Archives for September, 2009
30
Sep
Posted in Weekly Thoughts by Roger, the Amateur Financier |
Hello my friends and other readers. Hopefully, you’re all having a more pleasant autumn than those of us here in Pennsylvania; it’s been a cold, rainy fall so far, and there’s talk of early winter weather on the way. It’s like the year without a fall, which is especially hard as fall is my favorite month.
Luckily, there’s plenty to keep me occupied inside. Given that the seasons are changing, I figure it’s as good a time as any to work on changing my passwords. If I get in the habit of changing passwords with the changing of the seasons, I’ll switch my passwords every three months, a wise precaution to ensure that my personal information (to say nothing of my money!) stays personal. I’m also taking the precaution of encoding my password reminder notes, on the hopefully very off chance that said password notes fall into the wrong hands. A little bit of personal protection in these uncertain times never goes amiss.
And on the subject of things that don’t go amiss… let’s consider some of the interesting posts that put up by my fellow personal finance bloggers last week. (How’s that for a subtle transition?)
Good Posts This Week
Why I’m Not a Frugalista and Monavie Sucks – Two interesting stories were discussed over on Mrs. Micah, both involving bloggers and trademarked terms. In both cases, the entities in question are attempting to squash the free speech of others, either to prevent bad press (the Monavie situation) or to turn a semi-common phrase into their own personal brand (the ‘frugalista’ thing). In both cases, these complainers have no reasonable expectation that the terms used would be their own exclusive property and never, ever used by other people, ever, and should just shut up already. That is all I have to say on both situations.
Five Lessons of the Great Recession We Probably Won’t Learn – After the last six months of stock market recovery, I doubt even the name ‘Great Recession’ will stick around for too much longer. (If we really are in the recovery now, the whole thing lasted, what, two, maybe three years? Not really that Great…) Hopefully, this will serve as a teachable moment and help to prevent a repeat (and potentially worse) performance in the future. But, Frank Curmudgeon doesn’t have much faith in that outcome, and frankly, while I’m doing all I can to keep the memory of these events in my mind, I’m not terribly optimistic that the broader public will remember. But, the advantage of being a pessimist is that you’re always right, or pleasantly surprised; here’s hoping for a pleasant surprise.
Which Debt to Pay Off First? – There are any number of debts that you might have outstanding, which come in a variety of different flavors. Trying to decide which one(s) to focus your extra money toward paying off can prove difficult, especially if you are just getting started in the world. Studenomics has come to the rescue, though; making up a cheat sheet showing what order in which to pay them off. I agree with just about all the points he makes, although I would say that depending on whom you owe your ‘personal debts’, they may actually prefer that you put your money towards other debts first (particularly if they are parents or other relatives). Be sure to check first before bumping any personal debts down the list, though.
Foreclosure and Personal Character – Over on Mr. ToughMoneyLove, there’s some discussion of ‘stripping’, the unethical practice of a homeowner who is being foreclosed on taking all the furniture, flooring, paneling, and anything else of value from a house before the bank forecloses. I can’t even begin to imagine what being foreclosed on must feel like, but doing something like that out of spite is just plain wrong. Besides being illegal, decreasing the values of the neighboring properties and generally making things harder for everyone around you, it just makes you come across as a petulant child and loses whatever pity you would gain from losing your house in the first place. I just don’t know what to make of the world sometimes.
Finally, a quick little fun fact, shared by My Life ROI: Apparently, if you have alcohol in your blood stream, you are more likely to survive head trauma. So, next time you do something where you risk serious head injury, be sure to drink up first! (WARNING: The Amateur Financier is not a doctor (or a financial professional, for that matter; everything he says about your health should be taken with a grain of salt, and possibly a strong drink, before you attempt to act on it.)
Where The Amateur Financier Has Been Featured
The Money Hacks Carnival – 84th Edition, hosted by the Military Finance Network, hosted my article Scams, Schemes, and Scam: Protecting Yourself
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29
Sep
Posted in family by Roger, the Amateur Financier |
A common comment about children and the expense it takes to raise them is that such costs are ‘an investment in the future’. As analogies go, this isn’t bad; we put money, time and effort into raising children, and expect them to grow, mature, and become productive when they get older. But it’s not perfect, either; unlike stocks or mutual funds, children can’t be counted on to provide a direct return on our investment, either paying out money or increasing in their value when sold (particularly since selling children is frowned on in most places nowadays). Instead, the payout is seeing our children grow, learn, and become useful members of society, with some possibility that they will help care and provide for us in our old age. But, what are the costs and benefits of having and raising children?
The Costs of Raising a Child
It’s hard to say with absolute certainty just how much it will cost to raise the little bundle of joy you bring home from the hospital into a mature, productive, outstanding member of society. A lot depends on the choices you make over the course of his or her lifetime and the costs associated with each one. Do you spoil them with every toy and activity a child could want, do you teach them to live an austere and simple life, or do you try to stay somewhere in the middle? Do you have to pay for expensive child-care services, or will you (or your spouse) be able to stay home to care for your children? (Both options can have the effect of increasing the child-rearing costs, either from added expenses or decreased income.) Don’t forget college; how much you contribute to Junior’s 529 plan (if anything) will have a drastic effect on how much you spend during his formative years.
With such a diversity of options that exist for your child-rearing options, estimates for the expense of raising a child are going to vary widely. An series of tables from MSN, for example, shows total expenses from birth to age eighteen that range from a low of $125,000 to a high of $250,000. That’s not including college, which they pegged at $25,000 each year (an additional $100,000 for a four-year program). But that’s far from the only estimate that exists; the United States Department of Agriculture puts the cost at just shy of three hundred thousand, for example (and also makes me wonder why the USDA is responsible for reporting this data). On the other end of the scale, a mother named Mary reports that her per child costs total only about fifty thousand each year, in part due to her frugal methods of raising them and the advantage of having many children, spreading out some of the larger costs associated with the other figures.
(Quarter) Million Dollar Baby
For me, when thinking about when I will start having kids, I’m going to assume a fairly high cost for each child, in the $250,000-300,000 range. There are two big reasons for this: first, if I estimate too high and turn out to be wrong, the extra money can be diverted to other goals easily enough (such as saving for their college education, something not included in any of the figures mentioned), whereas assuming too little will put me into a scramble for more money at some point in the future. Second, unlike Mary, my fiancee and I are planning to have a relatively small family with one, perhaps two children total. The economies of scale that she has been able to harness with a fairly large brood simply won’t be available to us.
Financial Benefits of Children
Before you rush out to have various tubes tied or snipped to avoid ever becoming a parent, let’s not overlook the fact that children do have some financial benefits associated with them, as well. Some of the most well known include the various tax credits and deductions available to parents. While probably not enough for you to make a profit from your children, such tax advantages do make having dependents less costly than otherwise, decreasing the financial burden of having children.
Attempting to get a return on your ‘investment’ more directly, by getting your children to help take care of you in your old age for example, is much trickier. In most cases, it will come down to your child’s personal feelings as to whether he or she will be willing (and financially able) to provide for some or all of your expenses when you are ready to retire. Unless you structure the monetary support you provide as a loan (complete with interest and other terms, backed up with the full force of law) or have a financial incentive like the possibility of a large inheritance to use as a motivator (in which case, why do you need your child’s help?), there are few ways to ensure that you will get cooperation from your children in providing for your retirement or any other financial support.
Non-Financial Benefits of Children
Before you go thinking that I’m saying you shouldn’t have children, that they are ungrateful whelps who will drain you of money while you’re raising them and you will never see a dime in return, stop. That’s not the case. Yes, I wouldn’t have children expecting that they will provide for my retirement; there’s simply so many unknowns to consider between when they are born and when they are grown that even if you raise caring, nurturing children who want to help and support you (as I hope all of you would), there’s no guarantee that they will be able to do so. As many people in the Baby Boom generation are discovering, trying to balance caring for your children, your parents, and yourselves makes for a very tough balancing act (leading some to call the Boomers the ‘sandwich generation’, being stuck between two groups of relatives who want financial support). By the time your children are financially sound enough to help you, they might have children and families of their own, and need to provide support to them. Depending on your children to support you should not be your primary retirement plan.
Instead, focus on the many intangible benefits provided by raising children. Assuming you like kids (and if not, why are you even thinking about adding more to this world?), having children of your own is instead a chance for you to pass on your values, knowledge, and genes. Talk to any parent (or better yet, a grandparent; they get a lot of benefits from grandchildren with much less of the work) about their (grand)children, and the responses you get will generally focus on the emotions the kids invoke and the memories they generate, not the costs incurred or the loss of returns from investments. I am firmly of the belief that children add to the joy and wonder of the world, and if they are raised in a caring, loving family, will make the next generation an even better time to be alive on the planet. THAT is the real return on investment that children offer.
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28
Sep
Posted in If I Ruled the World by Roger, the Amateur Financier |
Welcome again to another session where I take on the role of Benevolent Dictator (although, not the one you learned about in Economics 101) and attempt to solve all the problems of the country in the course of a few blog entries. This week, we’re going to look at one of the most hated, cursed, and generally despised aspects of life, as well as the only one that ranks up with death in terms of inevitability. That’s right, this week I take on taxes!
Just about everyone believes that some level of taxation is needed, to fund the vital roles that various levels of government play in our lives; the problems arise when it comes down to who should pay those taxes, and how much. If you do enough reading, you’ll see that everyone has their own view on how the tax system should be structured; income taxes to sales taxes, capital gains taxes to the Fair Tax, flat and progressive taxes are all thrown out by one group or another in an attempt to fill our coffers. Going through every single proposed tax plan, discussing its pros and cons could fill weeks worth of posts, or even an entire blog. Instead, for this exercise, I shall use my powers to cut through all that and get down to the basics of what would be in MY tax system. The guiding principles I’m going to follow are that an ideal tax system should be:
1) Simple – The perfect tax system should be so simple that you can fill out a return on a single sheet of paper, with all the instructions included.
2) Progressive - Those who make more money should pay an equal or higher percent in taxes when compared with those who make less.
3) Controlling Disincentives – Unfortunately, taxes distort economic incentives. Income taxes make earning an income less appealing, sales taxes make buying things less appealing, and capital gains taxes makes selling economic products less appealing. The goal of a tax system should be to keep these disincentives to a minimum, or direct them towards decreasing the incentive for negative behavior.
With these principles in mind, what would be my ideal tax system?
My Solutions
A Graduated, Gradually Progressive Income Tax – The basic structure of the new tax system will be essentially an almost-flat income tax. Almost because, to ensure that our tax system remains progressive, those earning a higher wage should a higher percentage in taxes on the last dollar of income than someone earning less. A five to ten percent differential between each tax bracket (and a limit of only three or four brackets) will ensure that moving from one bracket to another won’t dramatically increase the taxes you pay on that last dollar of income. There will be arguments that this creates a disincentive from earning more money, but if all the ways of making an income are taxed according to the same rates (in my mind, ranging from 10% to 40%), the discouragement will be minimal. And speaking of which…
Tax ALL Income According To the Same Scale – One of the major sources of confusion and bad financial decisions when it comes to taxes is due to the numerous different types of income. Short term capital gains are taxed at a different rate than long term capital gain, money you inherit is taxed differently than money you earn by working, and of course, if you make a high enough amount of money working, you might have the Alternate Minimum Tax to handle, as well. The simplest way to deal with all those different systems is not to deal with them at all; treat all income as well, income, and tax accordingly. The system will be simplified, tax incentives to act irrationally will disappear (such as holding a declining security to get the long term capital gains tax rate, even if it declines to zero), and no more finagling of HOW you get paid to lower your tax rate will be possible.
Eliminate (Almost) All Deductions – Another problem with the current tax system is that it has, over the years, become so chock full of deductions for dozens of different reasons. Whether it’s trying to encourage homeownership, increase investments, or help people who have kids to have a little extra spending money, there are a huge number of tax deductions and credits in the current system, as you can see from this About.com list. The easiest way to cut through all the bull honky is to eliminate all of the deductions and just add back in the few that are the most common (and popular): retirement accounts, children and (possibly) mortgage interest payments will be among these selected few. Such eliminations of ‘loopholes’ will enable taxes to be lowered all around.
Make the Tax Rates Public, Flexible, and Tied to Government Spending – If you remember last week, I railed about how I would change government budgets. Here’s another step in that plan: when government spending rises, taxes rise. If the Federal Government wants to spend more money, rather than adding to the national debt (which, as you may recall, we will now be regularly paying down), taxes will automatically rise to a level consistent with the new budgetary needs. Unless otherwise specified in the bill, the increase will be across the board, covering everyone from the lowly minimum wage earner to the multi-millionaire living off dividends. If having everyone in the country watch their tax rates rise to cover new spending doesn’t make politicians think twice about adding more programs without first ensuring that they won’t add on more debt doesn’t slow them down, nothing will.
There you have it: my four step plan to a simpler, saner tax policy in the United States. Feel free to nominate me for the Noble prize in economics, if you so desire.
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25
Sep
Posted in basics, Value Investing by Roger, the Amateur Financier |
When it comes to investing in stocks for capital gains, there are two different approaches that can be taken in order to ensure that your stocks increase their worth: growth investing and value investing. (There are other rationales for investing, such as investing for dividends, but for now let’s stick with growth and value investing.) These two methods represent two different ways of viewing stocks and trying to profit from them. So, what sort of considerations do you have to make when considering which method to use when choosing your investments?
Investing Rationales
Growth Rationale – The growth investor is looking for companies that growing their business (which you probably guessed). These could be small, upstart companies that have a great deal of potential, or large companies that continue to expand into new areas and increase their business at a much faster rate than their rivals. If stock investing were horse racing (a reasonably apt metaphor), growth stocks would be those that are the reigning champions or the quickly rising upstarts. The growth investing model essentially involves trying to find some of the fastest expanding companies, and tethering your fortunes to their growth.
Horse Racing - An Ideal Stock Metaphor
Value Rationale – Value investing, on the other hand, focuses on finding stocks that have been knocked below the true value of their respective companies, then buying and waiting for the broader market to recognize their worth. As with growth investing, these companies can be either large or small, and the reasons they are currently undervalued can be diverse: bad news that took the stock prize below a reasonable level, a run of bad luck that decreased the company’s perceived value, or even a broader economic storm that dragged everything down at once (like we’ve just experienced). To go back to our horse racing metaphor, value stocks would be akin to the strong finisher who’s failed to win the past several races and wound up as the long shot.
Why Does This Matter?
The difference between growth and value might seem academic, and in a way, it is. There are those people who have argued that assigning stocks to the ‘growth’ or ‘value’ columns have nothing to do with the actual value of the companies, but instead such dividers display their own ignorance. (‘Those people’ in this case include Warren Buffet, as you can see at the bottom of this linked page, so perhaps they have a point.) On the other hand, when looking at the performance of broad segments of the US economy, it appears that the value investing style has beat out the growth style in the past.
The results, if you are a mutual fund investor (particularly a passive indexer like me), is that your portfolio should attempt to lean more towards value and less towards growth in terms of your funds’ orientation. This does not mean that every value stock will outperform every growth stock; on the contrary, because the faster increase in value of growth stocks is sometimes deserved, the top performers in the growth category can and will outperform the best of the value classification. Rather, it means that taken as a whole, stocks that are categorized as value will outperform those in the growth column over time. Unless you fancy being a stock picker (and make a good job of it, as well), sticking to a portfolio that leans toward value stocks will lead to a much richer future for you and yours.
I hope you enjoyed this rather brief introduction to value and growth stocks, as well as the difference between the two. Good luck with your investing, whichever option you decide to choose.
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