Saturday, March 31, 2012

Tax Relief? Probably Not!

Should you call one of these "tax relief" companies to solve your tax problems?  Probably not.  They are as bad a bet as "debt relief" companies.


An article on CNN today talks about TaxMasters and how they have been found guilty of fraud and fined $195 Million.  The company went bankrupt shortly before, in an apparent effort to elude the judgment.  Judgments can be easy to elude, for some people.  Ask OJ.  For you and me, however, we generally lose it all.

The irony here is that companies like this advertise heavily on the television, including on CNN.  One reason these sorts of companies make a lot of money is that they advertise a LOT of the TeeVee and people assume (wrongly) that this means the company has been "vetted" somehow and approved by the television station.  Nothing could be further from the truth.

If you see a loud ad on the TV or on the Internet that promises something-for-nothing, it is likely a bad deal.  Just walk away.   The invention broker, the caveman who buys houses, the tax guy - none of them will help you, just themselves.

In fact, just don't watch TV!  If the television networks are going to allow questionable advertisers to advertise on their networks, should you even patronize their business by watching their shows?  Let's face it, you can live without "Dancing With the Stars" - a show that is only interesting because they told you it was.

So how did the TaxMasters gig work?  Simple, according to the allegations raised in the trial, they took your money, $2,000 to $10,000 and just kept it and did little or nothing to help you with your tax problem.  The client ends up in trouble with the IRS and that's that.

Sounds pretty sweet, eh?  And how can you get away with this?

Easy.  Again, you cannot sue to collect small amounts of money - $2,000 to $10,000 being a good range.  The cost of Attorney's fees would far exceed the amount involved.  And even if you did sue and win, you would have a nearly impossible time collecting, as the lawsuit metioned above illustrates.

They will declare bankruptcy, reincorporate, and be back in business under a new name in no time.

After all, this is the GOP way - a "legitimate business" being "hounded by government regulators!"

Right?

If you are having trouble with your taxes, call the IRS first.  Then, talk to an accountant.  There are no secret back-door methods to getting huge tax bills waived, any more than "debt relief agencies" will wipe out your debts with a few phone calls.

That's the same gig there, too.    They take your money, do nothing, and let you go bankrupt.

And you know, bankrupt people don't have the wherewithal to sue you, so it is a perfect game, if you think about it.

OF COURSE A BETTER PLAN IS TO NOT GET INTO TROUBLE WITH OWNING BACK TAXES OR BEING HEAVILY IN DEBT IN THE FIRST PLACE, RIGHT?  PEOPLE BRING THIS SORT OF TROUBLE UPON THEMSELVES, PERIOD!!!



Note that your 401(k), IRA and other retirement accounts may be protected from judgements, but may not be protected from IRS liens.   Many folks are shocked by this, assuming the IRS is "just another creditor" that stands in line with all the others.   Not so.


And if you think about this, it makes sense.   People can fund an IRA with the money that they should have been paying to the IRS, and over a number of years, accumulate vast sums of wealth and then, when faced with an audit, just walk away with a fat retirement account.

The old adage in financial investing is "pay yourself first".  However, my experience is, "Pay yourself first, but only after you've paid the IRS!"

It is just basic common sense.

Friday, March 30, 2012

Heavy Metal Republicans


The GOP has been trying to court fundamentalist Christians and conservatives.   How do heavy-metal rock 'n rollers fit into this picture?

David Mustaine, the front man for Megadeath (one of those folksy Christian lite-rock groups) recently made news by saying he believed Obama wasn't a U.S. Citizen and moreover that he was going to support far-right Christian candidate Rick Santorum.

This might sound like an isolated incident, except that Heavy Metal Rocker Ted Nugent recently went on stage and suggested that he would like to machine gun the President to death and make Hillary Clinton suck on his machine gun.   Tasteful.

What is up with this?   Rock and Roll was always the music of youth and rebellion.  Today it is the music of conformity and fiscal policy?   Perhaps not.  I think other things are at stake here.

1.  The music business is dead.  The fact that these rock-and-roll fossils are still performing today, when they were popular when I was a kid is startling.  Their music has aged and the demographic has aged.  So Rock and Roll is no longer about rebellion but about Metamucil.

2.  Rock Stars Make Money - and they don't like to pay taxes.  So when a clown comes into town promising them lower taxes, they bite on it.   They are "rich" but not rich enough to pay the Mitt Romney tax rate (Capital Gains) but rather the 35% earned income rate.

3.  It's Just Music - Political values and music don't always match up.  Rock and Rollers might be perceived as liberal, but many are not.    Just as you might thing Frank Zappa smoked a lot of pot, but in reality he was against drugs.   Not all rockers are drug-addled boozers.

4.  The Connection with Skinheads - Hard metal is popular with the very, very far right - neo-Nazis and skinheads, gun-nuts, KKK followers, and white supremacists.   On the rock spectrum, heavy metal is, well, the GOP wing.
 
5.  The Connection with Military -  a lot of young guys in the military are into heavy metal (the young white guys, anyway) and being anti-Hillary is sort of a requirement, in a macho environment.  So this is sort of posturing to the crowd, to be conservative, to some extent.

The interesting thing, to me, is that Rock and Roll is indeed truly dead.  Rock and Roll was the music of the anti-establishment, of the lower classes, of the outlaws and the disadvantaged.  It was black music, not GOP country club waltzes played by an orchestra.

But over the years, this has been changed, morphing into Pop, Disco, and basically the background elevator music we hear every day.    It is not surprising that it has become the music of ignorance, violence and hate.  That was just the next step.

But then again, maybe we put too much faith in Rock and Roll.  It was a product, sold to us by record companies and record promoters, hoping to "cash in" on the youth market.  And we bought it all - good and bad.  The Beatles and Grand Funk Railroad.  We bought it all.

And today, it is just marketing for a different demographic.  And it seems odd that a musician practicing in a genre created by blacks would denounce the first black President.

And it is odd that, at one time, the GOP was spearheading efforts to "censor" Rock and Roll lyrics, including (especially) Heavy Metal lyrics.   They have backed away from this in recent years.  But Rick Santorum has pledged to stamp out porn.  Could naughty words be next?

And it seems odd that someone who works in an industry which promotes satanic messages, in a band called "Megadeath" would be getting all gooey inside over a squeaky-clean sweater-vest wearer like Rick Santorum.

Maybe he's just messing with our minds.  Maybe he did too many drugs.  Maybe these rock musicians are just really, really stupid.

I think the latter.

The Orignal Goverment Mandate

Adam an Eve invent clothing.  The world has never been the same.

A lot of screaming and shouting is going on today about the "mandate" to buy health insurance.  I am not sure it was a swell idea - a tax credit or other plan would have been far easier to administer and created less of a fuss.  But this is what they came up with, in their infinite wisdom.

And I am not sure why this is unconstitutional.  If people don't like it, wouldn't they vote new politicians into office who would overturn it?  Is the Supreme Court being an "activist" court by failing to let the political process take its course?  Or is all this "strict interpretation" and "activism" labels just a smokescreen for doing what you want to do and using post hoc justifications?

But beyond that, people are saying nonsense, like, "The government is FORCING US to BUY THINGS and DO THINGS we don't want to DO!"

And yet, every day, you are forced to do things you don't want to do, by the government.

When you get dressed in the morning, this is due to government mandate.  Don't believe me?  Try going to work naked.  In all 50 States, there are laws against public nudity, and no one has ever, ever challenged them on Constitutional grounds.

"But your honor!  The Government is FORCING ME TO BUY CLOTHES!"

And it is, too.  You have to get something - a sack even - to cover yourself in public.

And unless you plan on staying inside your house forever, this is a mandate that applies to all of us.

Other mandates are tied to behavior.  We mandate people wear seatbelts and motorcycle helmets, in many States, as a condition of those States receiving Federal Highway funds.  The heavy hand of government, yet again.  And yet few people feel these are onerous requirements.  Well a few do, but they are fools, period.

The social cost of motorcyclists with head injuries (who, by the way, make excellent organ donors!  Sign those cards, boys!  I need a new Liver!) far outweighs the "freedom" to ride around with no helmet, just one 5 mph collision away from a coma.   Ditto for seat belts, which reduce injuries, particularly in low-speed collisions - which are most collisions.  A simple 30 mph impact can be fatal - if you are not wearing a seat belt.

But of course, these are mandates tied to personal endeavors.  Driving is a privilege, not a right, yet a privilege enjoyed by the overwhelming majority of the country - and one necessary to economic survival for most people, you could argue.  Yet these mandates exist - and no one challenges them on Constitutional grounds.

You also are mandated to pay taxes (tax protesters notwithstanding) and to fund your Social Security and Medicare accounts.   You could argue, again, that these are behavioral-based mandates - that you only are mandated to pay taxes if you have income.  But survival in this country with no income is nearly impossible, unless you are a minor or someone's dependent (e.g., Cabana-Boy).  Otherwise, you have to work and earn money, and pay these taxes.  Even people who inherit or win the lottery have to pay taxes - on income and capital gains.

Is not the tax law a "mandate" of sorts?  In fact, not really of "of sorts" but just a naked mandate, period.

There are, of course, other mandates.   For example, if you are a young man, between the ages of 18 and 25, you have to register for the selective service, even if there isn't a draft, today.  And, by the way, with our equality and all, why aren't young women forced to register?  And with soldiers as old as 45 serving in Iraq, why only 18-25 year olds?

You think that is bad?  Well, if there is a war, they can draft you, force you to join the Army (or Navy, Air Force, or Marines) and then go to war, charge a machine gun and get killed.  Talk about a mandate!   The government literally owns your life, if you are of draft age, and there is a war on.  And if you refuse to go, you will be court-martialed and jailed, possibly executed.

There are tons of other mandates, of course.  And some are "behavioral-based" such as property taxes, which are applied if you own property.  And you can argue that these are excusable as you can avoid these mandates by choosing not to own property.  But unless you are homeless, you need a place to live.  And even if you rent, you are paying property taxes, indirectly, through your landlord.  The only people not paying property taxes this way are those in the military, in jail, or homeless.  It is a pretty broad mandate!

The list goes on and on, of course.  You are pushed around by Uncle Sugar many, many times a day.  From having to obey speed laws, to having to pay sales tax.  You are forced to do things you don't want to do - and to spend money you don't want to spend - even if all you want to do is live and breathe on planet Earth.

I am not sure what this argument that this new mandate is "different" is all about.  The justices on the supreme court are clearly being political, barfing up Fox News Talking Points (a new low for the court, since Dred Scott) about how the new law would force people to "buy something they don't want" just because they exist.

But the law doesn't say that.  They can buy insurance, or pay the fine, tax, fee, or whatever the fuck you want to call it (because, when it comes down to it, any dollar paid to the U.S. Government is a tax, in my mind, period).  And the idea that the government "forcing you to buy something" is somehow novel is, to me, somewhat specious. 

That is, if you wear clothes.

Our Struggles Define Us

Life isn't easy.  But that is part of the deal.


You wake up in the morning when the alarm goes off.  You'd rather stay in bed for another hour, but you have to go to work.  So you get up, shower, shave and put on a suit, fight traffic and make it to the office, just on time, to spend another day struggling with deadlines, work, and your fellow colleagues.  It ain't easy.

And it is tempting, at times, to think about a life of leisure, sleeping every day until noon, not having to work, just goofing off, full time.  But that never seems to pan out.  And for the few people it does, it never quite works out like you'd think.  They sleep until noon, then eat all they want, never do any exercise, and then get fat as Elvis.   Since they sleep late, they can't get to bed at night, so they take pills, or like Michael Jackson, anesthesia.

No, a life of leisure, without purpose or work, is a life without meaning.

The major religions all promise us eternal life.  No thanks.  Eternal life would be boring as hell.   Why bother getting out of bed, when life goes on forever?  There is always a "tomorrow" that you could do things.  You would be massively depressed in no time.

Death gives meaning to life.   And those two things - our finite lives, and the struggles we make in life, are what make it interesting.  You can't appreciate life, without death.   You can't really enjoy leisure, until you've worked really, really hard.  Continuous life and continuous leisure would become boring in short order - which is why these rich suburban teenagers end up getting into legal trouble - they are bored with riches, leisure and ease, plain and simple.  So they go out and beat a homeless man to death for "fun."  And yes, it happens - a lot more than you'd think.

And yet, most people fear death and want to avoid work.  The very things that give their lives meaning, they don't want.  And the very things that would make their lives meaningless, they crave.  It is an interesting conundrum.

We have the highest standard of living in the world here in the USA (please, no comments about how great things are in Sweden, they have a 70% tax rate).  People in the US are wealthier than most folks in the world - and our country has more people with wealth - global wealth - than anywhere else.   A man on welfare in the USA is "wealthy" by global standards.

And yet, we are a nation of depressed people, always looking for a pill to pop or a drug to take.  Wallowing in self-pity and watching television all day long.  Why is this?

Well, for many, it is because their lives have no meaning - because they have no struggle in life.  They just sit around and consume.

Happy, well-adjusted people struggle - just enough to make life seem a challenge.   And this is why many retirees work - even if they don't "need" the money.   They want a challenge, something to do.  Others acquire hobbies, or take up golf, searching endlessly for that perfect drive, that 20-yard putt.  And maybe they never see that, but the chase is more important than winning.

In a way, this posting is the bookend to my previous one.  It illustrates why winning the lottery is not as good as you might thing.   Suddenly, everything you have struggled for in life is meaningless.  It is game over and nobody won.  There is no victory parade, no relishing the triumph of years of hard work and sacrifice.   Rather it is just the sudden wallowing in excess.

It is likely that of the tens of millions of people who bought powerball tickets today, only a few might win.   The rest of us should consider ourselves lucky.

Because our lives still have meaning.

Too Much Money?

If you won $500 Million in the Powerball, would this be a good thing, or destroy your life?

Everyone is abuzz about the Powerball jackpot.  But few people bother to think, would winning this money make you really happy - or destroy your life?  For most Americans, the idea that winning a half-Billion dollars would be a bad thing is ridiculous.   But history has shown, time and time again, that sudden riches are usually a bad thing.

By now, you all know the story of Jack Whittaker, the West Virginia Powerball Winner whose life since winning has been marked by tragedy and legal problems.  His experience is not an anomaly, either.  Many lottery winners end up broke and destitute, over time.

Why is sudden wealth a curse not a blessing?   There are a number of reasons.

1.  Not used to handing money:   The poorer a person is, the more likely they are to play the lottery.   And as we have seen here, what makes poor people poor is that they make poor financial decisions.   Handing a poor person a million dollars - or 50 million - doesn't make them "rich" for very long, as they will just make the same poor choices, only on an amplified scale.  So the money goes away, quickly, to gambling, cars, houses, vacations, and of course friends who want "loans".     If you don't know how to handle money, having a mountain of it put in your lap is trouble.

Evelyn Adams, for example, gambled away a $50 million dollar jackpot, in short order.

Even folks who had millions before they won, such as Mr. Whittaker, have trouble with hundreds of millions.

2.  A Million is Not a Lot:   As we have explored here, if you won a Million dollars in the lottery, after taxes, that might be $650,000 or less, depending on your State Tax burden.   This is enough to adequately fund your IRA for retirement.  That much money might provide you with an additional $24,000 of income a year, once you retire.   But to a lot of people, being a "millionaire" means you are "rich" and they can tear through that in short order.  For a jackpot of $2 million or less, the only thing you really should do with it, is deposit it in the bank.  If you had more than this, perhaps you could consider retiring early and living off the proceeds.

3.  Managing Mega-Money is a Full-Time Job:   If you won, say $100 Million dollars, you would have to spend  a good portion of your time managing this money.   When Old Gus says, "I'm not quitting my job" after winning the powerball, it is just a fantasy.  And quite frankly, his company would rather he quit, as he would end up being a distraction and a disruption in the workplace.   Successfully handling hundreds of millions of dollars is tricky, and you would likely have to make a lot of major life-changing decisions - like it or not.   And there is the rub, winning that much money will force you to do things that you might not want to do.

4.  Family Matters:   That much money, dumped in your lap, will change your family dynamic considerably.   You and your spouse win $200 Million, how does this change your marriage?   You will both find yourselves receiving the unwanted attention of younger and more attractive people, who will try to temp you sexually.   Will your Husband wander?   Will you?   With $100 Million in your pocket, as you going to put up with his horseshit if you don't have to?   Such a lottery winning is indeed a true test of a marriage.

If you have kids, well, how do you think they will react?   Like children, even if they are well into their 20's and 30's.   They will expect you to lavish them with money, and likely will quit their jobs.   And if you don't give them money?   Well at least one lottery winner, Jeffry Dampier, was murdered by relatives who wanted the money.  In another case, the brother of William Post tried to hire a hit man to kill him, after he won the lottery.

Ah, Family Values!

5.  Your Goals and Dreams are Irrelevant:   You just spend three weekends planting a vegetable garden, and it is finally starting to look good.  You are proud of your work, and by the middle of summer, you will have a bumper crop of cucumbers and tomatoes, just like last year.   Maybe you will put up some of those pickles that everyone raved about.   Then you win the powerball.  Suddenly, such simple pleasures in life - creating something from your own toil - are meaningless.   Might as well bulldoze it all under.   It ends up getting trampled to death by news crews, anyway.

The best things in life are free, and our simple dreams and goals are often the most enjoyable things.  Replacing these with obscene amounts of money, overnight, is tawdry and gross.   Our lives go from having meaning, to being meaningless, in an instant.

6.  Unwanted Publicity:   Once you win the jumbo lottery, your name will be in the paper (this is one of the conditions of the lottery) and in short order, news crews will show up on your lawn.  I am not kidding - they will park their news trucks on your lawn, trample your flower beds, and shove cameras in your bedroom window.  You will not be able to leave the house for days, if not weeks.

Of course, the initial publicity will die down, but now the world knows your name and where you live.  You will gets tons of letters from "needy people" wanting money, and of course, visits from those same people - perhaps some of them unhinged or violent.

The fantasy that you can stay in your home at 1313 Mockingbird lane is just that - a fantasy.  You will be forced to move in short order.

7.  Threats of Violence:   Once you are that rich, you may be subject to attack, personally.  Unhinged people will find you.   Others, being more calculating, may try to stage home invasions, robberies, burglaries, and the like.   One of your loved ones may be kidnapped and held for ransom.  Then what do you do?  They want $10 million to let a friend of yours go free - a friend you don't really like too much.  And perhaps the friend staged the kidnapping.   Who knows?  The bottom line is, you are no longer safe.   You will have to move to a more secure location, where no one knows your address, phone number, or whatever.   You likely will have to hire security guards and a body guard, at least initially.  It is scary, to say the least.

8.  Meaningless of Life:  You win $500 million dollars.   To the average plebe, this is a ridiculous amount of money.  "Honey, I scratched the car!"  "That's OK, babe, here's a suitcase full of cash, go out and buy six more!"

Things that had meaning, are suddenly meaningless.   You were saving up to buy a secondhand Harley.  Now you have 12 brand new ones, and never ride any of them.   Is this making you happy?  Of course not.   The wife leaves, the kids are mad at you (no matter how much money you give them, they think they deserve more) and your friends all want more - and you are not sure the people who claim to be your friend are really your friends.

It is like Elvis Syndrome.

Some lottery winners, like Billy Bob Harrell Jr. (now THAT's a Texas name!) end up killing themselves.


* * * 

So how to Billionaires, like Warren Buffet handle this?  The answer is, they don't.   You see, they earn their money slowly, over time, and it is not just handed to them in a lump sum, so that they go from poverty one minute to fabulous riches the next.

Even spoiled rich kids who inherit vast sums from their parents have years of training within their social class as to how to handle money (although most of this group squanders it, albeit more slowly than lottery winners).

The problem is not the money, but the fact it is sudden and unearned.   Sudden wealth, like that which happens to rock stars and professional athletes (classes of people who end up broke, usually) is problematic, if you don't know how to handle money.

Unearned money is a problem, in that, not having had to sweat and toil for it, it tends to slip through your fingers more readily.

So what would I do, if I won the lottery, to try to hedge against these things?

Well, first off, you'd see this blog disappear in a hurry.   I would close every online account I have, erase every online entry I could.   And yes, I would close my practice and move from my house - not by choice.

And then I would try to figure out what the best use of $500 Million would be.   Give it away to charity?  Set up a charitable trust?  What?  Because after spending a reasonable amount to support myself, the remainder would be, well, just excess.

The temptation, of course, would be to give money to family and friends.   But how do you go about doing this, without similarly ruining their lives?   Like pot-smoking kids who live in their parent's basement, if you start handing out tens of thousands of dollars to friends, or giving them cars, a la Oprah, they would start to expect this sort of thing.

And how do you decide which friends get how much?   It is tricky - casual acquaintances will suddenly be your best friend.

The best approach, I am sad to say, is to keep enough money to support yourself comfortably, and give the rest to charity.  Perhaps you could give friends and family a nominal amount (this would piss them off, of course).  But the best approach would be to say, "Sorry, but if I go down this road, where do I stop?  How do I decide who gets a dollar more than anyone else?"

And you will find out, in a real hurry, who your real friends are.

Why give it away?  Well, to be sure, you could do things like buy a corporate jet, or a mega-yacht.  But both require a steady stream of income to maintain.   You could have Saville-Row suits made and go to all the upscale hotels and clubs.  But here's a clue - the people who are really rich are not going to rub elbows with a lottery winner.  And who wants to wear suits and spend time in stuffy hotels?

Therein lies the problem.   All that "rich people stuff" they show on TeeVee and in the magazines, well, I don't want any of it.   Some overwrought house that I had no hand in personally decorating and designing?  No.  And the people who own those never even visit them - they are about as personal as a hotel room.   Fancy cars that are a pain in the ass to drive - like Ferraris and Lamborghinis?  No thanks.

To me, that sort of bloated excess is just gross.

What about starting a business?   Really?  Winning the lottery will make me an astute businessman?  I doubt it, and the track record for businesses started by lottery winners is pretty bleak.

No, the more I think about it, the worse it looks.  I wouldn't mind padding my IRA account a bit with a few hundred thousand.  I wouldn't mind having a little extra money for a trip to Spain.

But I think $500 Million would basically ruin my life. 

And it is funny, but most of us don't bother to think this through.

Thursday, March 29, 2012

It Couldn't Have Happened to a Nicer Company!

Best Buy is hemorrhaging cash and closing stores - and looking to be the next Circuit City.  Oh, we can only pray!

Best Buy is on the rocks, and is trying to restructure as a "Mobile" outlet.   Good luck with that!

This comes as good news to the legions of consumers who have gotten bad bargains, crappy service, poor car stereo installs, and rip-offs like "extended warranties" at the store.  No one loves Best Buy - no one!

It is not hard to figure out why Best Buy and Circuit City foundered.   Neither were pleasant places to go to.  Stereo stores in the 1970's always had the reputation of having oily salesman with feathered and blow-dried disco-doo's, selling you a $200 stereo on time for $1000.

Best Buy and Circuit City just took this concept to a national stage.   There were really no "Best Buys" at Best Buy, and yes, when I was younger, I was dumb enough to read the sign and assume their were.

As computers become a commodity item, best bought from a discount store or online, it makes no sense to go to these overwrought stores, which are painted black inside, dimly lit, and manned by zit-faced teens hawking extended warranties.

The vaunted "advantage" of going to a "store" was that knowledgeable salespeople would help you make a selection - and that the selection was greater.  But despite large displays of products, the actual selection was small, once you waded through the "that's out of  stock" crapola.  And the salesperson?  Generally a clueless kid who knew nothing about the products.   You are better off researching and shopping online.

The other vaunted advantage was that if your e-toy broke, you could take it there to get it fixed.   But of course, they can't fix squat, so either they exchange it, or they mail it in to somewhere to be repaired, both of which are things you can do with an online purchase or a Wal-Mart or wholesale club purchase.

When the prices are higher, the sales experience is miserable, and there is no real advantage to patronizing your store, what then is your business model?

Answer:  You ain't got one, other than to liquidate and go live in a cardboard box.

And you know, it couldn't happen to a nicer company!  I hope they rot.  No, really.

And please, Obama, don't bail them out!

Homeowners Insurance, Once Again

Homeowners insurance costs are rising nationwide.  How can these costs be managed?


I have written about this three times before.   As I noted in my last posting, $100 a month is a lot of money, and over 30 years, adds up to a ton.   And yet, most homeowner's policies are about this much, which most people pay, as they get cradle-to-grave coverage type policies.

In the past, this was possible, as insurance was cheap, so no one bothered to think about the costs.  You called your agent and said "I need a homeowner's policy" and he took care of it and your mortgage company paid the bill through their escrow account.  No big deal!

But in recent months, rates have risen yet again.  It is not hard to understand why - Hurricanes, Tornadoes, Earthquakes, Wildfires, Mudslides, Floods - all sorts of natural disasters have been occurring recently, and insurance companies are paying out a lot of claims.

Suddenly, insurance, like property taxes, is rising up from an incidental expense of home ownership, into a major one.   At one point in my life, I was paying (or would have paid) close to $4500 a year in homeowners insurance costs.   Needless to say, this is a staggering amount of money, and one more reason why many folks are finding it harder to make ends meet.  You buy a house in Florida, and then the taxes triple, the ARM kicks in, and then the insurance goes through the roof.  It is a "perfect storm" of financial woe, for many folks - and one reason I left Florida.

When I wrote my first posting, we owned two homes and the costs were killing me.   My regular company, State Farm, raised our rates significantly, and then refused to write on our island home, so we had to shop around.   I was able, without too much trouble, knock $500 off the cost of one policy, and later, nearly $1500 off the cost of another.

A reader wrote about "replacement cost coverage" which raised a whole host of other questions.

This year, I had to shop this again, as costs were going up, and coverage here on the Island was going to run me about $2500 a year (!) with flood insurance.  And for the first time, I started to really examine what "homeowners insurance" really is and what it covers.

Like many car policies, when you buy a plan, it comes with a lot of "standard" coverages, including, sometimes, things the agents add-on that you might not need.  And there are two different standards of replacement cost - actual, or predetermined value (HO3 or HO8).

Stripping away some "junk" coverages may be a first step to reducing costs.

But first, as with car insurance, if you have a loan (mortgage) on the property, you have to clear anything you do with the mortgagee.  Your mortgage company will have limits on how much they will accept in terms of replacement cost, type of replacement cost, as well as deductible.

In terms of liability, like with car insurance, it is often cheaper to get an umbrella liability policy (a million dollars worth is about $200 a year) rather than add-on liability to your home.   However, the umbrella policy will generally require a minimum of $300,000 on your home.

With all that out of the way, let's look at the "junk" first.

1.  Medical - like with car insurance, many agents add on $1,000 to $10,000 in medical coverage, which is a trivial amount.   Some insurance companies make this part of the policy and it is not optional.   However, if it is optional, consider dumping it.   Yes, it is "only" a few dollars a year.   But it only provides a tiny amount of coverage and likely will never pay out.  You have health insurance (or should) and you have liability insurance.  When is this $1000 coverage going to be of any use.   And yea, you should have $1000 in the bank, if you own your own home.

2.  Loss of Use - I was shocked to see that on one policy, I was covered for $75,000 "loss of use" for my home.   If the house was damaged to the point where I could not live in it, they would pay me to stay elsewhere.   A friend of ours lost their house to a house fire, and the insurance company put them up in the Willard Hotel in Washington DC.   As their agent put it, "You have all this coverage to use up, so  you might as well spend it!"

To me, this is just wasteful.   A house fire should not be like a spa vacation, nor should a car accident.   If my house burned down or was damaged in a storm, I could rent an apartment locally, for no more than $1000 a month or so.   The "loss of use" coverage would cover me for 75 months at that rate - far longer than it would take to re-build my house.

While it may be handy to have this coverage, consider what you really need and whether you want to pay for this.  To me, $25,000 seems like more than enough coverage.

Again, some insurance companies make this a flat amount based on home value.  Other times, agents simply add it in, proportional to home value.  Investigate to see which is the case and make a calculated call.

3.  Contents Coverage - This is not junk coverage per se, but could be an area where you are buying more insurance than you need.  The retail value of the contents of your home can be pretty significant.   If you went around your house, and added up the retail costs of everything you own, it would be a staggering number.   In addition to the big ticket items like electronics, furniture, appliances, kitchen cabinets, and the like, there are hundreds, if not thousands of small items that cost $29.95 that you might not think about.  Dishes, silverware, lamps, vacuum cleaners, tools, telephones, artwork, rugs, linens, clothing - the list goes on and on.  Even for an average middle-class American, contents could easily exceed $100,000 - in retail value.

But that's the rub, isn't it?  Most of this stuff, particularly electronics, is not worth what you paid for it, anymore.   So the actual loss may be far less.   Again, my friends in the house fire were happy to get "all new" stuff from the insurance company, which was nice.  But were they really made whole?   One problem in filing such a claim is that you might need proof of every item you want to claim (having photos helps).  In most cases, insurance "adjusters" make you an offer, based on the average contents of a home, and you settle that way.

Some insurance companies provide contents coverage based on a percentage of the value of the house - usually HALF (which tells you how much contents can be worth).  This may or may not be what you really need.  Some companies assign this value and it "comes with" the policy.  Others allow you to opt for lower coverage (or indeed, higher, although they would likely want to see proof you have contents of that value).  If you can reduce this coverage, it may reduce your premiums.


4.   Other Structures:   Often a certain percentage (10%) is allotted to other structures on the property - your storage shed, cabana, or workshop.  Again, this may be a flat amount assigned by the insurance company and not negotiable, or may be struck for a discount on your premiums.   If you have no storage shed or the like, look into this as an area of savings.

So, that takes care of potential "junk" coverages - what about the basic replacement coverage?

A home is a big investment, to be sure, and even if paid for (especially if paid for) you want to make sure it is protected.  But how much protection do you need, and of what type?

Take my island house, which we bought for about $450,000 several years ago.   After a long drought in the Real Estate business, homes here are selling again, some down the street in the low 400's.   We did not do too badly, compared to the rest of the nation.

But how much of that value is in owning the lot (or in this case, having an 80-year lease) and how much is the actual cost of the structure?

I recently visited a friend who lives in an nearly new house on the mainland, in a tidy development of three bedroom, two-bath homes, with two-car garages and designer kitchens.   Like most modern homes, his has all the neat features - the high ceilings, crown moldings, engineered hardwood floors, and the like.   Yet, houses in his neighborhood are selling for $150,000 to $200,000 - far less than here on the island.   If we assume $50,000 for the building lot, the construction cost of such a home is far less than one might think.

Yet, our home was insured for a $250,000 replacement cost.  Were we over-insuring the home?  In addition, we had a more expensive HO3replacement cost coverage, which would pay for replacement cost, regardless of amount.  I went on several insurance company sites and talked to several agents.   Based on square footage amounts and the like, most came up with a lower number - $200,000 to $225,000 as a more realistic valuation of replacement cost.

Since we do not have a mortgage, I do not have to clear the cost value with the mortgage company, so I am free to pick any number I want - as well as the type of coverage.  We decided to lower coverage to $200,000.

Now, one big savings that we enacted last year, was to go to a combined homeowner's policy that covers wind and storms, as well as fire, etc.   Our previous policy, with Nationwide, did not cover wind, so we had to buy a separate policy for that, which cost an extra $1000 a year.   Between flood coverage, basic homeowner's coverage, and the wind policy, our insurance was close to $3000 a year.   This is a staggering amount.  Combining the homeowners and wind policies, into one policy that costs $1100 a year, saves a staggering $1000.

Flood insurance is problematic, as it is all issued by the Federal Government and there is no "shopping around" the policy.  If I was to rebuild this house, I would put it on stilts (and likely be required to) and not bother with flood insurance (although if that were the case, my rates would drop down to nothing, making it affordable).

Presently, the policy costs $859 a year, which has been reduced slightly by a re-categorization of our flood area.  There has not been a flood here since the 1700's, which means either we are due for one, or it ain't gonna happen.   My flood insurance costs would drop in half, ironically, if my home were about 6" higher in elevation.  Getting an elevation certificate from a surveyor can sometimes put you into a different claim bracket.   But in my case, that did not work out.

FEMA will only go to $250,000 on a flood policy.   So before you say all those coastal homeowners are "cleaning up" on "government subsidized" flood insurance, bear in mind that some of these coastal mansions cost a lot more than $250,000.   If you lose a millon-dollar house to a flood, you are not going to be made whole by your flood policy.

I am likely going to reduce my flood coverage to $200,000 as well, although at the present time, it appears that this does not result in more than $50 in savings.  Perhaps the agent is not plugging the numbers in right.

All told, by trimming coverages, I can keep the insurance to a "reasonable" sub-$2000 level for 2012.  Needless to say, however, this is still a lot of money, and one reason not to live on a flood plain or a hurricane zone (although given the rate of natural disasters in the USA right now, is anywhere really "safe" to live?).

One problem with coastal living is that some companies (e.g. State Farm) just aren't writing policies at all, so the number of insurers is limited, and often the ones who do write are companies you never heard of, like All Risks, Johnson & Johnson, or in my case, the Georgia Farm Bureau.  With limited competition, there is little or no incentive to reduce price.

The cost of home ownership is more than just the mortgage payment - often far more.   I calculated that even with no mortgage whatsoever that my costs of living here, including insurance, utilities, property taxes, water and sewer, trash fee, fire fee and our lot rent ($400 a year) comes to a whopping $1000 a month.

And yet on of my neighbors down the street is renting her house out for $1500 a month (utilities not included, of course).  This would lead one to believe that property values may be too high, given the competing rents (although as a vacation rental, you could probably get a lot more).

A smaller house, of course, would have a smaller utility bill (currently about $166 a month), lower taxes, and cheaper insurance.  Maybe, someday down the road, when I am older, and living on the beach loses its allure, I will sell and find some cheaper home or apartment, that will allow me to do more and spend less.

It is a sad thing, but I see older people here on the island "stay in the home" even though they no longer go the beach, play golf, ride their bikes, or do any of the things that people in a resort would do.  Living in a high-cost area for no real reason, makes little or no sense to me.

Wednesday, March 28, 2012

When Rational People Do Irrational Things

Would you buy a weight-loss shake from this man?

A recent article about the "Freak Captain" notes that in addition to being Right-Wing Republican and a Conservative Christian, he also was sucked into one of these MLM weight-loss "shakes" deals.

And people say he became delusional on the airplane.  Hate to say it, but his connection with reality was tenuous at best, before he left the ground.

In case you missed the bus, these weight-loss gags are all a scam.  Want to lose weight?  Eat less food.   There, I just saved you a ton of money, didn't I?   Shakes, drinks, pills, surgery, gadgets, etc. are mostly bad for you, dangerous, expensive, unnecessary, and usually don't work.  Just eat less and exercise more.  There is no other answer - except for weak thinkers, who think you can get something-for-nothing.

Speaking of something-for-nothing, you also cannot become "rich" being a "distributor" for some weight-loss product.  These MLM schemes are all the same - they ask you for money up front, and then promise you riches.  It rarely pans out.  Make that never.

And of course, if you Google the particular weight loss product with the terms "scam" or "fraud" you'll find lots of fake sites that say, "Is this a scam?  Of course not!" - the Internet is, well, broken.

MLM schemes are right up there with payday loans and other bad financial bargains.   People who believe in such things are just not being rational.  And frankly, a pilot caught up in such a scheme, scares me to death.  What's next, a Nigerian Scam?

To "believe" in an MLM scheme, you have to suspend your belief in reality.  So it is not surprising to me that he embraces far-right politics and far-right religion as well.  Eventually, worlds collide, as reality trumps fantasy.  The MLM scheme never pans out, and the weight doesn't get lost.   And no, the rapture doesn't come and Fox News never makes any sense.

This creates a cognitive disconnect in the brain.  Eventually, something has to snap.

Drinking all those cake-shakes with God-knows-what in them, could certainly be a contributing cause.

Sorry, but the cockpit is no place for raging true-believers.  We need rational people up there.  I am disappointed that Jet Blue considers him their best pilot.  Is Jet Blue some Christian-based organization?

What will they do when the angels fail to hold the wings up?

Is $100 a lot of money? (YES)

Even if you are making $100,000 a year, $100 is a lot of money, particularly for recurring expenses.

The other day, I was on a news site that was decrying the "injustices" of Smart Phone billing practices.  And I tried to point out, that you don't really need a smart phone, and the easiest way to avoid these staggering "injustices" is to just not have one.

Of course, the response you get when you say that, is, "Well, you're just POOR and can't afford one, and you're JEALOUS!"

So I pointed out that no, I am not poor.  And one reason I am not poor is that I don't have a smart phone.

Using the MoneyChimp Compound Interest Calculator, I pointed out that if you take the $499 cost of the phone, plus the $100-a-month user fee, and invested that, over 30 years at 7%, the sum total missing from your 401(k) would be $125,086.16

The reaction to this simple calculation was interesting.

First, several people tried to shout me down that I had miscalculated the amount by slipping a decimal point.   And then someone actually did the math and, whoa, maybe I'm right.  The fellow who tried to shout me down actually apologized - first time I've seen that on the Internet!

Second, people tried to say the costs were less.  "I only pay $69.99 for my plan!" one would say.  If that was true, that would bring the damage down to "only" $88,687.74.   But of course, cell phone plans all have user fees, taxes, access fees, 911 fees, and fee-fees tacked on.   My $69.99 plan routinely was $89 or more every month - I don't know about yours.

But I think the number shocked them, as many young people go "yea, yea, yea, I'll get around to funding that 401(k) next year.  But the new iPhones are out!  And I have to have one!" and they fail to consider the real costs of an expense they view as "only $100" a month.

And there are a lot of such expenses - unnecessary expenses - such as "getting a Starbucks," which a lot of my friends used to do (and I did, for a brief time) on a daily basis.   When you get done buying that $3.88 double-tall Latte, and throwing the snooty Barista (a word not in the dictionary) a tip, you've spent $5 on a 50-cent cup of coffee.   Over a year this comes to $1825, and over a 30-year working life, it comes to a staggering $184,458.30

Now bear in mind this is more money than most people have in their 401(k) accounts.  Maybe more than you have in yours.   It would be a sizable (and desirable) addition to mine, I can tell you!

And all from a $5-a-day expense.

But again, the reaction I get from folks is again, interesting.

First, there is some lame-ass who says, "Well, you are assuming a 7% rate of return, which is impossible in this day and age!  Good luck getting that!  You might as well spend it now!" - and of course, that is just an idiotic post hoc justification for being a spendthrift.   Yes, you can get 7% rate of return on your investments - easily - over time.  If you look at one year of the market, well, that is pretty short-sighted.

The second reaction is, "Well, you could say that about any expense in your life!"

Touché.

And that is the point - exactly.   Every expense in your life, particularly recurring expenses, like subscription plans or coffee habits, adds up to a lot of money over time.   One way to save a lot of money is to reduce or eliminate these sort of expenses.

A smart phone is a nice toy.  But is it worth $600 (more than a new laptop!) and $100 a month to use, all so you can text and twitter your online "friends" 24/7?

Ditto for Cable TV.  Do you really NEED to sit on a couch for 4.6 hours a day and be advertised to?

The point is, pick the areas of your life where you really WANT to spend the money - trying to "have it all" will make you bankrupt - even if you think you are wealthy.

We think we can afford these things, because "everyone has one" and moreover, "We're making good money" when in fact, neither proposition is really true.

Again, even if you are making $100,000 a year, maybe $10,000 of this ends up being "disposable income" after you've paid your taxes, living expenses, funded your retirement, etc.  Which in turn means that the smart phone ends up costing you 10% of your disposable income.

So yes, $100 is a lot of money, particularly in a recurring expense, even for a "rich" person making $100,000 a year.  (And in my book, people making $100,000 a year are not rich, they are just making a lot of money.   If they save none of it, they are poor).

One-time expenses are a lot less dangerous, however.   For example, you want to go out to a nice restaurant.  It may cost a few hundred dollars, but it is not something you do every day.   I went to a fabulous Italian restaurant in Atlanta the other day.  The sort of place with valet parking.  We had two bottles of wine with dinner, four courses and dessert with an aperitif and espresso, and it was fabulous.  But not something I do every day.

Costly?  Perhaps.   But less costly that the fellow who spends $15 on lunch every day at a restaurant, and maybe another $30 on dinner, five nights a week.   And yea, people do this, using restaurants as their kitchens, convinced it is "easier than cooking!" and more fun.  But over time, they will eat a lot of really bad food (and food that is bad for you) and spend far more than I did, having a truly fabulous meal, maybe once or twice a year.

Recurring Expenses are what makes middle-class people feel poor and complain they are living "paycheck to paycheck".

If you are looking to cut your budget, cut those recurring expenses first.  And bear in mind that $100 is truly a lot of money.

Tuesday, March 27, 2012

Stealing all your eTrash!

The scene of the crime:  A parking lot located remotely from the beach, not in sight of its owners.  Easy pickings for the smash-and-grab criminal, if you leave electronics in your car.



Summer is here and the crime rate is up.  Our sleepy little town has turned into a minor "Spring Break" destination, it seems.

From the Brunswick News, recently:
A man reported someone entered his vehicle and stole a purse, a camera, a tablet computer, a E-book reader, a backpack, a GPS unit and $60 in cash Saturday. He said he and his family were at the beach when the items were stolen. Entry was gained by breaking one of the vehicle's windows. The stolen items were valued at $1,600.
Owning a lot of electronic crap is expensive.   And one problem with owning this stuff is that it gets ripped off, with regularity.  Such items are portable and easy to fence or sell.   Not carrying a lot of this stuff with you is one way to avoid losing it.

Tourist areas are particular targets for thieves - who look for cars with out-of-state plates, parked at the beach.   If you have your luggage inside and your GPS on the dashboard, well, they smash - and grab.

If you have to take this stuff with you, bring a beach bag and put it in it.  Put electronics in large ziplock bags to keep out the sand. The fellow above had a backpack stolen - guess what the thieves used to carry away the loot?  Carry it with you, if you don't want it stolen, or lock it in the trunk of your car.

Or, you could leave it at the hotel, I suppose.  From the same issue of the Brunswick News:
A man reported someone stole his tablet computer from a hotel room Saturday. He said he left the room to go to the gym, and when he returned, the computer was gone. The responding officer spoke with the female who cleaned the room. She said she cleaned the room and came back 20 minutes later to replenish the towels. She said she did not steal the computer. It was valued at $860.
If your hotel room has a safe, use that.   Otherwise, keep this stuff with you at all times.  Even a sleepy little Southern town (especially a sleepy little Southern town!) can be a haven for thieves.

One good idea, that I have been lackadaisical about, is to write down the serial numbers of all this crap.  The Police sometimes catch these folks, and if you can identify which items are yours, you might get them back - and the Police can better prosecute the criminal.

I set up a simple document in WORD and wrote down all the serial numbers of the electronic crap, bicycles, and the like and then uploaded to Google Docs - just in case the computer is stolen.

But the best idea of all is to own less electronic crap - less small stuff that can get broken, damaged, dropped, easily stolen, or otherwise create a financial loss for you.  While it may seem like you "need" all of this to get by, you'd be surprised how little you really need, for a day at the beach.

Mickey Mouse Credit Card

These sort of 'rewards' cards are a raw deal.

I received a credit card offer in the mail today, and before I threw it in the trash, I thought I had better write about it.  Again, the best credit card deal is the lowest possible interest rate with no annual fees.  You actually have a shot at paying these off, if you get into trouble.

But a rewards card?  You have to be squeaky-clean Mr. Perfect, and pay off the balance, every month, for the rest of your life, without ever, ever, ever, EVER, making a mistake - or else!

How bad can it get?  Well this card is not atypical of the trap they have set.  I am not picking on Disney (I am a shareholder, which is how they got my address, no doubt.  Lately the stock has been doing well, by the way) - ALL of theses 'rewards' cards suck equally.

The deal is as follows:

  • Annual Fee: $49
  • Interest Rate: 14.29%
  • Penalty Rate: 24.24%


In addition, there is  a foreign transaction fee (3%) and of course penalty fees for going over-limit or making a late payment.   But those penalty fees pale in comparison to the penalty rate, which, if triggered, is perpetual.

Why is this so dangerous?  Well, suppose you are Mr. & Mrs. Jones, and have two kids and like to go to Disney.  You drive down there in your mini-van complete with your stick-figure stickers of the family members (including your dog Rex!) on the rear window.  The kids just love Disney!

So this card seems like a good deal - you get 2% back on purchases, to apply toward a Disney Vacation!  You can spend your way towards wealth!

Problem is, even if you put all your utility bills and stuff on this card, you will be hard pressed to pay more than $20,000 a year on it, which means, at 2%, you would get a paltry $400 toward your Disney stay.  They throw pennies at us, hoping we spend dollars.  If you deduct the $49 annual fee, this works out to $351.   Not a lot of dough, considering the risks involved.

What are the risks?  Mr. and Mrs. Jones pay off the balance every month religiously, so they don't pay any interest.   But several years into this gig, something happens.   Maybe the minivan needs a new transmission.   Maybe the family has to fly to Mr. Jones' Mother's funeral at the last minute.  Maybe one of the kids gets sick and there are medical bills not covered by insurance.  Whatever - shit happens, expect this.

And sadly, the bill that they cannot "pay the balance on" might end up being that very Disney Vacation that they charge on the card.   A want, not a need.

So, they carry a balance.  At first, it doesn't seem like a big deal, as they can make more than the minimum payment.  But the 14.29% interest adds to the balance every month.  Using a Compound Interest Calculator if they make payments on a $5000 debt, at $150 a month, it will take more than three years to pay off and cost them $6396.17.   That doesn't sound too bad to a debt chump, right?  After all, you are "only" paying $1396.17 in interest on a $5000 debt.  Ouch!

But it doesn't quite work that way.  Since they are piling on debt at the same time they are paying down debt, the balance just goes on forever - or so it seems.  In other words, even if they pay $500 a month toward the bill, they add on another $500 every month, so they end up treading water.   You can play with the numbers all you want to - how much you pay, etc.   But unless the Jones' decide to cut up the credit card and never, ever use it again, they will pay far more than $1396.17 in interest, and it will take far longer than three years to pay off.   In fact, it becomes like a perpetual debt - a running balance on the credit card that goes on for years and years.

Sound far-fetched?  It isn't.  Most Americans live this way.

But that is not even the really deadly trap.   If the Jones' really hunker down and cut costs, they could pay off that debt, over several years, even at 14.24% interest - which is not a "good rate" but a staggering amount - usury levels in the recent past.

If the Jones miss even one payment, or go over their limit, bounce a check with their payment,  or even do one of these things with another account with the same bank, the "Penalty" interest rate kicks in.  And what a penalty it is!

Say that Mr. and Mrs. Jones have been paying on this card for two to three years now.   The balance hovers around $5000, sometimes going up, sometimes going down.   They get a tax refund and pay part of it off.   The kids need new braces, and it goes back up.   Then the worst happens.  They go over their limit ($7500) or they make a late payment.  Now what?

Well, again, assuming our $5000 balance (which is low - some people have credit card debt that is ten times this amount) if they try to pay it off at $150 a month, it will take nearly five years and cost $3380.06 in interest charges.  About half their monthly payment is interest!

And again, if they continue to use the card, they will never pay it off and moreover, will find it very hard to even pay it down.  And since their credit is now damaged, they may find it hard to "roll over" the debt to a lower-interest rate card.  And even if they did, the rollover usually requires a transfer fee, or provides only a "teaser" interest rate that gives them breathing room for only a few months to a year.

By the way, these "rollover" deals are prima facie evidence that a lot of Americans have these intractable credit card debts - for life.

Moreover, since they are now behind the 8-ball, they cannot afford to take another Disney vacation to use all those reward dollars.

And when the mini-van finally blows out its motor, they are going to find getting a car loan pretty difficult - and have to pay very high interest rates as a result.


Again, I am not picking on Disney - or Chase.   The same deal works with cash-back, rewards miles, or whatever - and all the banks offer these crummy deals (you do not, however, have to take them).  Yea, Discover gives you a check for $50.  Big deal.  If you have an intractable balance of several thousand dollars, that ain't gonna put a dent in it.

So, what seemed like a fun lark - to get a discount at Disney - ended up being a nightmare of debt.   And if you add up the costs and "savings" it doesn't work out.   The Jone's maybe got a few hundred "Disney Dollars" to spend, if that, but these were dwarfed by the interest charges on the credit card.

If you had a lower interest rate credit card, the ability to pay off the debt is a lot easier.  Moreover, the amount you pay, in terms of interest, is a lot less.  For example, if you have a Capital One card at 6.5% as I do, and had a $5000 balance, if you paid it off, $150 every month, it would take almost exactly 36 months to pay.  But the amount you pay in interest is less than half - only $529.30 - compared to the standard rate on the Mickey-Mouse card, or 1/6th the amount paying on the "Penalty Rate."

At 6.5% interest, this is an affordable loan rate, and one which won't bury you in debt that you will never be able to get out of, without refinancing your house (which is also a bad idea and you are just spending equity you don't have, and in most cases, people end up running up more debt).

Are there some things you can do to avoid trouble with Credit Cards?  Yes.  Regardless of Card type, you should:

1.  Set up Autopay to pay the minimum amount due, from your checking account, even if you forget to make your regular payment.   This prevents an accidental triggering of your "Penalty Rate".  You should, of course, make more than the minimum payment, regardless.

2.  Decline Charges Over Your Limit by calling your Card company and setting this up.  Many card companies offer to cover over-limit charges as a "convenience" to customers (like a knife in your back is a "convenience") by "allowing you" to go over your limit, for a nominal over-limit fee, and of course kicking in the Penalty Interest Rate.

3.  Set a Reasonable Credit Limit and Decline Automatic Raises.  Set a reasonable credit limit, based on your income.  Preferably less than $10,000.  Ideally less than $5000.  The lower the better, within reason, of course.   Tell your card company to not automatically raise your limit unless you say so.   The "Congratulations!  We've raised your credit limit!" letter is not a sign of fiscal responsibility, but rather an omen of doom.

But Frankly, if you want to stay out of the credit card trouble that affects almost every American at some time or another in their lives (and since you are young, it hasn't happened to you yet, so of course it won't - right?  Just like the motorcycle accident) the best thing to do is to use credit cards sparingly, get the lowest possible rate and avoid annual fees.  Such credit cards will never get you into trouble and the petty "rewards" you may be "missing out on" are just not worth the risk involved.

Unfortunately, for most Americans, they have to put their hand on the hot stove before they learn.  I get e-mails from smart-ass youngsters who regale me with how they get $200 a year in rewards dollars by putting everything on their credit cards, and then "paying the balance every month".   If you are in your 20's, you've been keeping these spinning plates aloft for maybe 48 months now - so obviously, nothing can go wrong for the remaining 30 years of your financial life - right?

No one sets out to get into intractable credit card debt.   Rather, they are lured into it by the bait.  And once they are hooked, the credit card companies just wait - and wait - and wait - for that inevitable moment when you can't pay off the balance one month, and then the debt starts to "revolve" in a big way.  And then they hope you trigger the "Penalty Rate" and then they have you - as a perpetual debt slave.

Is the very real risk of debt-slavery worth a few hundred dollars a year in rewards?

I don't think so.

Just say "NO" to Mickey-Mouse deals like this!


* * *


NOTE:  At first it seems almost scandalous that the Credit Card companies would do things like this - offer to "let you go over your limit" as a "benefit" and then sock you with a 25% interest rate! There should be laws against this!  (at one time, there were)  It is an odious deal!   But you don't have to take it.  The credit card companies are not your "friends" giving you "great bargains" because they like you.  They are a business and out to make money.   And they are very, very smart and have a legion of experience, both in banking and human nature, behind them.   And you think you are going to finagle a few hundred "free" dollars out of them?  Think again!   You are entering the arena, unarmed, up against an army of experience Gladiators.  You will get creamed, period.

Monday, March 26, 2012

Uncle Sam's Dysfunctional Family

Our country is a lot like a family - with needy and irresponsible siblings, as well as crazy cousins.


It struck me the other day that our country is a lot like a family.  It is dysfunctional.  As I pointed out in a previous posting, there are people in this country who spend every last penny they have, and then borrow 10 cents more, just to have a jet-ski or some other stupid purchase.   And they don't fund their retirement or buy health insurance.

These folks are a burden to the rest of us, and you and I pay for their care, when they go to the hospital and stiff the $20,000 bill from their Jet-Ski accident (and they we pay them the rest of their lives, as they go on disability).

Others of us work hard, ask for little and end up paying a lot of taxes.

And it is funny, but many families work the same way.

Take Jason (not his real name).   Jason comes from a family of three children.  Jason works pretty hard and saves his money and supports himself in a modest lifestyle.

His "crazy sister" Eileen has four children (and no husband) and is constantly calling her parents and begging for money.  The living room needs new carpet.  The children need braces.  The car needs a new transmission.

And Jason's parents sigh, and then write out a check to Eileen.  Their checkbook is filled with stubs of checks written out to Eileen, which Jason would find, once he probated his parent's estate (and yes, Jason is a real person, and yes, I saw the checkbook).

Jerry, Jason's neer-do-well brother, has a substance abuse problem, and similarly sponged off Jason's parents for years.  The parents finally cut him off - there were willing to buy Eileen a new washer/dryer, but not crack for Jerry.  What the difference was, I don't know.

But Jerry went into rehab, and once he got out, the largess poured from the parents.  They let him stay in their vacation home, for free, for several years, as a primary residence, and Jason's Dad gave Jerry his Mother's old Cadillac to drive around.  And of course, there was the money.

Now, Jason kept quiet about all of this.   As a middle-child, he was not one to make a fuss.  But nevertheless, it infuriated him that his siblings were using his parents as an ATM machine and a personal loan officer - for "loans" that were never paid back.

As I noted, Jason probated his parent's estate.  "We always try to treat each of you equally," Jason's Parents always told him, "And we're so proud of you, Jason, as you have been such a success in life!"

But Jason, sitting at his Father's desk, sat and cried quietly, as the cancelled checks and bills fell to the floor.  He read his parent's will, which, as they promised, left everything to the three of them, equally.

The problem was, since his parents had doled out so much money to his siblings over the years, there was nothing left for anyone to inherit.  Jerry and Eileen had taken the lion's share of the money, over the years, leaving little more than $100,000 in the Estate.

Jason didn't need the money.  Well, he could have used it, in his retirement, to travel.   But that was beside the point.  Jason felt cheated.  Why did his parents favor layabouts like Eileen and Jerry, and seemingly punish him?  What did he do to incur their wrath?

And maybe Jason's parents didn't intend it to work out that way.   But then again, maybe they did.  As I noted in The Parent Trap, many parents love to lord over the ruined remains of their children's lives - and then complain to their friends what parasites and layabouts their kids are.  But the successful kids - do the crow about them?  Hardly ever.  Successful kids are a threat to them.  They hate them.

The problem with this sick behavior is that it enables, which is amateur psycho-babble for encouraging bad behavior.  Eileen has hit upon a perfect scheme - where her house gets continually remodeled at someone else's expense.  And, as a bonus, she gets to spend part of her Brother's inheritance.  Jerry gets to get high and stay high - all the time - with little or no consequences, even after he sobers up.

It is, to say the least, unfair to Jason.  These people are "needy" and "need help" because of their own actions - and the help provided does not cure them of their needs, it merely amplifies them.

The same could be said of our dysfunctional "Family" as a country - our government hands out money to people who are often irresponsible, which encourages more irresponsible behavior.  People are entitled  to money, regardless of their actions.

And maybe our elected officials enjoy lording over the ruined lives of welfare recipients - at least they know who they will vote for, right?

And today, more and more wealthy people are cashing in on this, from $50,000 mortgage reductions for mini-mansions, to bail outs of Wall Street.

GM and Chrysler get a bailout, while Ford is forced to go it on its own.

I bet Ford feels a lot like Jason!

Sunday, March 25, 2012

Should We Force People to Buy Health Insurance?

One of the controversies facing the Supreme Court is whether the Health Insurance Mandate is Constitutional.  Of course, some would say it is not even a mandate.


Two neighbors live side by side.  They make the same amount of money, but live radically different lifestyles.   The Smiths spend all their money and then borrow more.  Their yard is choked with cars, boats, and jet-skis.   They have four satellite dishes, and everyone in the family (six children) have the latest smart phone and designer clothes. They have no health insurance, as they argue they are young and healthy, and besides, that $400 a month pays for another car.  And of course, they have saved nothing for retirement.  They eat out nearly every night, putting it all on credit cards, and they are all terribly obese and in poor health, despite their relative youth.

The Jones live frugally, have two children, drive older cars, don't have cable TV or smart phones, and they wear ordinary clothing.   They save for retirement and have paid down their mortgage.  They live frugally, but their finances are in order.   They have little or no debt, are fully funding their 401(k) and have health insurance.  In addition, they have started a savings plan for their children's college.

The Smiths often openly mock the Jones' for being "poor."   When they get together, Mr. Smith will say to Mr. Jones, "I guess you-all can't afford a smart phone!  Ha-ha!"   Mr. Jones just smiles and wonders what he did to deserve such boorish neighbors.

The problem is, of course, that eventually the Smiths end up in financial trouble.  Mrs. Smith or one of their kids gets sick, and with no health insurance (and no money, just debt) end up in the emergency room, which they use as their primary care physician.  The hospital tries to collect from the Smiths, but they have no money, so the costs are folded into the operating cost of the hospital, which means the rest of us, including the Jones', are paying for the Smiths medical care, and in effect, the rotting Jet Skis in their side yard.

When the Smith children are ready for college, they get more financial aid and student loans, based on "needs tests" - as it is not hard for the Smiths to show they are insolvent.

When Mr. Smith is laid-off from his job, he collects unemployment, and millions like him petition the government to extend this for two years - because they have hit on "hard times" and are "disadvantaged."

When the bank comes to foreclose on their home, the Smiths cry out that it is all so unfair, and demand a reduction in their interest rate AND a reduction of the balance on the mortgage.  And Government programs are set up to do this.   Banks, so overwhelmed by the Smiths of the world, just give in and cut $50,000 off their mortgage, without blinking an eye.

When retirement comes around, Mr. and Mrs. Smith have nothing but Social Security to rely on, and since there are so many retirees, the government cannot pay them all.  So, they decide to do a "needs test" and cut the Social Security of the Jones' so the Smiths can get more.

How is any of this fair?  And the answer of course, is that it isn't.    The Smiths are out having a grand old time, buying up a lot of crap and being fiscally irresponsible, and then forcing the rest of us to clean up their messes.  We end up paying for their medical care, paying for their houses, and paying for their children's college.  We even pay for their jet skis and penis boats, directly or indirectly, since our subsidies of other parts of their lives allow them to buy these things - and since their frequent defaults on loan obligations and the resulting losses are paid for by part of the interest on our loans.

In short, the Smiths are not "rich" at all, but just social parasites.   They are financially irresponsible and thus end up costing us all a lot of money.  And worst of all, they don't even say "thank you" but mock us, for being "poor" and not buying a lot of the crap they buy.

Taking care of yourself is not just a good idea, it is a social obligation.  It is part of the unwritten social contract that we have with one another, to not just help one another, but to not be a burden to one another as well.

The Smiths have avoided this obligation, assuming (rightly) that we will not let them fail in life, due to our humanitarian impulses.  And many people, oddly enough, feel "sorry" for the Smiths of the world.   And many of the Smiths of the world are so-called "teabaggers" who claim they pay too much taxes, which is why the finance company is towing the jet skis away - and ain't that unfair?

In most Industrialized countries, the unwritten social contract is, in fact, written.   In most of Europe, the UK, Canada, and even Mexico, medical care is nationalized, socialized, or whatever you want to call it.   For some this is deemed a "human right".   But for others, it is just making sure that people pay their fair share for medical care (through taxes) and then receive such care in the most cost-effective way (other than at the Emergency Room, which is quite costly).

Similarly, most Industrialized countries have some sort of Social Security, National Pension plan, or the like, so that people who don't save for retirement have at least some sort of pension, or at least a "safety net" that they are required to pay into.


Of course, in America, we are a little different.   We believe more in free enterprise and free markets and letting markets decide how such things should play out.   But the Smith/Jones situation is, in fact, an example of such a market decision.   Mr. Smith is a blithering idiot, but he has stumbled upon what could be considered an optimal outcome.   He lives large, spends it all, and has a wealthier lifestyle than his neighbors, who are actually wealthier.   And he gets his neighbors to pay for a lot of it.

Worse yet, since there are so many Smiths in the world, when it all goes bust, they can petition the government for relief and get more free money in the process.  Democracy fails, Heinlein wrote, when the plebes all discover they can vote themselves a raise.

And yet, we have realized, in the past, that allowing people to do this sort of thing is unfair to everyone involved.   When someone retires with no money at all, the are a burden to the rest of us.  And their life becomes brutish in short order.   So, we established Social Security - mandating that everyone who works, pay into a system that will pay them back, in retirement.   We also mandate that people who work pay into Medicare as well - so their medical needs are addressed in retirement.

Is this a humanitarian gesture?  To some extent, yes.   But it also is sound economics, in that we are forcing people to pay for their own care in later years, at least in part - so that they are not a 100% charity case when they retire, and thus a total drain on everyone else's resources.  And as I noted in an earlier post, if you live to an average age, you basically get back your Social Security money, plus a few percentage points in interest.

Our country is steadfastly against nationalized medicine, perhaps rightly thinking that government bureaucracy and medicine don't mix.  Of course, the private-sector model of medicine has its own problems - and let's face it, we don't have a totally "free market" model of medical care in this country, and never will, unless Medicare and Medicaid are abolished.  The government is already the largest player and payer in our medical system.

So instead, we have come up with this crazy idea that people should be forced to buy health insurance.  Well, not forced, in the traditional sense, but encouraged very strongly.   If you buy health insurance, fine.  If you don't, you are assessed a "fine" or "tax" depending on your point of view.  In a way, this is not a radical departure from what we already do.

For example, if I buy health insurance, the premiums are deductible from my taxes, which means I pay less in taxes than the fellow who doesn't buy health insurance.  Under existing law, we are "fining" or "taxing" people who don't buy health insurance for themselves.  Of course, we are also fining people who are provided with health insurance by their employer, which would not happen under this new law - only those who refuse all health insurance will be taxed or fined. 

(From a deduction point of view, of course, this makes sense.   Someone who gets "free" health care from their employer is getting an untaxed benefit, so it is justice that their tax bill should be a little higher than mine - where I have to pay for this benefit out of my own pocket).

Of course, one problem with deductions is that they only reduce the taxes of people who are working and making a lot of money.   Moreover, they favor the rich, who get a 35% rebate on their health care costs, in the 35% bracket, versus 15% for us peons.

Well, then, why not sweeten the pot and make it a tax credit?  That would certainly be Constitutional - after all, Congress can grant tax credits for buying electric cars, why not health insurance?   That is an interesting approach as well, and in fact, such an approach could actually pay poor people to buy health insurance.  A tax credit, even if you owe zero taxes, can result in your getting a check back from the Government.

But there are two problems with that approach, too.  First, it would mean we would be paying a LOT of health insurance premiums - the bill would be staggering.  But I suppose you could limit the deduction to a certain amount, so that people didn't just go out and buy so-called Cadillac plans.  Second, since a lot of people wouldn't have the foresight to understand how tax credits affect their taxes, they would not buy the health insurance, claiming they could "not afford the premiums" on a monthly basis, even though they would get all that money back on their taxes.

But it is an interesting idea - if you allowed, say $2500 to $5000 a year tax credit for health insurance, insurance companies might scramble to provide a basic coverage plan that could be paid for, in one lump sum at tax time - perhaps.

So, instead, they came up with this so-called mandate.   Like I said, it really isn't a mandate, as no one is going to jail if they don't buy insurance.   But your taxes will be higher.  And you might go to jail if you don't pay your taxes (big surprise there, right?)   Will this work?  Is it Constitutional?

The very poor end up costing us all a lot of money in terms of health care costs.   They tend to use emergency rooms as their doctors, and they leave huge unpaid bills at hospitals, which we all end up paying for, in terms of higher health care costs.   This so-called mandate approach would make them choose whether to pay for insurance or to pay the government, the latter of which would recoup some of the costs of uninsured patients.  It might work.

Is it Constitutional?  Well, that remains to be seen, and with a polarized and politicized Supreme Court, the ultimate decision may have more to do with party politics than any real reading of the Constitution.   Act shocked, and then read the Dred Scott decision, and then sober up as to what this country is really all about.

The reality is, this is not a mandate but a tax.   Granted, like most taxes, it is calculated in a convoluted manner.  Just as my taxes may be lower than yours, because I can deduct my health insurance premiums, a person who buys health insurance under this new law will get a tax break.  Those who do not, get a tax increase.

The opposition, of course, calls this a "fine" and thus a "mandate" to obtain coverage - coercion by the government, "forcing you to do things" you don't want to do.

And yea, that sucks, but wake up and smell the coffee.   If you work for a living, you are forced to pay Medicare and Social Security taxes.   Your employer is forced to match these.  And if you don't pay these taxes, you end up going to jail - simple as that.

Again, it was decided that Congress should force people to pay for their retirement or at least some kind of safety net, rather than let people just rot in the streets ("freedom!") and have the rest of us have to care for them through charity, welfare, or other taxpayer-funded programs.

So to me, anyway, it seems clear that the Constitutional mandate for this "mandate" clearly exists.   If  this is unconstitutional, then so is Social Security and Medicare.

But then again, some folks think those two programs should be abolished as well.....

Saturday, March 24, 2012

Hey, How's that IPO working out?

If you remember this sock puppet - whose face was once everywhere on television - you know why IPOs are as bad a deal as a payday loan!


IPOs, as I have noted before, are done for one thing, and one thing only - to make the founders of the company obscenely rich by selling off a pittance of the company to foolish retail investors (e.g., You and Me) who read all about them in the Paper and confuse good publicity with a good business model.

The media is hyping the Facebook IPO, because it is an event, and the media likes events, not long-term trends, or heaven forbid, follow-up stories.

So, before the Facebook IPO comes out, let's look back at some famous IPOs of recent and not-so-recent past, and see how they panned out.  As you can see, most are a mixed bag - and some have just yet to tank - being of recent vintage.

Bear in mind that the IPO price for a stock is not the price that is available to YOU, the small investor.  Rather, these are the share prices offered to institutional investors and insiders, who immediately (sometimes within seconds) sell the stock to you, sometimes for double the price.


1.  ZipCar, zoomed from the insider price of $18 a share to the retail price of nearly $32 a share.  Today, it languishes at $14.38.  No dividends, A P/E ratio of "--" and a trailing Earnings Per Share of -0.19.  In other words, if you "invested" in this turd stock, you would have lost more than half your money in a company that is still losing money and appears poised to lose a lot more.  Some bargain.

I wrote about this stock before - twice.  And analysts all wrote about the same thing - that the business model made no sense, and that for the stock price to make any sense, the company would have to expand rapidly - yet at the time of the IPO it was shuttering outlets.

Maybe ZipCar can make a go of its business model, and maybe the stock will be worth something some day (really?  Why?  It pays no dividends and represents a tiny share of the company).  But the bottom line is, it is highly doubtful that it will hit $32 a share again in the next decade, if indeed in our lifetimes.



2. Zynga is a fairly new IPO, and if you were able to buy it at the offer price of  $10 a share, you'd be doing good now, at $13.75.   But then again, since the overall market has gone up by about 11% since December, you'd be good buying any stock around then.  And if you sold it back in January, you might only have gotten $8 a share.  Ouch.

Again, the dividends are nonexistent, the P/E ratio is a divide-by-zero error, and the trailing earnings per share is -0.57.   You have to hope that virtual cows take off again soon - or that their new, Non-Facebook platform is a big hit.

Gaming companies are risky bets, as they are tech companies, but also that their games are the subject of fashion trends.   Quirky games become wildly popular and then vanish overnight.  Game maker OMGPOP labored in obscurity for eight years before scoring a hit with "draw something" - they could find themselves back in obscurity just as fast.

Not sure the plebes have figured this one out yet - that their class-A shares have no voting power and represent about 10% of the company.  And I suspect that one reason the shares have taken off since their January nadir is the Facebook IPO halo effect.

This news item should give you pause:

March 15, 2012
10:35 AM ET Zyngas Secondary Offering to Allow Some Employees to Cash Out

This news item illustrates what I am talking about - selling stock in an IPO creates a mechanism wherein the insiders can "cash out" by selling their shares.  And apparently the people who work there think that having cash is a better idea than having Zynga stock.  I suggest you listen to them!



3.  Linked-In was supposed to be the Social Media Success Story - but the jury appears to be out on it so far.   The stock price has peaked and plummeted in the few months since it went public. While it was offered at $45 a share, on opening day, it rocketed to over $90 a share and has spiked as far as $110, and then valley-ed to as low as $60, before bouncing back to $100.  Hang on to your hats!  You're in for a bumpy ride!

Linked in was supposed to be the success story as it has actually has earnings - 11 cents a share.  But at $100 a share, this means a staggering P/E ratio of 851 - fantastically high, even by Internet standards. (This means, at current earnings levels, you'd have to wait 851 years to make your money back).  At current earnings levels, a more appropriate share price might be on the order of $8 to $10 a share.

To bring this P/E back to planet Earth, Linked-In will have to either increase profitability significantly (like by a factor of 10-20) or expand rapidly.  I doubt either will happen.   Why?  Because this website (and remember, these "dot coms" are just websites) has been around for at least five years or more.  If it ain't grown yet, it ain't going to.

Personally, I find the site less than useful, in terms of finding clients, jobs, or whatever.   Like the friend-of-a-friend-of-a-friend on Facebook, these links are just specious at best.   Why should I "trust" someone I basically meet online, because someone I sort of know sort of knows them?

The upside is that they appear to be taking a bite out of Monster.com in terms of job postings.  Can this grow the company to the point where the P/E ratio is below 100?  An 8x grown in earnings?  Sounds kind of far-fetched to me.

Why is the stock price of Linked-In going back up again?   I would call it Facebook Foreplay.  People got tired of waiting for the Facebook IPO and decided to screw her ugly sister instead.


4.  Groupon was offered at $20 a share, zoomed to over $25 a share, and is now trading at $16.89.   Another company with zero dividends, and P/E ratio that is "--" and a trailing EPS of -0.36.  This means they are hemorrhaging cash, folks!

Groupon was a fad - and an idiotic one at that.  And as a business model, it was entirely un-protectable as well.  As a result, a hoard of "me too" companies have jumped in, diluting the profitability, the brand awareness, and generally flooding the field until the profits - if there are any - are marginal at best.

If you bought this IPO you lost nearly half your money so far, and are ready to lose the other half.  Hey, maybe they will offer a Groupon for their stock!


4.  Martha Stewart Omnimedia is not a stock you hear a lot about these days.  She sold off 4% of the company for $18 a share, over five years ago.   Today?  trading at $3.87 a share, and no dividends, a ? P/E and an EPS of -0.30.   Yup, Martha is losing 30 cents a share every day she stays in business.

Of course who could have foreseen her arrest?  Shit happens as they say.   But on the other hand, I think anyone can foresee that a media "empire" based on one lady making cookies can't be worth all that much.   And when that one lady gets old and decrepit, well, what happens then?

Like with Groupon, there are no barriers to entry in this market.   Anyone can show you how to make snowflake ornaments with a glue gun - and a legion of Martha wanna-bes did just that, with their own TeeVee shows and magazines.

This stock will not likely recover, ever, in my lifetime, as far as I can see.


5.   Pets.Com  At the height of the dot-com mania, a company called Pets.com was started, did an IPO and went bankrupt - all the same year!  They hemorrhaged cash from the get-go, selling products for below cost and then blowing more money on a saturation ad campaign.

But, at the time, the "dot com" era was the "next big thing" and many little people invested in these speculative stocks - and lost it all.

Again, what is the market model that cannot be copied?

* * * 

The conclusion I reach is this:  IPOs, particularly with regard to Internet, Media, and Technology stocks, are very, very risky bets.  There is going to be a lot of hoopla over Facebook, and the stock price will no doubt jump up initially, leading some short-attention-span folks to say "told you so!"

But investing is not a matter of looking at short-term gains and losses, but the long haul.  And in many cases, these IPOs, in the long haul, are real losers for their initial investors.

And the winners?   In the examples above, they have only been out a few months.   Wait for it.  We could be in for a "dot com bust" in the latter half of 2012 or 2013.

Why?  Because you can't have negative earnings forever without going out of business.   And P/E ratios of over 800 cannot be sustained for very long, before people wise up.

Much of the inflation of these stock prices is due to small, unsophisticated investors getting into the market - investors who never look at earnings (or losses) or P/E ratios or any other metrics.   They listen to the shouting guy and look at stock prices - as if something could be derived from the price of the stock itself.

In fact, if you look at every bubble in history - from the railroad bubble of the late 1800's, to the crash of 1929, to the gold bubbles of 1981 and 2012, to the real estate bubbles of 1989 and 2009 and the dot-com bubbles of 1995 and 2015(?) the same common denominator is there - little people decide to get into the market and "Strike it rich like everyone else!" and prices skyrocket.

When the little people get in - you should get out.   This is how I avoided the Real Estate Bubble of 2009.

You are not "missing out" by not buying an IPO.  You are far more likely to lose money than gain, I believe.  I think a better approach, rather than hoping to "strike it rich" in the stock market, is to look for long-term growth and income companies.  It may not be sexy or hyped, but it is probably a safer bet.