OCTOBER 8TH, 2010
By CPA SAM
Each day, we are assaulted with news stories about the level of debt Americans hold both in government and personally. Still others trumpet the fact that Americans are actually reducing their debt levels. Others are more cynical stating that debt levels are declining because of higher defaults. No one really knows of course what is going on. However, these are all macroeconomic statistics. Today, let’s take a look at you specifically. Are YOU trying to reduce your debt load and what is your motive?
In pure economic terms, debt is more acceptable in certain cases when inflation is present or the economy is growing. During times of inflation, the real value of the debt you hold is being paid back in dollars that continue to decrease in value making the overall economic cost lower to the purchaser. That is good for the debtor but really bad for the debt holder. During times of economic growth, businesses can use debt as leverage to prop up their earnings. As everyone knows, we are now in a much different time. The economy is not growing as quickly as before. Businesses and individuals who took on all that debt now have the distinct pleasure of paying it all back or defaulting.
Which brings me to my question. Why are you paying off debt? Is it simply to put yourself in a better position to borrow again when times improve? This reasoning got us into the current housing mess. We’ll buy a house now and it will increase in value and we’ll sell it and make more money and buy a bigger house…. and repeat multiple times. A better way of thinking is that your debt reduction plan can give you flexibility in the future regardless of what happens. This could lead to a more stress-free life. If you look at the fixed payments required to service your credit card debt, auto loans and lines of credit, you’ll see that you are essentially locked into long-term slavery. Think of the stress if anything abnormal happens to upset your servicing of all this debt.
It takes so long to clear the debt mess, that it would be a shame to simply dive back into it in the next economic boom cycle. What about this scenario?
- Your only payment is towards your mortgage.
- You have normal utility bills each month.
- You pay cash for everything.
- You have a savings account that contains 6 months of living expenses.
- You have life, short-term disability and long-term care insurance.
- You live within your means.
Can you see the difference in the amount of stress? Incidentally, the latter scenario is recommended by most financial consultants. There are no short cuts to this plan. You simply make sacrifices and pay back all the debt accumulated from years of overspending. There is a very pleasant side effect of cutting back on the “fluff” that we all think we need to make it in every day life. Suddenly, meals at home with the family, game nights with friends, and quiet time with your spouse become a bigger part of your life. If materialistic (selfish) thinking invaded your life to get you into debt, changing that thinking to spending time with others (giving) is a benefit of getting back out of it.
FEBRUARY 26TH, 2010
By CPA SAM
After watching the stories about the new credit card rules this week, I decided to do some digging and see exactly what options are available for those wanting to open new credit accounts. One story I heard was from a man with a long-time Macy’s credit account. He said his account is now charged interest from the day of purchase. Once he pays the balance, and if he pays on time, the interest charges are credited back to the account. That means, he will never have a zero balance. Upon visiting the Macy’s online credit application, I found another disturbing number, 24.5% interest! I think we should all pass on that one.
Next, I visited Bank of America curious about their Major League Baseball cards, Since I am a baseball fan, it would be fun to open a card showing my fan spirit. An interesting item here is that the fee for balance transfers is now 4% of the amount transferred. The interest rate is variable and goes from 12.99 to 20.99%! Apparently, the days of the old fixed rate cards are over. New card holders get anywhere from 7 to 10 months to pay off balance transfers interest free upon opening the card. After the initial opening period, further balance transfers begin accruing interest from the day they are transferred. Definitely don’t transfer unless the new percentage is less than the old card!
Many financial experts recommend that people simply quit the big banks and switch to a regional banking institution or a credit union. For an example, I went to the Desert Schools FCU website, and looked at their credit card terms. When you click around the site, it is apparent that they do not underwrite their own cards. This is important because the fees schedule and onerous terms found with Bank of America look nearly identical to the ones found with this credit union card. The big difference is the rate range. It goes from 9.99 to 17.99% which is significantly lower if you plan to carry a balance.
The next stop was to find a regional bank that offered a card. But…I could not find one. Many seem to contract with an other third-party issuer to underwrite credit card for their members if they offered them at all.
The new rules issued by the government attempted to reduce some of the most egregious acts committed by credit card issuers. Unfortunately, we all know that the vast majority of the members of Congress are not financially trained. That means that any rules they produce will stop the practices they intended to stop. However, the minds within the big banks are financially trained and very creative. The new terms received in the mail from anyone who has open credit accounts show just how little the Congressional action did to stop high fees as new ones were created.
The best advice is always to pay them off as quickly as possible. There is always some way to get ahead. When you are trying to reduce debt, simply work account by account to pay off the balances. Any sacrifices that you can make to pay off your debt faster will be well worth it in the end when you can be debt free.
OCTOBER 21ST, 2009
By CPA SAM
When an employee is hired in the United States, in most cases, the employer is required to pay a minimum amount per hour for the services of that employee. As of 7/24/09, that amount is $7.25 per hour. If that employee works 40 hours per week and 52 weeks per year, the total gross wages of a full-time minimum wage worker will be $15,080.
The IRS actually collected about $2.74 trillion in 2008 (the latest year for which data exists). For 2008 the governments minimum wage equates to$1,317,307,692.31 per hour. With a US workforce of 150 million, we pay on average $8.78 per worker, per hour to the government, the government minimum wage.
On October 16, 2009, the US Treasury Department released official figures of the national budget deficit. Keep in mind that the deficit is the amount the US Government spends beyond what it takes in. That number was an astounding $1.42 trillion. Written out that is $1,420,000,000,000. Actual spending is somewhere in the range of $4.16 trillion dollars. If we divide that by the 2080 hours that the average worker actually spends at his/her job, we see that our government spends about $2 billion per hour. If we divide that by 365 days in a typical year, we see spending of almost $12.4 billion per day.
I read a book about a year ago called “Secrets of the Temple: How the Federal Reserve Runs the Country.” This book contains a very good discussion of the economic conditions surrounding the Carter and Reagan administrations. According to the author, the Federal Reserve and Congress worked against each other as they both attempted to fix the economic crisis of the day. Because the situation was so dire with runaway inflation and economic recession, the two really needed to work together to fix the problem.
Back to the present, news reports say the Fed is looking at drafting the policy going forward of slowly removing the money used to prop up the financial system. Other news reports talk of increased Congressional spending. It sounds like these two groups are getting ready to repeat the same errors. Job growth has always lagged economic recovery. Let’s hope the policies put in place do not discourage job growth in the next recovery.
How does this apply to you? By keeping your financial house in order and spending less than you take in, you are able to better withstand the storms of economic change the those who spend everything they make plus accumulate extra debt. You never know when a health, repair or job crisis will hit. It’s best to be prepared for those events when you can.
OCTOBER 14TH, 2009
By CPA SAM
During my lunch break, I usually read news articles and opinions from various news sites. One thing that is always fascinating is the paradox of how many people want to be like the various celebrities in the news, yet how out of touch those same celebrities are with real people’s lives. So many magazines at the checkout stand in the grocery store offer “new” ways to attract men or make yourself more attractive, or drop pounds and even change your body in a few easy steps. Unfortunately, nothing in life is that easy whether it be finances, dieting or your career.
As part of a successful personal financial plan, it is important to keep your focus on your ultimate goal, getting out of debt and planning for both unforeseen problems and retirement. It is also important to ignore the temptations around you that try to get you back into your old ways of overspending. I think the current economic climate has taught many Americans that buying on credit is simply not the smart way to go regardless what everyone else is doing. What happens if you lose your job or your income is reduced? A good budget will help you work your way out of debt while still affording a few small “rewards” along the way to keep you motivated. It also provides a bit of accountability
To get started in a budget, the first thing that needs to happen is to stop reading about celebrities and fashion. They make “crazy money” as Angelina Jolie once said for doing very little. They have essentially unlimited resources that the rest of us don’t! Book after book has been written on how stuff and money simply does not bring happiness. I invite you to spend more time with friends and family. Getting to know people and making an impact in someone else’s life is a pursuit that brings lasting rewards. Soon the stuff you bought will be broken or obsolete anyway. Why bother with more of it?
Fashion houses and designers will tell us that our wardrobes all need to be refreshed each season with the latest styles. Why? Is that pair of pants any less useful now that someone else has declared it “out of style?” I know, coming from a CPA (traditionally fashion-challenged people), it’s hard to take fashion advice. Think how much extra money you could put toward paying off debt if your closet didn’t look like a department store! Wearing clothes for more than one year and dressing in classic styles can save hundreds of dollars. Think how much less stress you can have sitting on your couch watching a movie from RedBox ($1) in last year’s jeans and t-shirt with a cup of hot cocoa (6 pack from grocery store for $4). You have created a relaxing quiet evening in without worrying about how you will pay for all the new stuff you just bought.
MARCH 4TH, 2009
By CPA SAM
The IRS just released it’s taxpayer statistics for the 2006 tax year. With all the press dedicated to analyzing the new administration’s tax proposals, I thought it would be good to look at just who is paying taxes these days.
First, the average tax rate paid on all returns was 13.8%, which is slightly higher than the year before. There were 138.4 million tax returns filed that year of which 67% had some level of income tax reported. This is line 61 of the 1040, line 28 from the 1040A and line 11 of the 1040EZ form. I think if more people looked closely at how much tax is assessed for their situation, they would be stunned.
Back to the statistics, the top 1% of taxpayers paid 39.9% of the tax paid that year. The top 5% of taxpayers paid 60.1% of the total tax. The top 5% of taxpayers includes those with Adjusted Gross Income of at least $153,542. That means 95% of the taxpayers only pay 40% of the taxes on returns.
What does this mean? There is only so much money that can be squeezed from the population of taxpayers. If one takes into consideration the total Federal, Social Security, Medicare, State, Local, sales and property tax that each person in this country pays, it is truly a staggering number that in some cases could exceed 50% of income.
As I have stated before on this blog, individual consumers must find a way to live within their means. No person can continue to spend more than they take in. Eventually, they must repay the debts. Invariably, in the lives of ordinary taxpayers, we have unforeseen issues occur that require we maintain a “slush fund”. If no financial cushion is available, the average person would be forced into bankruptcy. Let’s hope our federal, state and local governments can learn this principle soon as well.
DECEMBER 31ST, 2008
By CPA SAM
Don’t you just enjoy the passing of an old year? 2008 brought many challenges from a financial perspective. Large and small corporations, retailers, stockholders, investors and regular employees all felt some pain. This post will have two major points. First, the biggest question everyone has is why did this happen. Last year, I was reading a book entitled “Secrets of the Temple: How the Federal Reserve Runs the Country” by William Greider. While the book is a bit heavy to read for most people, it does a very good job of describing the role of the Fed and the economic turmoil of the late 1970s through the 1980s. There is also some Read more »
DECEMBER 4TH, 2008
By CPA SAM
Q. I have taken a 50% hit on my 401(k) account this year because of the market contraction. I’m thinking of just pulling all the money out and investing in a rental property instead. Is this a good idea? I live in the southwest where real estate has really dropped anyway. I’m not 59.5 yet either. I am in the 35% bracket.
A. Now that is a very defeated person! Anyone who has the slightest bit of risk in their portfolio, 401(k) or not is Read more »
OCTOBER 10TH, 2008
By CPA SAM
Continuing on from where I left off yesterday, how do we become more financially free? Debt is not the new inevitable item adding to the death and taxes list.
After changing the way you think about debt (part 1) and developing a budget (part 2), you need to develop a plan. First look at Read more »
OCTOBER 9TH, 2008
By CPA SAM
In this second installment of the personal financial freedom series, I will discuss budgeting. To most people, a budget is how much money they have left to spend until the next check. This is dangerous and keeps families and individuals from finding areas where they may be wasting their hard-earned cash.
Why budget? If you admit Read more »
OCTOBER 8TH, 2008
By CPA SAM
I did not get a question on this one, however, the subject seems to be appropriate given the falling sky scenario presented by the media these days. What is a person supposed to do to be financially prepared for unknown future events? In my opinion, Read more »
