at the airport.   we could have also parked in an off airport parking lot to save about $2 per day.   That would have cut about $16 off the cost.  We could have also taken public transportation to the airport and back.   Tickets are $3 each way which would have ran us $12 total for a savings of $58.   On the other end we could have spent $120 or $170 for parking if we had parked at the lots closer to the terminal.  We chose to spend the $70 to park in the economy lot since its the easiest way without being excessive.

Driving to Vegas - Cheaper than flying

We decided to drive from Disneyland to Las Vegas.   We could have flown from LA to Vegas and saved some time.   Cheapest flights from LA to Vegas are about $140 roundtrip.  We would have spent around $280 total to fly.   Instead we rented the car for 4 extra days for about $170 and spent $50 in gasoline.   That saved us a net $60 plus we had additional savings in Vegas since we had the car there to use and didn't have to pay for taxis.   We would have spent at least $70 or so on taxis and monorail travel in Vegas.   I did have to pay $2 in parking when we went to the Fremont though. 

Food - Medium spending

We spent $432 on food that I can account for plus some more in cash spending.   I don't think our food spending was frugal at all but it wasn't that lavish either.  Considering that it was food for 2 people for 7 days that comes out to just about $31 per person per day.  Plus one meal was $80 at a fancy restaurant.  Thats not too bad if you're eating at real restaurants and not packing sandwiches.   So while our spending wasn't really cheap we did try to keep it under control and had some nice meals as well.

What we spent extra on

3 star hotel in Anaheim close to Disney instead of a 2 star hotel likely requiring a shuttle = $100 extra
Hertz rental car instead of random brand from Hotwire = $100 more
Splurging on a fancy 5 star hotel in Vegas = $540 extra
Baggage fees instead of just carry on = $80 extra
Parking at the airport economy lot instead of using mass transit = $58

Total extra spending = $878

What we saved money on

free airfare using airline miles = $500 to $600
Using airline miles for hotel in Anaheim = $122
discount Disney tickets purchased via a friend  = $125
driving to Vegas from LA = $130

Total savings = $877 to $977

Our frugal savings basically equaled the amounts we splurged on other things.   In a way you can say that the frugal choices we made basically paid for some splurging and perks on the trip.  For example if we hadn't saved up airline miles and used them to pay for the airfare then we wouldn't have been able to splurge on a 5 star resort hotel in Vegas.

June 24, 2010

Example of When Whole Life May Pay Off

I've posted many articles (like the one yesterday) giving examples of when cash value life insurance isn't a good investment.  To be fair and not entirely one sided on the topic I figured I should really talk about the benefits of cash value life insurance.   One reason for whole life insurance that I've often seen cited is that it can help shelter your assets from estate taxes.  So lets talk about that.

I found this article Insurance: When Costly Insurance Makes Sense on Forbes from 1998.

They say that generally whole life is a "bad buy" but that there is an exception: "You might find yourself in the exceptional category if you are a prosperous middle-aged saver looking at a policy primarily to transfer wealth to the next generation."   In other words estate planning for people with higher wealth levels. 

One of the key benefits for investing in cash value insurance is that it can help handle estate taxes.  So this can help you pass on your giant pile of money to your heirs when you pass away at a ripe old age.

The Forbes article gives an example comparing the two options of buying a whole life policy versus "buy term and invest the rest".   

The whole life policy: "Say you are a healthy, 50-year-old man who wants to create a fund, worth $1 million immediately, to help pay estate taxes at your death. The premium for a typical whole life policy from a top-rated mutual insurer, with an initial death benefit of $1 million, would be about $24,000 per year, says Ratner."

Versus the "buy term and invest the rest" strategy:
"The alternative strategy is to buy a cheap term policy and invest the balance of the $24,000 in a conservative municipal bond fund earning, say, 4% per year on average. That account would grow to about $1 million by age 77. If you die then, your heirs will collect that amount plus the $1 million death benefit from the term policy. If you live, you could forgo insurance and probably maintain a $1 million-plus investment account with modest growth."

In their example the whole life policy would do better in the long run:

"Those numbers sound okay--but a whole life policy would probably beat them in the long run. Ratner's projections of likely insurance policy dividends say that if you paid the same $24,000 per year into whole life--and recycled dividends back into the policy to increase the death benefit--the death benefit would slightly lag that of the term insurance/investment combo until age 68, then would overtake it. By age 77, the whole life policy would pay $2.3 million, or nearly $300,000 more than the term/fund combo. A low-load policy would provide substantially better returns. With the same premium, you would buy a bigger death benefit over time--about $110,000 bigger by age 69."

Now there are some qualifiers to this comparison.  They are using municipal bonds for the investments when buying term life.  Municipal bonds are a very conservative and safe investment but they have relatively low returns.   If you wanted to take more risk your potential returns are greater.   I think their comparison is good cause the returns of a life insurance policy are comparable in risk and return rates to municipal bonds.   And they point out that : "If covering a sizable premium becomes difficult in a policy's early years, whole life's inflexibility will hurt you."  In other words if you are for some reason unable to make the policy payments and have to cancel the policy early then you'll take a big loss compared to simply saving the money in bonds.

This all hinges on the need for estate planning to handle a significant estate with the purpose of avoiding estate taxes.   Over 99% of people do not pay estate taxes, so this really only applies to less than 1% of the population who are the most wealthy.   If you aren't a multi millionaire then this benefit of cash value insurance isn't going to do you any good.   If you are very wealthy then I'd recommend you talk to a qualified estate planner to figure out how to best handle your estate.   It is possible that cash value life insurance could help you with your estate planning if you're wealthy.   But please don't get your estate planning advice solely from an insurance salesman.

June 23, 2010

Norton products 10% off coupon and +12.5% cash back via Ebates

Right now you can get 10% off Norton software products from Symantec using a coupon from Ebates and then get an additional 12.5% cash back from Ebates.   Thats a total of 22.5% savings on Norton products when using the coupon and Ebates.

10% off Top Norton Products at Symantec with code 10NORTONSTORE (Exp. 06/30/2010)

You'll have to be signed up with Ebates in order to get the cash back.

High Cost of Surrender Fees for Cash Life Insurance

A few weeks ago I watched an episode of the Suze Orman show and a caller had a cash value life insurance.
I've previously talked about several examples of how cash value insurance turned out to be poor investments:
One example, another example, another, another, and another.  You can add this example to the list primarily due to the steep surrender fees.

The Cash Value Insurance Details 

They had two policies for $1 Million of death benefit.   Policy #1 they had for 9 years with a $500 monthly premium and Policy #2 was 6 years old with a $650 premium.

They had a cash value of around $40,000.   They had also previously cashed out $40,000.  If they want to cash the policies out now they'd have to pay surrender fees for $18,000.   Their policy's surrender fees last for 16 years.

Premiums spent :
policy 1 : 9 years x $500 x 12 months = $54,000
policy 2 : 6 years x $650 x 12 months = $46,800
total = $100,800

Current value :
cash value = $40,000 + previous withdrawal = $40,000 - surrender fee = $18,000 = $64,000

So they're currently in the red for $36,800.

Compared to Term

Lets take a look at term policies to compare.   QuickQuote.com gives quick quotes on term life insurance.  Lets say I'm a 35 year old male who doesn't smoke in good health in California.   (just arbitrary chosen)
A 30 year term policy for $1 M in coverage would cost about $1000 a year.   A 25 year policy would start under $900.

If I got two 30 year term policies one for 9 years at $1M and another for 6 years at $1M then I could get  both at a total cost of  $15,000 (9 yr x $1k + 6 yr x $1k = $15k).

Total cost of equivalent term insurance = $15,000

Cash policy cost $36,800 vs Term policy cost $15,000.   They would have saved $21,800 with the term policy.

Why That Surrender Fee Really Hurts

Notice first that the surrender fee is going to last them another 16 years.   Thats a looooong time.  This acts to lock them into the cash value insurance for a long time with heavy fees.

The $18,000 they would have to pay in the surrender fee is about half the money they'd be in the red.   If the surrender fee didn't exist then they'd be looking at currently $18,800 in the red.   Thats only $3,800 more than the term policies.   Plus they pulled $40,000 out of the policy in the past which hampered the cash values ability to grow.   If the surrender fee didn't exist then these cash value policies wouldn't be such a bad deal really.  

The surrender fee locks them in to the policies for a long time and really undercuts their actual cash value.

June 22, 2010

4 college guys + 1 year = $5000 repair bills

My wife and I were watching a program on the HGTV network.  It was about a couple trying to sell their home which was in a different city.  They had trouble selling the house so they decided to rent it out.  They chose to rent it to four male college students.   They knowingly and purposefully handed the keys of their property to four college age men.   On top of that it was rented through a property manager acting as the middleman so they had no personal knowledge of the four renters.

Let me be clear, It is not correct to discriminate based on age, race, sex, etc.  If you can personally screen tenants then I think there are situations where four male college students may be very good tenants.  However any time you are renting to four people then the potential for damage is four times as high.    And lets be honest here, on average four college age men are not most likely to be responsible tenants.   So you need to be careful when screening such tenants.   It is also perfectly fair for a landlord to not rent to groups of adults given the expected additional wear and tear and hassles dealing with 4 individuals coordinating to come up with a rent check.

Unfortunately about a year later when the renters moved out the owners found the mistake in their decision.   I hope this doesn't come as too much of a shock to you but the 4 college age men living together managed to trash the home.  Actually the damages were not really that bad in my opinion.  Most of it was just surface wear and tear or minimal repair bills.   The tenants broke the front door handle, put a small gash in one wall, somehow tore off the railing from a stairwell and the worst was lots of scuff marks or staining on the hardwood floors.   Other than the hardwood floor the damage shouldn't have taken more than a few hundred dollars to fix up.  Of course even a few hundred in repair bills isn't good, but as a former male college student and a landlord I can image much worse damage.

However the owners then made their second mistake by apparently repairing everything to 'good as new' condition.   All together they spent $5,000 to fix the damages.  They had the hardwoods sanded and refinished which is a pretty large expense.   I'm guessing they probably went all out to spend the money to have everything else fixed as well.   I'm not sure if there were other expenses or damages not shown on the program but $5,000 is a lot of money to spend for what we did see.   It could be that repairing the floors was most of that cost since it can be pretty pricey to refinish hardwoods.   Personally I would have just fixed the things that absolutely needed fixing and left the hardwoods as they were.   The next renter could live with slightly scuffed and blemished floors.   Chances are that the next renter or the renter after that will do some more damage to the floors so if you refinish the floors every time they are less then perfect you'll be spending a lot of money very quickly as a landlord.

You need to be careful when screening tenants and screening for good tenants is one of the best ways to improve your success as a landlord.   Don't over spend to repair your rentals.   Expensive to fix cosmetic damage in particular is something you should consider leaving as is if at all possible.

June 21, 2010

My $3.75 Cup of Coffee

The cup of coffee pictured cost me $3.75.  

I was on vacation with my wife and we had a meal in the cafe in The Venetian which is one of the nicer casino resorts in Las Vegas.   I didn't realize it was $3.75 until we got the receipt.   I didn't even think to look at what the beverage costs were.   The meal prices were actually not that bad considering how expensive the place was in general.  Most meals there were in the $10 to $25 range if I recall right.   Thats not cheap but its not highway robbery either.   I guess I made the assumption that given the entree prices on the menu that the beverages would be similarly moderately priced.  

The hotel is actually pretty smart to jack up prices on beverages this way.   I bet most do the same thing I did and not even really consider the cost of beverages.   You just look at the cost of a $12 sandwich and think thats not too outlandish then order a drink to go with it without even really thinking about it.  If you add tax and a 20% tip then that cup of coffee cost me closer to $5. So your $12 sandwich and drink turns into a $20 meal.

The frugal thing to do would be to keep an eye out on these extra costs.  Maybe I'll learn from my mistake and not order drinks without checking the price.   An even more frugal option is to just order water.  

To be honest if I had seen the price of the coffee and known it was $3.75 in advance I am very sure would have went ahead and still ordered it.   I have a slight caffeine addiction so it isn't something I do without too lightly.   Plus we were in a very expensive hotel so my price expectations are different.  If The Venetian wants to charge more for coffee then thats easier for me to swallow (sorry) than if Denny's started charging that much.   Lastly we were on vacation and my frugality is in a different mode when I'm on vacation.  Theres a little devil on my shoulder saying "live a little" and the little angel on the other shoulder isn't putting up much of a fight.

So I guess I'd sum up the experience to say that I should watch out for the beverage prices in the future.  At least that way I'll know if I'm spending too much.

June 20, 2010

Account for a Health Savings Account (HSA) On Your Income Taxes

When you have an HSA you have to account for the contributions and distributions on your income taxes.  With an HSA you need to make sure you don't put in too much or take out too much or you'll owe income tax and possibly penalties.  

Contributions and Distributions

The key things to account for with your HSA for tax purposes are the contributions to the HSA and the distributions.   The contributions will tell the IRS how much of a deduction you get off your taxes and if you put in more than the maximum.    The distributions tell the IRS how much was taken out and how much of that was for your out of pocket medical costs.  If you did things correctly then your contributions will be under the maximum and your distributions will be no more than your out of pocket medical bills.  If you took more in distributions than your out of pocket medical bills then you'll owe taxes and a 10% penalty, just like if you were to cash out a 401k prematurely.

Form 8889 
If you have an HSA then you must fill out form 8889 when filing your income taxes.   Form 8889 has two main parts to be concerned with.   Part I you document how much you put into the HSA which then gives the amount that is deducted from your taxable income.   Part II accounts for how much money was taken out of the HSA and how much you spent on reimbursed qualified medical expenses.

Part I of form 8889 : HSA contributions

In this section you list all the money contributed to the HSA.   You could have money contributed by yourself either directly or via a paycheck withdrawal.   Your employer may also have contributed to your HSA with their money.   Its also possible to fund an HSA via a one time rollover from an IRA or Roth IRA.

Line 2 of form 8889 is the amount you put into the HSA.   Lines 9 & 10 are the amounts your employer put in and any amount from a qualified contribution from an IRA.   The amounts for line 9 & 10 are not tax deductible.   TO figure the amount you can deduct from taxes you subtract what your employer put in and any IRA contribution from the total amount.

For example: You are single and your HSA was funded with $3000 total in the year.   $500 of that came from your employer and $2500 was your own money.   Line 2 you enter $3000, line 9 is $500 and line 13 ends up $2500 which is your HSA deduction or the amount that can be deducted from your taxes.

Note that if you put more into the HSA than the maximums then you could owe taxes on it.

Part II of form 8889 : HSA Distributions

In the section section of form 8889 you account for the money taken out of the HSA.   Line 14 starts with the total amount taken out of the HSA.   This includes rollovers, money spent to pay medical bills and any other money taken out for whatever reason.    With line 14b you subtract any rollovers from your withdrawals which results in line 14c.    Line 15 is the amount of qualified medical expenses you had which were not reimbursed by someone else.   This means medical bills you paid out of pocket.   If someone else paid the bill such as your insurance company then you can't count it here.    If you subtract line 15 from the amount on line 14c then that is the amount taken out of your HSA that was not for a rollover and was not for a qualified medical expense you paid yourself.    That total is in line 16 and is the amount taxable.   This counts as taxable income that you owe income tax one.  Also if its not a qualified distribution then you will also owe a 10% penalty tax which is figured on line 17b.

All together that gives us :
The amount put in (line 14) - rollover funds (line 14b) - qualified medical expenses paid out of pocket (line 15) = taxable income (line 16) & 10% penalty (line 17 = 10% line 16)

Example:   You had two doctor bills for the year that you paid 100% out of your HSA funds.  You had a $200 bill and a $300 bill for $500 total.   This is all the money you took out of the HSA.   When you fill out part II you would list $500 on line 14 as the total distribution, $0 on line 14b since none of it was a rollover which gives you $500 on line 14c.   Line 15 is your medical expenses of $500 total.  These are qualified expenses because you used the money to pay for legitimate medical expenses.   When you add it all up the value for line 16 comes out to $0 which is what you want since this means you don't owe any taxes or 10% penalty.

Information the IRS gets

The bank that handles your HSA will send a 1099-SA form to the IRS.    This form tells the government how much money was distributed from the HSA and how much interest your HSA made.   The gross distribution figure is the important one.   This is the amount taken out of the HSA.   The 1099-SA only gives a total dollar figure and does not say exactly why the money was taken out or even if it was actually for medical expenses.

Another form is the 5498SA which tells the IRS how much money was put into the HSA and what the year end balance was in the account.  

Tracking the medical costs

The IRS has no information on exactly what you spent your HSA funds on or withdrew the money for.  There is no reporting to the IRS by your doctors or health care professionals to tell them what your bills were.   You are responsible for keeping records on the medical services you paid for out of pocket.  You need to keep receipts and invoices to show the amounts you were billed and what you were obligated to pay yourself.

What You Need to do

Key things you need to do as a HSA user:

  • Don't contribute more than the maximum to your HSA.  If you do it will be taxable
  • Don't take out more from the HSA than your out of pocket medical costs.  If you do it will be taxed as regular income and subject to a 10% penalty
  • Make sure to keep records of your qualified medical costs.

Image from IRS document

June 17, 2010

Comparing Furnace and AC Efficiency

Have you considered getting a new furnace or air conditioner?    There are some good tax incentives right now which can help you pay for the purchase.   We've been thinking about getting a heat pump installed in our home.   When you look at furnaces or air conditioners they have efficiency ratings.   You'll see specifications like SEER 14 or 90% efficient.   But these numbers don't really tell us how much money you'll actually save.   It is not really obvious how a SEER 14 air conditioner compares to a SEER 16.   Here I'll tell you how to tell how much more efficient one HVAC unit is compared to another.    I'll compare the units in terms of % savings.    You can then use that figure to see how much actual money one unit might save you versus another.

Note: Keep in mind that all the examples I give below are just arbitrary examples.   Electricity and natural gas costs will vary depending on where you live.   The calculations are not super exact either.   The efficiency figures are meant for estimation purposes and theres not guarantee your energy costs will be exactly the same.  You should also bear in mind that weather changes daily.   Some winters are colder than others so changes from year to year can have more to do with how good or bad a season you have more than how efficient your furnace is.

Air Conditioner efficiency

AC units are rated by a SEER number.   EESI explains what SEER is :
"The SEER is defined as the total cooling output (in British thermal units or Btu) provided by the unit during its normal annual usage period divided by its total energy input (in watt-hours) during the same period."

So the SEER is a direct measure of cold air / energy used.   Higher SEER is better because it means more cold air for the same energy.

Lets say you have a unit with SEER 10 and another unit with SEER 15.   The SEER 15 unit is more efficient since you get 1.5 times as much cold air for the same amount of energy used.   The SEER 15 unit will use 33% less energy to give you the same amount of cooling.  If your current summer air conditioning costs run you about $600 for the season then the more efficient unit will cut about 33% of that off to save you around $200.

cost savings = 1- (current SEER / New SEER )

So for example if your current AC system is SEER 12 and you're upgrading to an SEER 13 unit then the cost savings would be = 1- (12 / 13 ) - 1 = 0.923 - 1 = 7.7%

Gas Furnace Efficiency

Gas furnaces are given a % efficiency number like 80%, 90%, 92.3% etc.   This rating is a basic measure of how much of the energy from the natural actually gets converted into heat in your home.   The higher the % the more heat you get.

cost savings = 1 - (current AFUE / new AFUE)

So for example if you currently have an 80% AFUE furnace and are looking at updating to a high efficient 95% AFUE model then that would mean your savings are = 1 - (80% / 95%) = 1 - 0.84 = 0.16 = 16%

The ACEEE site has an easy table showing you how much you can save if you upgrade from various level AFUE furnaces.  

Heat Pumps

Heat pumps have two different numbers for their efficiency ratings.    They have a SEER that is the same as the value used on air conditioners.   You can compare the cooling efficiency of a heat pump by comparing the SEER the same way you do when comparing air conditioners.   For heating the heat pump has a rating called the HSPF or Heating Season Performance Factor.   The dept. of Energy defines that as

"Heating efficiency for air-source electric heat pumps is indicated by the heating season performance factor (HSPF), which is the total space heating required during the heating season, expressed in Btu, divided by the total electrical energy consumed by the heat pump system during the same season, expressed in watt-hours."

In other words: HSPF = BTU / Watt - hours

Higher HSPF is better.   

The HSPF is  the same kind of measure as a SEER so we can compare HSPF the same way as comparing SEER.

cost savings = 1- (current HSPF / New HSPF ) 

When you are looking at a heat pump you have two different numbers to compare.

For example:  Lets say you are looking at a new heat pump with SEER of 14 and HSPF of 8.2.   Another model is a bit more expensive but it has better SEER 13 and HSPF of 8.0.   

cooling cost comparison = 1 - ( current SEER / new SEER ) = 1 - ( 13/ 14 ) = 7.1%
heat cost savings = 1 - ( current HSPF / new HSPF ) = 1 - (8 / 8.2) = 2.4%

The SEER 13 / HSPF 8.0 unit is 7.1% cheaper to cool in the summer and 2.4% cheaper to heat in the winter.

Standard Electrical Furnaces 

A basic electric furnace is effectively 100% efficient.    DOE explains that "Electric resistance heating converts nearly 100% of the energy in the electricity to heat."   So there aren't really more or less efficient electric furnaces.  

Comparing Gas Furnace to Electric furnace to Heat pump

Its straight forward to compare a gas furnace to a gas furnace since they have the same ratings and its a straight forward question of math.   But comparing a gas furnace to a heat pump is a more complicated question.   When comparing across gas, electric and heat pumps you're comparing not only the different efficiency levels but also the different costs for gas or electricity.    We can use this handy calculator to estimate heating costs for different forms of energy it is from a previous article I wrote talking about wood pellet stoves.

If you go to the calculator page you can see a form that lets you compare heating costs for wood pellets, fuel oil, electricity, natural gas, propane, wood and coal.    For our purposes we can use it to compare electric and gas furnaces.   You have to know how much natural gas and electricity cost where you live to compare them.  If you start with that and then put in the efficiency rating for the gas furnace and use the assumption that the electric furnace is 100% then the calculator will show you how much each type of furnace will cost to heat 1 million BTU.

So for example lets say that you currently have an electric furnace and electricity costs you 10¢ per kWH.  You're considering replacing it with a 95% efficient gas furnace and natural gas costs $1.20 per therm.  If you plug in those figures and hit the 'Calculate' button it will tell you that 1 million BTU with the electric furnace will cost $29.31 and 1 million BTU from the gas furnace is just $12.32.     The 95% efficient gas furnace would cut your heating bills by about 58%   [ 1- (12.32/ 29.31) = 58% ]

The calculator doesn't have an entry for a heat pump but we can  use the definition of the HSPF to figure out an equation to find out what 1 million BTU's cost.    The HSPF is the BTU / watt hours.  

HSPF is BTU / watt hours.  
The cost of 1 million BTU with a heat pump
= 1,000,000 / HSPF * 1 kWhr / 1000 watt-hr * cost per kWh
= cost of 1 million BTU = 1000 / HSPF * cost of kWh

1 million BTU from a heat pump = (1000 / heat pump HSPF ) * cost per kWh

So if you know the HSPF and the cost of a kWH then you can figure out what the cost of 1 million BTUs are for your heat pump.    For example looking at the 8.2 HSPF heat pump we talked about previously, if electricity costs you 10¢ per kWH then that gives us : cost of 1 million BTU = 1000 / HSPF * cost of kWh = 1000 / 8.2 * 10¢ = 121.95 * $0.1 = $12.19

Using the calculator page and the formula above for cost of 1 million BTUs for a heat pump we can do apples to apples comparison between gas furnace, electric furnace and heat pump:

So the end result of the three options from the last two examples would be: 
Electric furnace 100% efficient, electricity cost 10¢ = 1 million BTU costs $29.31
Gas furnace 95% AFUE, gas cost $1.20 per therm = 1 million BTU costs $12.32
Heat pump with HSPF 8.2, electricity cost 10¢ = 1 million BTU costs $12.19

Important Note: The cost for 1 million BTU isn't the complete picture of heating costs with a heat pump.   The cost to heat with a heat pump is based on when the heat pump is in operation.  If you live in a very cold climate then the heat pump will need supplementary heat from a standard furnace for the coldest days.   When temperatures get below a threshold of 40F or so then less efficient electric heating coils will kick in to supplement the heat.   The cost for 1 million BTU figured above is based on the heat pump providing all the heat.   To know how much the heat pump is working all alone and howmuch it has supplemented heat from traditional furnace will depend on the climate.   Thats a little more detailed than I'd like to get in this already lengthy article.  So suffice it to say if you have a fairly mild climate then the 1 million BTU calculation is closer to accurate but if your region is particularly cold then heat pumps become much less cost effective.

If you know the annual costs to heat your home with one form of furnace you can use the above information to estimate the cost to use the other forms of heat.

Lets say that you have the electric furnace right now and you spend about $800 a year in heat.   If you're spending $29.31 per 1 million BTU then that means you're using about 27.29 million BTU a year.   [ $800/29.31]

Electric furnace = $800
Gas furnace 95% AFUE= 27.29 * $12.32 = $336
Heat pump HSPF 8.2 = 27.29 * $12.19 = $332    (assuming milder climate)

If you replaced your electric furnace which currently costs you $800 a year with the gas furnace you'd save approximately $464 a year and if you replaced it with the heatpump then you'd save approximately $368 per year.

June 15, 2010

Don't Believe Everything You Think

Don`t Believe Everything You ThinkA while ago I saw a bumper sticker that read : Don't Believe What You Think.
Apparently there is a book with the title too.   It might be an interesting read.   The bumper sticker stuck in my mind.    Its an obvious play off the old saying "don't believe everything you hear".   We certainly shouldn't believe everything we hear.   You also shouldn't believe everything you read on the internet (if that really needs saying).   But like the bumper sticker says we shouldn't believe everything we think either.   You see many of us have ideas in our heads that got there somehow at some point in our lives which are simply not true.

A while ago I stated in a comment on another blog that bananas cost 22¢ a pound.   I believed and thought that 22¢ was a typical cost for bananas.   This is what I thought at the time.   At some point I must have seen bananas for sale at 22¢ a pound so that is why I thought that is what they cost.   Someone rightfully challenged me on that figure which made me reexmine it.  I did a little Google searching and quickly found that normally bananas cost a lot more than 22¢ a pound.  Right now Safeway has them for 70¢ a pound.  Thats not a sale but its probably a normal price.    I don't know where or when I saw bananas for 22¢ a pound.  Maybe it was years ago and it was some sort of super sale during an abundant banana crop season. Its possible I simply remembered wrong and it was 22¢ per banana for small size bananas instead of per pound.   Or was it actually 29¢... ?

Sometimes what we think is based on an incorrect assumption or misapplication of the facts. People might take a generalization based on a statistic and then apply it as a fact.   You could for example read a statistic that says that the average Honda Civic lasts 180,000 miles and then misapply that information to assume that every Honda Civic will last 180,000 miles.   Its likely that your Honda will last a long time but there is no guarantee.   Maybe you actually heard 108,000 miles and remember it wrong or was it Toyota they were talking about?

Sometimes people believe what they want to believe.   People who are inclined to think global warming is hogwash might be happy to think that hybrid cars aren't really very green and its all just tree hugger propaganda perpetuated by car companies to try and sell you expensive technology.    Or people might think that recycling is always good even though sometimes it costs more and wastes more energy than simply hauling stuff to the trash.

People may think things that are simply based on incorrect information.   A while ago I head that G.E.D. does not actually stand for General Equivalency Degree as I'd always thought.   Apparently G.E.D. stands for General Educational Development.   But I've always heard that it stands or General Equivalency Degree (or Diploma).

People may believe things simply because they don't know otherwise and just assume.  Did you know that crime is going down in the USA?   Its a safe bet that many people think the opposite is true.   I mean the economy is bad and everything and just look at the news its full of crime.   But crime has been going down in US steadily for many years.   The FBI tracks the statistics and you can see the national figures for 1989 to 2008 in the Uniform Crime Report 2008.

People might believe things cause they just don't know how something really works.   Many people think that if you your income level puts you into the next tax bracket that you could end up losing money.  This is based on a common misunderstanding of how tax brackets work.   If you're in the 15% tax bracket and then get a $100 raise and get bumped up to the 25% bracket then that does not mean you'll be paying 25% on all your income versus 15%.   Yet many people think it works that way and some of them will even avoid making more money because of their incorrect understanding of the tax code.

Many of us are wrong about many things.   We believe things that are not correct for various reasons.  But what to do about it?   

If someone challenges you on something then don't automatically assume you're right and that they're wrong and dismiss them as ignorant.   Sometimes people argue with you because they are right and you are wrong.

Rethink what you know and be willing to take a new look at the facts.   Maybe what you think used to be true but has changed over time.

Recognize when your own biases might make you believe things that aren't true.   If you know your politics lean left or right then be more critical of your beliefs that support your own argument.   Be aware of your bias and ask yourself if what you believe is influenced due to your own bias.

Think about where you got the information.   Maybe it was from an undependable source. Maybe you can't even remember where you got the information which should be a red flag it may not be dependable.

We should all be willing to question the things that we think we know.   We are all capable of being wrong, misinformed or simply clinging to outdated information.

June 14, 2010

On Vacation for a few days

I'm going on vacation and will be out for a few days.   I have a few posts scheduled to publish but won't have something every day.

June 13, 2010

Career Interests of High School Students

What do High School students want to be when they grow up?  Are their career goals realistic?   It seems that most high school students are expected to go to college and I wonder if the career expectations of teenagers are practical.   The company RIGID conducted a survey of about 1000 high school students nationwide and asked what their career path was.   The article mostly focuses on the skilled trades but they also list the other career paths that students favored.

Career field of interest among High School students:

25% - computers or the Internet
16% - business
15% - engineering
15% - healthcare, defined as doctors, nurses, assistants, technicians
15% - the entertainment/arts field, defined as actor, musician, TV anchor, reporter, producer
6% - skilled trades
that leaves about 8% unaccounted for who I assume had various other interests.

There are a lot of high school students looking to get into good fields.   However I see some problems here.   It seems that most students want to go into some form of professional field and there simply aren't enough jobs out their to support 40% of the population working in computers and engineering.    There are too few people interested in going into skilled trades.   There are far too many students who are interested in an entertainment or arts field. 

I certainly think students should pursue an career that interests them.   However I think that everyone should have practical and realistic expectations about career potential.

June 11, 2010

Best of blog posts for week of June 11th

In the positive front, some big companies are hiring.

DoughRoller posts an interesting personal story of How I Survived a Gambling Addiction

Jim at Bargaineering wonders  Is Goldline A Scam?

Pop Economics talks about Fundamental indexing: A magic formula?

June 10, 2010

Self Employment and Social Security Taxes

I recently received an email from a reader asking:

How does now being self employed and not paying SS benefits, how does or will this affect my ss retirement benefits?
Signed, Concerned Self Employed
My response was:

Hi.   If you are making an income from self employment then you will normally pay self employment tax which covers the social security tax.   The self employment tax is taken out when you file your IRS income taxes.  
It is covered at the Social Security web site at this page:

The base tax is 15.3% up to $106,800 and then you pay the medicare portion of 2.9% on anything above that.
 If you've never been self employed then you may not be familiar with self employment tax.   Self employment tax is basically how they collect social security and medicare tax for people who are self employed.  However since you are both the employee and employer in this case you pay both halves of the tax.  Normally when you work for a company as an employee you pay half the tax and the company pays the other half.  More information on the self employment tax is available at the IRS site.

June 9, 2010

Student Loan vs Mortgage Debt Levels

I've seen numerous sources referring to student loans and college spending as a looming financial bubble.   It seems people fear that student loan debts might have the same kind of impact that the real estate bubble had.  I'm not sure that I agree that student loans or college costs are the same kind of financial bubble, but if it is then whats the extent of the problem?    If college spending is a bubble then is it as big of a bubble as the real estate bubble?   I think we can look at this by comparing student loan debt levels to mortgage debt levels.

First of all, lets just think about how common and large mortgage debts are versus student loans.  70% of Americans own homes and most of those people have some form of mortgage.   About 30% of Americans have college degrees.  Houses cost significantly more than college.   Most of a typical home purchase is financed.   College costs are paid for by scholarships, government grants, help from parents, etc in addition to loans.  Home loans last 30 years usually and student loans more often have terms of 10 years.  More people have mortgage debt, the mortgage debt is higher amount and the repayment terms of mortgage debt are longer.   It would seem from simple observation by comparing mortgage lending to student loans that there is significantly more mortgage debt than student loan debts.

We can find statistical data on the amount of debt.   In 2007 the Survey of Consumer Finances data we can get the amount of the average household debt in various categories.

46% of families have a primary mortgage with mean value of $149,500
8.5% of households have a 2nd mortgage with mean value of $39,200

15.2% of families have education loans with average of $21,500

The average values are only for those families who have the debt in question.  So for student loans 15.2% of families have student loans averaging $21,500 and the other 84.8% of households have $0 loan debts.

The data above is from 2007 so its 3 years old now.  Mortgage Debt levels actually peaked in 2008 and then dropped back down and have since started to creep up again.  Federal reserve Z1 data has more info on total mortgage debt level.  After peaking in 2008 the mortgage debt in the USA is about equal today as it was in 2007.   I don't have current debt information for student loans, but I would guess that it has increased.   From 2004 to 2007 the average amount of student loans went from $16,700 to $21,500.

I would make a couple points from the SCF 2007 data:

The vast majority of households have no student loan debts. 

The total of all student loans in the USA is about 5% of the amount we owe on home loans.

Student loan debts are increasing and the issue is not trivial.   The amount of debt is increasing due to two major causes.  More people are going to college and college costs are increasing swiftly.   Those two factors multiply to increase the amount of student debt.

If student loans turn out to be a financial bubble like real estate bubble it would seem that the size of the bubble is a small fraction in value and the exposure is limited to a smaller minority of the population.    Student loan debts will not be the same kind of financial disaster that the real estate bubble and sub-prime mortgage crisis resulted in.

June 8, 2010

Guest Post Policy

I do welcome guest posts here on Free By 50.   If you are interested in writing a post then please contact me directly to let me know. 

Here are some guidelines on guest posts for my site:

  • The article should be a topic that fits with this site.  Almost anything in the personal finance realm is OK but I might refuse an article that has what I consider to be bad information.
  • I retain the right to edit the article if necessary.   I don't expect nor plan to change anything but might want to fix a typo or something like that.
  • I may ask you to edit your article to fix errors, clarify your points or remove unnecessary content.
  • Please no links to self advertise your product or service.   A link to your site / blog in the author description is cool, but thats all.   I'm not interested in hosting guest articles that are simply self advertisement for your products or services.
  • I would require a certain quality of writing.   I'm not an English professor myself so I don't mean to be too picky, but I won't publish something with poor grammar.
  • Please avoid political opinions in your posts.
  • Nothing offensive, unethical or illegal will be considered. 
You can also find some good guidelines for blog posts over at Get Rich Slowly.   If you followed the suggestions that J.D. gives for posts then you'd do well.

    Figuring Your Real Automotive Spending and Cost Per Mile

    Transportation is often the second highest expense in a household after housing.   We Americans spend a lot on our cars. 

    Since spending on transportation is such a large portion of our budget its important to have a clear understanding what we're spending.   You might be surprised how much your car is really costing you.    In addition it is useful to know what each additional mile costs you.   For example, knowing your cost per mile can be used as a basis to decide if driving your car to visit relatives in another state is more or less practical than taking a plain or train.

    Average Spending in America
    According to Bundle.com the average household spends $486 per month on transportation which is primarily automotive expenses.  That comes out to $5,832 per year.   There are about 2 cars in an average American home so that means the average American home spends roughly $2,916 per year per car.
    The average American drives about 12,000 miles a year so this means Americans are spending about 24.3¢ per mile driven in our cars.   This is an extremely rough average.  But you and your car aren't average.   The range of spending per mile for various cars is likely somewhere between 10¢ and $1.

    How to Figure What YOU Spend

    Edmunds.com and Yahoo's auto site both have estimates on the total cost of owning cars.   Edmunds calls it the 'True Cost to Own" and Yahoo's name is 'Total cost to own".   So looking up your car on those sites would give you a good starting point.   Edmunds has listings for used cars going back several years.

    Your own car may not be on those lists or your own spending may differ from what they assume.  To figure your own total cost you need to consider and add up all of the different costs that a car has.  The major categories of costs for your automobile are as follows:

    Depreciation : this is the amount your car drops in value in a given year.   You could roughly approximate this by assuming 10% depreciation for used cars and 25% depreciation for the first year of a new car.

    Fuel costs : This is the cost of gasoline and should be pretty easy for you to find from your own spending records.   You can also approximate it by using the MPG rating on your car, the amount you drive in a year and the average gasoline costs.

    Financing expense:  This is the interest you pay if you have an auto loan.

    Insurance:  Your total auto insurance cost.

    Maintenance:   This category includes any routine maintenance such as oil changes, new windshield wipers, new battery, etc.  I'd also put car washes in this category if you spend on that.

    Fees and taxes:  This is sales tax on car purchase plus any annual fees or taxes on your car.  This category will vary considerably from state to state.

    Repairs:   This is unexpected costs from break down of your car.   If you have to take your car to the shop to get it fixed then that bill would go into this category.

    Opportunity Cost:   This is an economic term that refers to the loss of what else you could do with your money.  In otherwords it accounts for any profit you lost from not using your money for something else.  Simple way to look at it is to think of how much money you could make on your money if you had done something else with it.   Say your car is worth $10,000 market value right now, if you had instead put that money in a savings account then you could be making 1-2% interest on it.  So this means you're losing $100 to $200 in opportunity cost.

    Other:   Anything I don't cover above.  It doesn't really matter how you categorize your spending as long as you add it all up.   If you have spending that doesn't fit in one of these categories then put it in a separate category.

    Once you figure out and add up all these categories the total sum will give you the total amount you spend on your car in a given year.    You can also then figure your cost per mile by dividing the total spending by the total number of miles driven.

    Cost of Marginal Miles

    If you spend $5,000 on your car in a year and drive 10,000 miles then that means you spent 50¢ per mile.  But that doesn't mean that you will spend 50¢ more for each additional mile you might drive on top of that 10,000.    A portion of your spending on a car are basically fixed costs that don't vary based on the number of miles drive.   For example your finance costs and annual license fee are going to be the same  whether you drive 10,000 miles or 15,000 miles.   TO figure the cost of additional miles you need to figure out what your variable spending costs are and then also add in increased depreciation based on high mileage.    Your variable costs are primarily made up of your fuel, repairs and maintenance costs.   Figuring the mileage depreciation is a little trickier.  I would do this by looking at the market value of the car on Edmunds and comparing the value for a car with +/- 10,000 miles.   So for example if your car currently has 100,000 miles on look up the market value of the car with 90,000, 100,000 and 110,000 miles and compare the different values.   You might have other costs that vary based on your actual driving so you should account for those as well.

    What do I spend?

    My wife and I have three cars.  Thats 1.5 cars per person in the household.   We certainly do not need three cars.  In fact we don't need any cars.  We want three cars.   One of the cars is a fully restored classic that I keep garaged most of the time and drive a bit when its nice out.   The other two cars are our daily drivers.   We have two cars for daily drivers since it is very convenient and we have the income to easily support it.

    Looking at my daily driver: 
    I paid about $14,000 for my car and its now worth around $8,000.

    Costs for my car are :

    Depreciation $800
    Fuel Costs $600
    Financing $0
    Insurance $650
    Maintenance $360
    Fees, taxes $55
    Repairs $0
    Opportunity cost $480

    This gives an annual total = $2,945

    I'm assuming 10% depreciation for this year and opportunity cost return rate of 6%.   Those are not exact but close enough.   Fuel costs and maintenance costs are averaged annual rates based on spending over the past couple years.

     I drive about 10,000 miles a year so this means I have a total cost per mile of 29¢.

    The variable costs are $960 total so additional miles would cost me about 9.6¢ each.   I looked up the value of my car with different mileage totals and it looks like each mile adds about 4¢ to the depreciation. 

    My total marginal cost per mile is 13.6¢.

    You can use these same methods to approximate your own automotive spending total and cost per miles.  If you haven't looked at your transportation spending then it would be a useful exercise.  I think chances are fairly good that you're spending more than you realize.

    June 7, 2010

    Total Revenue For Various Entertainment Industries

    I remember not too long ago hearing that the video game industry had passed the movie industry in worldwide sales.   I found that very interesting.    I thought it would be interesting to find out how much is spent in the various forms of entertainment in the USA.

     Theres big money in this stuff.   Entertainment is a huge industry in the USA and worldwide.  According to PriceWaterhouseCoopers the worldwide spending on Entertainment and Media is expected to hit $2 trillion by 2011.   In the USA the spending on E&M is expected to hit $754 Billion.

    Below are a list of various industries and the amount spent in each for the U.S.A.   The figures are in Billions of dollars.

    Video games $19.7
    US Movie tickets $10.0
    Book sales $23.9
    Music $10.4
    Radio $16.7
    Newspapers $37.9
    Magazines $40.0
    Television  $80.0
    Live theatre $2.0
    Fireworks $0.9
    Toys $21.2
    Candy $17.0
    Greeting cards $8.0
    Fabric, craft, sewing $5.2
    Internet providers $20.0
    Jewelry $30.0
    Weddings  $86.0
    Bar and nightclub $18.0
    Tobacco  $40.0
    Beer,Wine, Spirits $100.0
    Pornography $13.3
    Casinos $30.7
    Total Gambling $92.3
    Las Vegas Casinos $5.5
    Atlantic City $3.9
    Ski facilities $2.0
    Sport and camp equipment $3.5
    MLB $6.2
    NFL $6.0
    NBA $3.2
    Pro Sports $19.0
    Golf $20.0
    Bowling  $3.0
    RV's $20.0
    Horse industry '02 $25.3
    Pets $45.4

    The figures are from various sources that I found via Google searches.    The number for live theatre was from 1992 which is the only one I could find.   There is some overlap between categories, like for example the spending in bars and nightclubs would overlap with spending on beer, wine & spirits.   And the spending on MLB would be part of the spending in pro. sports.    I didn't check the accuracy of the figures so I can't say if every one of the numbers is correct.  Personally I doubt we spend $25B a year on horses, but what do I know.

    I also made up a bar chart to show how the the spending figures stack up to one another graphically:

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