Thursday, February 28, 2008

In Praise of Lattes

In the area of personal finance, I am an atypical blogger. I have always had an emergency fund and I have never had any student debt (I went to college on an ROTC scholarship). I have also always paid off my credit cards in full every month. I've read enough PF blogs to know that makes me a little unusual. I also suspect I'm longer in the tooth the the average blogger.

I 'fess up about these things because I'm about to go against the grain of most PF bloggers.

I love going to Starbucks. I'll go in, check out the newest CD's, order a tall latte. Sometimes I banter a bit with the staff, who usually seem to be in a pretty good mood. When my coffee comes, I sit in the padded chairs and lounge around sipping while I listen to jazz and read the New York Times. It's a wonderful experience. For half an hour I feel like a hip, upper-class urbanite.

The prevailing wisdom is that buying expensive coffee is a waste of money. David Bach of "The Automatic Millionare" fame calls it the Latte Factor: stop buying lattes and use the money you spend to fund your 401K. I understand the need to get out of debt and prepare for retirement, really I do. But you should not put off living until retirement.

The beauty of the near luxury experience is that for a few dollars you can feel like a million bucks, even if you don't have a million bucks. The key is to strike that balance between preparing for an uncertain future and enjoying the present.

Sunday, February 24, 2008

Doing the Taxes

I'm currently working on my 2007 tax return. This will be a fairly complicated year for me. I have two W-2's, capital gains, dividend, and interest income like usual. This year I also have to include a Schedule C business (for the store my wife started up last year). and the income from her 401K withdrawal (capital for the aforementioned store). I had a pretty good chunk of capital gains this year, so I need the losses from starting up the store to offset them if I want to avoid a hefty tax bill. We itemized our deductions, and unless our AGI is too great, I get a tax credit for the tuition from my MBA program.

In past years I have used TurboTax, but this year's release is only compatible with Mac OS 10.4 and above. I have Mac OS 10.3.9. I was going to purchase the on-line version of TurboTax, but a friend who works for H&R Block got me a copy of thier Tax Cut software.

The first pleasant surprise was that Tax Cut was able to extract all of my personal information from last year's tax return, saving me from having to enter in the data by hand. I had assumed that Tax Cut would not be able to open the file created by TurboTax, but apparently both programs use the same file format.

Tax Cut walks you through the process in a fashion similar to TurboTax, so I would rate them as about the same in ease of use. TurboTax has a big edge over Tax Cut in on way, however. TurboTax has the ability to go on line and directly download banking and brokerage account information. This really speeds up the process of entering passive income like capital gains and dividends. I'm not done with the process yet, but so far I'd rate TurboTax ahead of Tax Cut.

Wednesday, February 20, 2008

Bells on bobtail ring...

The subprime mortgage meltdown mess and the collapse of the housing bubble have created a new phenomenon. Basically, people who can no longer afford their mortgages, and who know that they cannot sell their house, have decided to spare the mortgage holder the need to have them evicted. They simply put the keys in an envelope and send the keys to the bank.

It's called "Jingle Mail."

There was a story on "60 Minutes" last week about foreclosures, and as part of the story, Steven Kroft interviewed a couple who are going to walk away from their house becuase it has turned into a bad investment. They are willing to take the hit to their credit rating. What made this couple interesting is that they could continue to afford the mortgage. They just felt it was a money losing deal, so they wanted out.

On the one hand, you can make a case for walking away as a rational business decision. On the other hand...

Ultimately, modern societies run on a scarce commodity: trust. We trust that our paycheck won't bounce when we deposit it. We trust that the bank won't go belly up and lose our money. We trust that when we pay our insurance premiums, our car will be repaired if we're in an accident.

At the same time, businesses trust us. They trust us to return rented videos. They trust us pay for the dry cleaning, and not shoplift. And yes, they trust us to pay our credit cards and our mortgages.

All of the business regulation, insurance, and contract law that we have does not and cannot replace what is at the heart of every deal, from a used car sale to the biggest mergers: people keeping their promise to do what they say they are going to do.

So when we say it is okay for people to walk away from their mortgage, we're actually sapping the foundation of a civil society.

Saturday, February 16, 2008

Trouble Brewing

Last week in USA Today I read two different articles about entitlement spending by the Federal government. Taken together they painted a frightening scenario.

In the first article, it was disclosed that the average senior citizen received $27,289 in benefits from the Federal government in 2007. That is the combination of medical costs and Social Security combined. For the first time, medical spending outpaced Social Security. From 2000 to 2007, benefits increased 24%.

The second article was a short piece on Kathleen Casey-Kirschling. She is officially the vey first baby boomer, having been born one second after midnight on January 1, 1946. Having just turned 62, she has activated her Social Security, and has just received her first check.

So we have a combination of rapidly increasing costs per person for entitlement spending, and the start of a demographic bulge in the number eligible recepients. Put the two trends together and you have what I call "train whistles in stereo."

What do I mean by that expression, you may ask. Imagine you are standing in front of a railroad track. In your left ear you hear the whistle of an approaching train. In your right ear you also hear the whistle of an approaching train. Two approaching trains, one track. "Go fetch a cooler of cold drinks and set up the folding chairs, ma, there's gonna be a show. Um, mebbe you shouldn't set the chairs so close to the track."

The best part of one of the articles was the following quote: "We have a health care crisis. We don't have an entitlement crisis," says David Certner, legislative policy director of the AARP.

My reaction to that statement: "Where do they teach you to say things like that? Some Panama City 'hey sailor, want a hump-hump' bar? Go sell crazy somewhere else. We're all stocked up here." (Jack Nicholson, "As Good As It Gets")

Seriously, the AARP is a major lobbying group in Washington, and their public reaction to the predictable and wholly unsustainable rise in entitlement costs coming in the next few years is to stick their heads in the sand. Well, they've stuck their heads somewhere. Maybe not in the sand.

Wednesday, February 13, 2008

Stimulus Package IV

Well, the stimulus package legislation has passed Congress. President Bush is expected to sign it this week. According to one poll I read about, 74% of respondents indicated that they would either put their rebate into savings or use it to pay off debt. This would be the wisest way to use this windfall, although if enough people did so it would really obviate the point of the government borrowing this money to hand out to the citizenry.

Somehow I don't think that will be the way it goes down, however.

I owe the following precept to Lorelei Stepp, a former collegue of mine. Lorelei's Law of Expected Income: The longer the time period between notifying someone of a coming windfall and the actual arrival of the money, the more ways that person will find to spend the money.

It's February now, and the check won't be in the mail until May or June. You can discover a whole bunch of uses for $1200 in three months.

Spenders, start your imaginations!

Monday, February 11, 2008

Stimulus Package, Part III

Last week I caught an episode of Larry King Live on CNN. Larry had on a panel that included Dave Ramsey and Robert Kiyosaki (of Rich Dad, Poor Dad fame) to discuss the stimulus package proposed by Congress. One of the first questions was something along the line of "Do you think the stimulus package is a good idea?" None of the panelists thought that mailing out a bunch of tax rebates would actually pull the economy out of recession. But all of them agreed that "Congress had to do something."

I have two objections to the "They have to do something" line of reasoning.

First, I question the whole assumption that Congress has to do anything at all. As a fiscal conservative, I believe that the government should tread lightly in interfering with the economy. Smoothing out every vagery in the unemployment rate is not what the Founding Fathers had in mind when they established the Constitution to "promote the general welfare." Making the budget deficit worse than it already is strikes me as trading short term gain for long term pain.

But let's say we accept that Congress has to "do something." They're only our elected representatives, after all. No one expects them to display enough moral courage to stand in the way of buying off the voters in an election year. However, shouldn't they at least do something that was going to work? I have yet to read or hear one commentator that approves of the proposed stimulus package. No one thinks that the current plan will have the desired effect of pulling the U.S. out of recession. So why are we doing it?

Sunday, February 3, 2008

Stimulus Package, Part II

In my last post I argued that the proposed stimulus package approved by the US House would be ineffective. First, it would do nothing to solve the structural problem in the housing and financial services industries. That problem is that falling house prices have put a large number of subprime borrowers underwater on their loans, just as those loans start to reset from their original teaser rates up to higher market rates. Lowering interest rates, as the Fed has done recently, may aleviate some of the pressure on home owners, but handing out checks to households will only delay the inevitable by one or two months. If you can't afford your mortgage, getting a short term infusion of cash defers going into default, but does not make the mortgage more affordable in the long run.

I also argued that a Keynesian stimulus would not be effective when the government was already running a massive deficit. So just what is a Keynesian stimulus, and when would it be appropriate?

John Maynard Keynes was a British economist of the early 20th century. His most influential work was published in the 1920's and 1930's. From a policy perspective, his biggest contributions were in the realm of increasing total economic demand by increasing goverment spending. The idea is that during times of reduced demand, unemployment increases. Government can start deficit spending, which will increase demand. To meet increased demand, businesses will have to hire workers, who will then have money to spend, causing other businesses to hire more workers to meet that demand. This all leads to a virtuous circle of increasing economic activity.

The metaphor most commonly used to describe this process is "priming the pump." Businesses will only borrow money when they need to expand. But governments can borrow in order to smooth our the down part of the business cycle. The goal is to keep employment levels high (after all, employees are voters as well).

But right now, we are already running a massive Federal budget deficit. Also, unemplyment is still low. So if you are already providing a hyper-Keynesian stimulus, and yet economic acitivty is still dropping, you have to look somewhere else for the solution to the problem.

So in my next post I provide some of my own modest ideas of how to get the economy out of the doldrums.