Wednesday, October 29, 2008

Our economy needs more Mormons

If you think this is going to be a post about Mitt Romney you are wrong. I am actually writing about an article on economist.com detailing the relatively healthy economy in Utah, and how that is in large part due to the Mormon way of thinking. I encourage you to read it, but if not I'll at least share with you the last paragraph that I find very amusing.

"Mormons do not come to work nursing hangovers, and they are inclined to stay put in the promised land rather than pursue better-paying jobs elsewhere. Matthew Donthnier, who is hiring for a new Procter & Gamble plant, has only one complaint about the local workforce: it can be a little difficult to persuade people to toil on Sundays."

The idea of working in the "Promised Land" when one could make so much more money elsewhere is strange indeed. What kind of crazy person would feel that way?

Tuesday, October 28, 2008

Vote for the man or the party?

The conflict continues. I've already written about why I like Obama's plans over McCain's but I still struggle.

Something needs to be done about healthcare coverage and while McCain will give help for people to buy their own insurance I do not think many in America will buy health insurance unless forced to do so. I'm still in the Obama camp on that one.

History shows me that the Democratic policy of raising taxes is not a very good one. Hoover's wonderful plan to increase the top income tax rate from 25% to 63% in 1932 sure proved to be a great solution to the depression that started 3 years earlier. Massive inflation in the 70's only came to a halt when Reagan put a stop to many of the Carter policies.

So do I vote for the specific policy I believe is better or do I go with the party that I believe has done a better job with the economy historically? The Bush administration has not done too well by me with the economy. The devaluation of the dollar during the past 8 years is not what I call good business. I don't know that a McCain administration will do any better.

In the end maybe a vote for Obama is a win/win situation. If his plans work then things are great. If they don't maybe Romney will have a better shot in 2012.

Of course there are other topics of concern to me and my views are much more inline with the democratic party when it comes to the education of my children (I throw this in here in hopes that my mother won't disown me if I vote for a democrat in a presidential election).

What to do?

Sunday, October 26, 2008

Who deserves my vote?

Never have I struggled with a presidential election like I am this year. I'm going to put aside my moral disagreements with the democratic party (sorry but abortion rights doesn't really play out in presidential politics) and discuss the two things that have the most relevance to me in this election namely; taxes and healthcare (didn't see that one coming did you?).

Healthcare:

I do not like Obama's healthcare plan because I don't believe healthcare is a right. I don't believe it is the government's job to make sure everyone is covered by paying for their healthcare, and I don't believe that I should have to pay taxes to support an expensive government plan.

I like McCain's plan but I don't think it will work. McCain claims that by taxing healthcare dollars and giving healthcare credits to American's everybody will be able to afford health insurance. If the healthy in the country use that money for catastrophic insurance because that's really all they need then the cost of full coverage will necessarily go up because only those who need it will be paying the premiums. This is a horrible idea.

In the end I do believe it is irresponsible for anyone to go without health insurance and if the government has to step in to make sure everyone get's covered then the government needs to step in. As I don't think McCain's plan will work I have to go with Obama on this one.

Taxes/Economy:

Anyone who knows me knows that I hate Robin Hood economics. I disagree completely with any plan that increases taxes in the higher tax brackets while increasing credits for lower wage earners. I also do not like the way the current administration has given so many credits to the executives and stock owners in this country. It truly is a shame that the very richest people in the country pay a lower percentage in taxes than the middle class because of capital gains and dividend tax rates.

Obama's plan will result in an increase in taxes for those making over $250,000 while giving all kinds of credits as the income goes down. He will also repeal the current capital gains and dividend tax rates and replace them with much higher rates.

McCain will decrease taxes across the board, but moreso for the higher wage earners. McCain will keep the capital gains and dividend taxes at the low rates they currently are at. Once again I like the McCain tax plan, but just like his healthcare plan I don't see how it will work. McCain's plan will not support the other plans he proposes. Whether or not you agree with the war the one thing that is certain is that it will definitely continue under a McCain presidency and it is not cheap to do so.

If I were to propose a plan it would include more taxes for capital gains and dividends as opposed to salary taxes. I would increase taxes on luxury items such as expensive cars, luxury hotel rooms, and chartered jet flights. There are obviously many more things that fit into the luxury purchase category, but by taxing these items the democrats get to tax the higher wage earners while not punishing those who are trying to save for the future. As I've said I don't like the uneven tax code, but if a person or company can afford to travel from the airport in a limo or a helicopter they can certainly pay a premium in taxes for that luxury. Of course this would mess up the whole tax system because many of these luxury items are bought by businesses and are actually used as tax write-offs. Tell me that isn't a little bit backwards?

In the end I don't think McCain's plan is wise and while I don't agree with Obama's plan in principle I don't think it will kill the economy. On a personal level I don't plan to be making $250,000 in salary anytime in the near (or distant) future. My investing approach involves buying individual stocks for the long term (no capital gains) without worrying about a fixed income at the present time (few dividends). My only mutual funds are held in my 401k (tax deferred). Obama's plan actually puts more money back into my pocket. As much as I hate it I have to go with Obama again on this one.

I don't consider myself a dyed-in-the-wool republican, but I have always voted along party lines. Should I feel bad that I am seriously considering voting for the senator from Illinois?

Sunday, October 19, 2008

Finance 101

I'm frustrated with the presidential campaign. I don't think either candidate has an effective plan for the future. I don't believe either of them will actually be able to lower taxes as they both promise and you know how I stand on the plans anyway. I don't want to dwell on it tonight so I'm going to post about the first lesson I'm going to teach in my future finance class.

Any finance class has to have some semblance of order, but before that there has to be a bit of excitement. Finance is nothing if not exciting so my first lesson will be about the future value of an investment, more specifically, the Future Value equation.

FV = PV*(1+i)^t

Big deal right? This equation is learned in Algebra class in middle school or high school and the wow factor lasts about 15 minutes. What happens when we apply the equation to a real life scenario regarding automobile purchases?

Let's take the example of a $15000 car bought with a loan at 6.6% over 5 years. That comes to a monthly payment of $295. The resultant cost of the car is $17700. Now let's say that instead of a $15000 car we decide to buy a $10000 car resulting in a monthly payment of 195. The resultant cost of the car is $11700. $1000 savings over 5 years in interest payments big deal, but if the $100 per month is invested in a mutual fund with an average gain of 10% per year the resultant sum after 5 years is $8000. In either scenario the car is paid off in 5 years and the layout in cash is $17700.

I'm going to say that the person buying this car is 22 years old so when the car is paid off the purchaser is now 27. Let's say that the $8000 was invested in an IRA and no further additions are made to the balance following the initial 5 year layout. At age 59 the balance is just shy of $200,000. If, however, the $100 monthly payment is continued to age 59 the balance becomes a not too shaby $472,187.

Just to take it one step further let's say that Joe Plumber continues to buy a new car every five years. He continues to pay $295 in monthly payments and his cars get progressively more expensive as he is able to place some money down from the sale of the previous car. At age 62 (used for calculation purposes) Joe Plumber has a pretty nice car free and clear.

Joe's brother Nate decides to eliminate his debt and at the end of 5 years he uses the sale of his car plus the $8000 saved to buy his next car with cash. At this point he places the whole of his monthly $295 into investments. At the end of 5 years his investment balance is $22843. He then takes $15000 to buy a new car with cash, but continues the payments to his investment account. After 5 more years the balance is $35748. Increasing the price of the new car purchase by $5000 every 5 years still yields a balance of $245,000 at age 62. If the price of the new car purchase is capped at $20,000 the investment account grows to an amount of $319,000 at age 62. Finally if the car purchase is pushed to 7 years instead of 5 the amount at age 62 grows to $481,786.

So that's half a million dollars saved just by buying slightly less expensive cars with cash as opposed to buying them on credit all thanks to the future value of money.

Now we get a little crazy, but to illustrate the equation we must continue.

Next we have Joe's other brother Tyson, who decides to bike to work and borrow Joe's car when he goes out of town. He places all of his monthly $295 into investments from the beginning. At age 59 Tyson decides to buy a $300,000 Ferrari 599 and be happy with the left over 1.1 million dollars still in his account.

Tyson's wife Cheryl doesn't have quite as much discretionary income as her husband so she only has $100 per month to invest. Having been born in Omaha, Nebraska she is a fan of Warren Buffet and decides to put her money into Berkshire Hathaway giving her an annual return of 21.1% (average annual gain from 1965 to 2007). She's not interested in cars, but has her eye on a 6.5 million dollar villa on the coast so she buys it with half of her $13 million at age 59. If only she had gotten Tyson to put his money into Berkshire he could be sitting on a ferrari 599 and $39 million. Oh yeah, none of those gains are taxed until sold because Berkshire doesn't give a dividend.

Finally we have Jonny who took the $8000 from our original example and put it all in Berkshire. Jonny didn't invest another penny his whole life yet 32 years later his 21.1% interest turned that 8 grand into $6.5 million.

I'm probably going to get some calls from angry parents after this lecture, but it will still be fun.

Friday, October 10, 2008

Optimism in Recession.

Since September 26 the Dow has lost 25%. This week the Dow dropped 17%. The S&P hasn't been this low since April 2003 and that was following the correction from the Internet bubble. Previous to that bubble we have to go back to May of 1997 to see the S&P this low. Eleven years of gains have been wiped out just like that and yet I find myself incredibly positive about the situation.

I began reading and learning about finance and the market shortly after returning from my mission in 1998. Since that time I have been of the belief that the market was overvalued. I read over and over again the statements by the bulls on wallstreet saying that the markets had changed and historical valuations no longer applied in our current market. I didn't believe it then and I don't believe it now. I thought the recovery from the internet bubble was too much too soon.

Today I feel like the market is finally properly valued. Does that mean I think we have hit the bottom, not necessarily. I do believe it is a wise time to start putting money into the market. Stocks may continue to fall, but many great companies are falling along with the rest of the market making them great buys now. I'm seeing P/E ratios under 10 for companies that have increased their earnings.

If you are worried about getting back into the market too early I would suggest investing through ING direct with a sharebuilder account. The great thing about sharebuilder accounts is that you have the option to create an investment plan that automatically buys a certain amount of your specified stocks or funds the the Tuesday of your choice (or every Tuesday should you choose to do so). The plan takes the impulsiveness out of investing, and while dollar cost averaging is not the most lucrative investment strategy it is a tried and true way of building wealth.

Wednesday, October 8, 2008

Politics and Money

I watched the Presidential debate last night. I wasn't particularly impressed with either candidate, though I was slightly more disgusted by Obama's rhetoric. I have come to the conclusion that Republicans and Democrats alike are idiots when it comes to fixing the economy.

Democrats think the best way to bolster the country is to steal from the rich and give to the poor (Robin Hoodenomics). Could somebody explain to me how this is a good idea. There is a lot of privilege and a lot of poverty in this country that is a result of where, when and to whom one is born, but there are also a lot of people who work their way up and down in society and the Democratic views of leveling the playing field will never work when they are taking dirt from the winning side of the field.

Republicans think that giving money to the wealthy is the way to go. Trickle down economics was all the rage in the 80s. The theory goes that these people invest their time and money into business, leading to more jobs across the board and thus more production and money. Those who are not working don't necessarily benefit, but who cares, they don't really deserve anything anyway right? That's not the only drawback to the theory. There is also the problem of unethical behavior at the top. Wow, isn't that what's happening right now Jake? Ding, Ding, Ding.

So if neither political party is right what do we need? What we need is something that the American public will never accept. We need to be held accountable. The poor in the country need to stop depending on handouts, and the rich in the country need to take care of those who cannot take care of themselves without being forced to do so. Politicians need to stop catering to the wants of the nation and realize that as a collective group we are idiots (as opposed to the politicians who are geniuses).

When the average American citizen spends more than he makes in a year we've got a problem and Washington needs to stop blowing smoke you know where and tell it like it is. If the senator from Alaska can neglect to report $250 grand in gifts, while, at the same time, telling pharmceutical companies that they can no longer provide pens to physicians, then that same senator can tell the American public to stop spending money they don't have even though the government does this as the sun rises in the morning.

I disagree with Senator Obama when he says reform needs to start in Washington. As the country goes Washington will go also. It is not the other way around.

One final thought; why is finance not taught in schools? I think a basic finance class should be required of every high school student in the nation. I find finance much more important in my day to day life than many of the other classes I was required to take. I had to take 6 terms of art for heaven's sake. Now don't get me wrong I use those Acapella skills every week in church and I do enjoy looking at the beautiful pot I made in ceramics, but seriously a year and a half of art? Wouldn't high school seniors be a little better prepared to handle all the credit they are offered (or were offered a month ago) when they turn 18 if they had just a little bit of financial education?*


*My not-so-secret dream is that I can convince the school district in Cedar to allow me to teach a finance class at Cedar High School. I don't want to go back to school to get a secondary education degree, but you never know what will happen in the next 20 years.

Monday, October 6, 2008

Financial Freedom

What is financial freedom? The pop culture definition of financial freedom seems to be one of freedom to do whatever one wants without financial repercussion. That definition is variable based on what one wants to do. I like things to be a little more concrete so I have come up with my own definition. For me, financial freedom is the accumulation of enough wealth to satisfy all my needs from today until the day I die. This definition certainly will not fit everyone, but it makes sense to me.

As you might assume I also have a plan to achieve financial freedom that has evolved over the years. Rather than bore you with the details of the plan up to this point in my life I will share the details of the plan from this point on (I'll bore you with the details of the plan up to this point at a future date).

The wealth necessary to satisfy my needs (when I say my needs, I include the needs of my wife and kids of course) for the next 50+ years isn't going to appear in the next month, the next year, or even the next decade, so I have set up some long term rules for what to do with my income. Here are those rules:

1. Be generous with charitable contributions.

2. Contribute the max to my work retirement plan.

3. Budget to live below my means. I'm a believer in strict budgeting (before redbox came along the video rental category was $4.04 per month because that's how much it cost to rent one video from Hollywood Video).

4. Make purchases and pay bills with rewards credit cards.
4a. Keep credit card purchases within budget.
4b. Pay off full credit card balance each month.
(exception to rule 4: If purchases or bills charge a fee to use a credit card then use checks)

5. Don't carry cash

6. Buy used cars.
6a. Pay cash for used cars.

7. Invest wisely
7a. If you can't devote at least a few hours a month to investment research then it is imperative to hire a financial advisor.

8. Hire a good tax accountant.

9. Purchase adequate insurance.

10. Avoid impulse decisions when dealing with money.

11. Track all money movement with financial software.
11a Review monthly and yearly reports.

Obviously most of my rules have some detail within them (budget for example) and I may post on them individually in more detail at a future (that's fodder for 11 future posts right there).

Feel free to add any of your own rules, but know that if I don't agree with them I will probably tell you why (maybe even in another post).

Sunday, October 5, 2008

Do we need universal healthcare? part 2

Disclaimer: I just reread this post after a night of sleep and I've got to say this is quite possibly the worst post I have ever made. The grammar is difficult to read. The arguments are not really arguments at all. There is no flow to the post. I may try to improve on my views at some point in the future, but that time is not now. So, read at your own peril.

Anyone who thinks government healthcare is a slam dunk needs spend a little more time looking at medicare and medicaid (that means you Hillary). Why are there so many doctors in this country that don't accept medicare patients? Many physicians who do see medicare patients stop accepting new medicare patients when they build their practice up to a satisfactory level. The rules and regulations required by medicare are as bad as the tax code and the reimbursement is laughable at times.

Like it or not America is a country of capitalism (though we'll see what happens when President Obama is calling the shots), and health insurance is big business. There's no way the government can scrap the current system. Shareholders of these giant companies wouldn't allow it. If it were to somehow come to pass the problems with a government run system are not limited to the exorbitant cost to the American taxpayer. Government run healthcare is like anything else that is run by the government; slow, inefficient, and costly.

The truth is that America currently has the best healthcare system in the world. Can it be improved? Sure. Are there too many uninsured people in this country? Absolutely. Is that the government's problem? I don't know. When did personal accountability become a thing of the past? I don't recall reading about the founding fathers speaking of the unalienable rights of life, liberty, and the pursuit of happiness as long as the government can provide healthcare for all citizens.

I think the healthcare system in America could be restructured to make it more affordable for everyone, but I'm not sure we can come together to make the necessary changes. The truth is that lawmakers can affect the cost of healthcare. Tort reform can cut down on malpractice costs, which affect more than the physicians paying for malpractice insurance. Our president could have pushed to give medicare the right to negotiate with pharmaceutical companies for medications the way they are allowed to negotiate with physicians for everything else (reimburse amounts are more of a decree than a negotiation). Medicare could revamp the current reimbursement system using some system of order that makes sense rather than the current system where new procedures are billed based on whatever the physician decides he should be paid.

If you can tell me why physician reimbursement for an emergency appendectomy by medicare at about $600, while the cost to an uninsured patient is closer to 3 grand you are well on your way to understanding the problems with medicare. On the note of reimbursement, I have yet to find anyone who understands why that emergency procedure only nets the physician $600 while a spinal surgeon can fuse a few vertebra and bill several thousand dollars. Sure some of that is the increased malpractice for neurosurgeons, but seriously.

I think we need a better system and while I don't have a solution but I do have some ideas. I think there should be a significant healthcare tax placed on cigarettes. The amount of medical conditions that are caused by smoking is astounding. I think gym memberships should be medicare-tax deductible. I think adults should be required by law to have catastrophic health insurance much like they are required to have auto insurance. I think that if the insurance industry and the government decide to pay physicians and hospitals based on the success of their interventions (pay for performance) they should also charge the insured if they fail to adhere to the medical plan agreed to by the patient and the healthcare team. I think the general public needs to be informed of the cost of keeping a loved one alive on life support at the end of life, and insurance companies need to do a better job of covering the grief support for those people who are making the decisions at the end of life.

I've got other thoughts that will most likely be shared in a future post but I've rambled on too long tonight (and the Dodgers just won game 3 so I'm going to bed now).

Wednesday, October 1, 2008

$7500 Tax Credit

As a first time home buyer I was looking at the mortgage rescue bill signed by President Bush in August and I came across the $7500 tax credit. I had heard about this $7500 government loan, but I didn't really understand it until now. Like all tax code it is somewhat tricky and could lead to some pitfalls.

Here's what it entails. A first time home buyer who closes on a home between April 9, 2008 and July 1, 2009 is eligible for a tax "credit" of 10% of the purchase price up to a maximum of $7500. The catch is that the credit is not applied at the time of the purchase, it is claimed when your taxes are filed, therefore not helping with closing costs or a down payment as was the intent. The other caveat is that this isn't a $7500 credit at all. In actuality it is an interest free loan that the borrower will begin repaying 2 years after the original claim in the form of $500 in income taxes for the next 15 years. The loan is to be repaid in full upon sale of the house if any capital gain is realized. If you do not realize a profit on the sale of your house the loan is forgiven (forgiven on death as well).

In the end I am looking forward to getting this massive tax return this year as it has no downside for us as long as it is managed correctly. We will most likely take the $7500, sock it into an interest bearing account and leave it be for the next 3 years until we sell our house. At which time we will pay back whatever is left on the loan (assuming we make a profit on the sale of our house).

As always I feel a need to point out the pitfalls of the bill. First, just like anything else in tax code the loan is reduced for higher wage earners and disappears altogether at $95000 for singles and $170000 for married (have I written about how much I love Robin Hoodenomics?). The real problem lies in the way the loan is packaged. I think the majority of Americans who are eligible for this benefit will take it and they will find themselves with an extra $7500 in their tax return. The money will be spent without reading the fine print and the individuals will then be stuck with an extra $500 bill on their taxes for the next 15 years.

Once again the greatest beneficiary of this bill is the tax accountant. Maybe I should take a sabatical and let Melissa go back to work.