Thursday, September 15, 2011

Its been a long time, but we're back....Talking about taxes lesson 1

Well it has been about three months since the last post and I am sorry about that. Life sped up and may never slow down. With a new job and starting grad school the posts will surely be fewer and further between but we will try to keep them coming as we can.

With that, lets talk about the most exciting topic ever...TAXES. Taxes are no fun. It sucks paying money to the goverment. Even if you benefit from every program in return, its easier to let the rich pick up the tab. Its even worse preparing your own tax filing every year. Or you could just pay someone to do it for you. But if you take some time to understand some of the relevant tax code, you can apply it to maximize your deductions and credits and minimize your tax liability.

Taking a step back, when you owe the fed money, its a tax liability. You owe them for income generated over the year. This could be from your salary, business, stocks, interest income, etc. (there are a few sources of income not taxed but we'll either talk about that later or not worry about it).

You can offset this income with either 1.) Tax Deductions (lowering your tax basis - or the amount you pay taxes on) or 2.) Tax Credits (a dollar for dollar reduction of your tax liability). A quick sidenote - tax credits are better than tax deductions. If you get a $500 tax credit, you save $500 on your taxes. If you get a $500 tax deduction, you saving your marginal tax rate (lets say 25%) times the deduction or $125. See the difference.

When computing your taxes, you take your taxable revenue or income and subtract your deductions to get a "tax basis". You then apply this to the marginal tax rates to come up with your tax liability. You can then reduce this by all available credits to come up with what you owe the government.

Something important to keep in mind. Federal income taxes are progressive and are based on a marginal tax rate. This means richer peeps pay more dough that poorer folk (progressive). A marginal tax means that your tax rate is based on the next dollar of income.  Made up Example: If you made $100,000 then the first $10,000 may not be taxed, from $10,001 - $25,000 may be taxed at 10%, $25,001 - $50,000 may be taxed at 15% and $50,001 - $125,000 may be taxed at 20% (these rates are fictitious). This means that your MARGINAL tax rate is 20% because if you made $100,001 that next dollar would be taxed at the 20% rate. If you made $125,001 your marginal tax rate would be whatever the next tax bracket rate is set at.

As a result, when looking at tax increases or decreases you are typically going to calculate the net tax effect by your current tax bracket because that is the rate that is going to be applied to the marginal change in income or deductions.

So i'm going to stop there and just bitch about how much I hate our tax system. Why is it this difficult? The marginal tax rate was developed so that the rich paid more or their "fair share".  Now you have 50% of the population paying $0 AT ALL, so for them, no taxes must be their fair share. Way to have skin in the game and contribute to your country. Bunch of leaches. Then you have all these crazy rich guys (named Warren Buffett) saying the rich should pay more because they can. Well then Mr. Buffett, if taxes are such a noble cause, why not retract the commitment you made to the Gates Foundation for $20 billion dollars or however much it was and send that check into the Federal Government (Attn: Mr. Timothy Geitner).

I'm a big proponent of a consumption tax, because this too is progressive, but it would be based on what you spend not on what you make. You want a nice yacht, pay a tax. Send your kids to a better private school, pay a tax. Invest that money into your business or the economy...no tax. Pay the government for what you consume/use and no more.

And I am perfectly aware that property tax is not a federal tax, but why do I need to pay taxes on the same asset over and over and over? Your federal and state income tax and your sales tax are all one time taxes on your income or expenditures. But that damned property tax kicks you in the A$$ year after year for the SAME EXACT THING. To me, that's criminal.

During the next discussion of taxes, we'll examine ways to use the current system to pay less taxes and save more of your hard earned (well maybe hard earned) dollars.

Sincerely,

Coco

Wednesday, July 20, 2011

I HATE fees...

Here is an article on fees built into purchases you make that just make you want to strangle someone. This is one of my pet peeves and when I see these things pop up I usually try to run as fast as I can the other way.

http://finance.yahoo.com/banking-budgeting/article/113142/most-annoying-fees-moneytalks?mod=bb-budgeting

Sincerely,

Coco

Sunday, July 17, 2011

Diversification

The key to managing your savings is diversification. Diversification is the spreading of you assets to ensure safety and security of the entire portfolio from the up and downs experienced in each asset class. In short, diversification is the thinning out of the peak and valley nature of certain investments. Diversification does not mean boring. It does not mean buying only stable small gaining assets. Instead, its the avoidance of putting all your eggs in one basket. At the end of the day, you diversify your assets so you have simple peace of mind that nothing will cause a dramatic change in your portfolio, that your savings are safe.

In my opinion, diversification should take place at each level of your savings. Its not just about investing in different stocks, its the spreading your assets in each pool of investments and should end up looking like a pyramid.

So think of a hypothetical amount of NET Savings (all your assets less all your liabilities). This amount of money should be spread out over several investment devices. I'm not going to stipulate at what percentage this breakout should be, but the more even you keep it, the more insulation you should typically have. If your savings are all in your house's equity and the value of your house drops 25%, well you just took a hickey to your whole portfolio. If you put it all into stocks and the market has a sudden drop of 5%, that is a lot of wealth to lose in one day. So think about all these different savings options.

1. Real Estate - This doesn't have to be just your house. You like fixing up houses? Consider a rental property. You like hunting and fishing, think about a ranch of sorts. You can also invest in REITs (Real Estate Investment Trusts) which is like investing in a stock of real estate type assets that pay a "dividend"  based on the earnings of the trust assets on a regular basis.

2. Cash - I'm not a big proponent of sitting on a lot of cash as you risk inflation diminishing the value of your paper and earns essentially nothing, but keeping cash on hand for a rainy day is always a good strategy as it is your most liquid asset. Also think about splitting it over two banking institutions on the very off chance something happens to one of them. The FDIC (a government entity) insures your deposits up to a certain amount (I believe its a quarter of a million dollars) but why even worry about it. If you have cash sitting there, maybe you split it into different currencies. Think the dollar will tank with all this debt we have? Well, take some of that cash and put it into Euro's, Yen or Canadian Dollars. Should you need the cash its easily convertable and you insulated this asset class from significant devaluation.

3. Bonds - There are tons of bond types out there from US Treasuries, to municipal and corporate bonds. They each provide a different return on investment, tax strategies and relative safety which we can talk about more later, but at the end of the day, bonds are designed to pay you an interest rate for lending your money. It typically brings a lower return than you would find in other investment classes, but provides relatively more safety. One theory is that the closer you get to retirement, the more assets you should take from riskier stock assets and put more into "safer" cash flow earning bonds. Within bonds, you should diversify over different bond types should any one default (not pay) on their bonds.

4. Commodities - Commodities can be both tangible and intangible assets. Buy some gold coins or silver bars and stick them in a safe. Or buy future contracts on barrels of oil. The going theory with commodities are they are a safe haven during times of inflation as they are priced in currency prices (value of the dollar goes down, you lose value in your cash, but the price of gold goes up) so they are a good hedge against inflation. Additionally, tangible assets give you some comfort during extreme liquidity crises. A commodity is just a good that could be bought and sold and can range from cotton to pork bellies to copper to gasoline. At the end of the day I believe the most positive reason for owning commodities is to protect from inflation.

5. Stocks - Most people think of this first when you hear someone talk about investments. There are countless strategies to own stock. You can buy a share in a single company or you could buy a share in a mutual fund which is a grouping of many stocks. When it comes to diversifying your stock portfolio, my only recommendation is that you purchase several different companies or a few different funds and you focus on multiple different industries. For example, you are not really diversifying well if you buy five different stocks or 3 different funds, but they are all financial institutions. Think about spreading the wealth over several groups such as consumer staples, defense companies, health care, etc.

There is no right answer when it comes to diversifying your assets. There are many more investment opportunities than those listed but the point is you should mix it up a little bit. Spend some time to understand the pros and cons of each class and then proactively develop and execute a plan to diversify over several investment tools. At the end of the day you want to be able to sleep easy knowing that your savings are safeguarded to the best of your ability. Additionally, in taking part in this activity on a regular basis, it allows you to take stock (no pun intended) of your portfolio and act as a catalyst for your continued task of building your wealth.

Sincerely,

Coco

Sunday, July 10, 2011

Do things your self

When I was growing up I think my family violated every child labor law on the books. I spent the majority of my youth doing chores and yard work (when I wasn't playing with Teenage Mutant Ninja Turtles or my Star Wars action figures). I would wash the cars, trim trees, pick up dead oranges (we had sixty orange trees in our back yard), do laundry and help mop the floors, spray weed killer and help with any other house maintenance. I could have used an "etc." for that last line, but I really wanted to stress the nature of many of my weekends - they sucked. At the time I just wanted to hang out with the neighborhood friends or play some computer games (this was pre-puberty so girls weren't really on the radar).

After having graduated from college and living by my own means, however, all those torturous things turned out to be a great lesson on how to do things your self. Each one of those tasks my family could have afforded to pay someone else to do. But like everything in life, there is always an opportunity cost and you have to manage your priorities. While back then I would have easily shifted my priorities to watching X-Men cartoons on Saturday morning, it was clear to see that my parents valued my sheer misery.

Looking at my life now, there are so many things I could (and sometimes do) pay others to do. Much of that comes with home ownership, but the point is that we all can be more self sufficient. Take for example, washing your car. For 25-30 minutes of work you can probably do it yourself at home or take your car to a self-wash car wash. Either way is going to cost you about $4 or $5 but more often than not, your car will look even better because you tend to put more pride into your things than others do. If you factor in the time it takes to drive your car to a car wash and wait for a team of guys to wash it for you, you are really only actually saving maybe five minutes. Sure you avoided manual labor, but that time is still shot and you just spent $20.

Another example is simple home repairs. I'm no handy man by any means, but I can spot things I can do around the house myself. Recently a put in very simple flooring in part of my attic. It took maybe a FULL day of work though I spread it over several different times. To do the same work, I had received a quote from a contractor for over $500 dollars. When we first moved in I painted the room in our house we wanted to change colors. This was a fun activity for my wife and I to do together (I still got stuck doing it myself) and though painting can take you a lot longer than a pro, again you can save hundreds of dollars. Its simple, time consuming work that involves patience and effort, but you CAN do it your self. There are many other types of home repairs that may be needed maintenance or could be just sprucing up your home and adding value (like changing your door hardware or touching up dents in  your wall.)

At some point I really would like to have maid service. If only once or twice a month, it is not terribly expensive and would save a lot of time. However, that time is not now. With our smaller sized townhouse, it is not difficult for my wife and I to knock out most of the household chores (laundry, vacuuming, dishes, cleaning toilets, etc.) in a few hours on a Saturday. My mother lives in a house four times our size and still maintains it herself. Again its a simple question of what is that saved money worth to you.

Some other expenses that could be cut out:
1. Hair cuts (only recommended for simple dews. My dad used to cut my hair and I looked 7 until I went off to college. But it is easy to buzz someone)
2. Washing your own dogs
3. Ironing your own clothes instead of the cleaners (I have to be honest and note that this is my big pet peeve and one of the only areas I splurge on expenses)
4. Changing your own car oil, air filters, tires (basic car maintenance)
5. Cooking at home (spend a little time and cook at home a few nights a week, it saves a ton of money and you usually eat a lot healthier)


The point is that you can control a number of expenses in your daily life by simply putting in the effort. Most people value their time far too highly. I myself seem to piddle away half of my free time on random nonsense whenever I find it. By sucking it up and doing some of less fun but easier tasks in life yourself, you can really make room in your budget to do more substantial and meaningful things with your free time in the future. I challenge you to sit down and calculate how much you spend on these types of things each month or year and then make a list of what you could have done had you saved that money. You could invest it!

Sincerely,

Coco

Wednesday, July 6, 2011

I Love this Guy

As I have included a link at the bottom of the blog for Yahoo Finance Breakout, here is their newest episode.

http://finance.yahoo.com/blogs/breakout/purple-crayon-save-world-120947133.html

I really enjoy the fresh points made by Jeff Macke and his unending wit is superbly entertaining. He's often one of my more trusted points for info because his level-headedness is a great compass to have when dealing the ebb and flow of these high tide markets. On top of that, he is a Jim Kramer type that I can actually stand listening to for more than two minutes.

I stongly recommend watching these clips on a frequent basis if you have any desire to understand the market forces at work on any particular day or week.

Sincerely,

Coco

Tuesday, July 5, 2011

Who can afford to pay more taxes?

A few days ago, one of my favorite readers sent me a script of the following video that I have attached below, which I read and was quite interested about.

http://www.youtube.com/watch?v=FAtJaJf1mUI

Its Ben Stein, our favorite professor, clear eyes, and game show host ever squaring off against Laura Ingraham who was filling in for Bill O'Rielly.

I got pissed at both and here's why. Lauara Ingraham, or FoxNews's stance rather, is that spending cuts are the key to lowering the deficit and no tax increases are necessary. In raising taxes, you will stymie economic growth and consumer spending and that it's only in lowering taxes that will get people to spend again and increase economic conditions. Ben Stein goes on a tear at how the statistical data for this is hogwash...no...lets say crap and that those who are preaching this, while they may or may not be correct are simply pulling it out their A$$es. I've personally looked at the statistical and historical data he mentions and he is in fact correct. Moreover, he stresses that while he doesn't want to see taxes raised, he feels its the only way to lower the deficit enough, that budget cuts simply won't be enough. Again, I agree with Ben.

If you follow the stock market at all, you may have noticed that as we pulled out of the financial crisis, many companies increased their reported earnings by slashing costs and expenses, in turn increasing their net income. This was wonderful for a few quarters as analysts saw the belt tightening as the only ray of hope in a dismally clouded world. However, as time passed, this was not enough to protect stock values. At the end of the day, investors wanted to see revenue growth as the catalyst to better bottom lines. The top line shows the health of the business. The same is true for the government. No matter how much they slash, they can't cut enough to save us from an increasing deficit. Over several posts, I've talked about the drain entitlements are on this country. You can't just throw them in the trash overnight, people (the majority being seniors) depend on these services. Additionally, we've also discussed social demographics and how that can effect the economic state. With the baby boomers entering retirement, you are going to see another even larger strain on entitlements and social welfare programs. As a result, the government HAS to increase its revenue. Even if you cut spending and balance the budget today, you still need additional revenue to then pay off most of the...well...um....$14.5 TRILLION in debt and the $114 TRILLION in unfunded liabilities related to entitlements. To increase the top line, the government could sell federal lands and buildings (Yellowstone is overrated), supply arms to growing third world countries (because everyone wanted to play soldier as a kid) or they could RAISE TAXES.

Now I strongly believe that before you can raise taxes on hard working individuals, you have to have a HUGE show of good faith by balancing your budget, by making the tough choices, by sacrificing political ends to do the right things for the nation. This entire blog has been devoted to showing the need for prioritizing and finding a happy budget. The government needs to do this before I'd be happy to contribute a little more for the good of the nation.

On the flip side, what kills me is how everyone in favor of raising taxes thinks they need to target the wealthy. This is where I disagree with Ben Stein.

Per http://www.taxfoundation.org/news/show/250.html "The top-earning 5 percent of taxpayers (AGI over $159,619), however, still paid far more than the bottom 95 percent. The top 5 percent earned 34.7 percent of the nation's adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes." The richest 5% of America may make 34.7% of the wealth but pay almost 60% of the taxes. AND YOU WANT TO TAX THEM MORE? Where goes the incentive of working hard, going to school, saving, entrepreneurship, business ownership? Everyone keeps saying how the rich need to pay more, that tax loopholes need to be closed for big business. Why is no one asking "Why doesn't everyone pay a fair share?"

As Shakespeare's Shylock from The Merchant of Venice notes "If you prick us, do we not bleed?
If you tickle us, do we not laugh? If you poison us,
do we not die? And if you wrong us, shall we not revenge?
If we are like you in the rest, we will resemble you in that." (Yes, I know this is the famous monologue of a persecuted Jew, but stay with me here)

So why is it that 50% pay NOTHING in taxes in this country? http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1 You answer me that and we can talk taxing the rich. Because I contend that these people drive the same roads, go to the same schools, drink the same water, are protected by the same military and actually consume more in entitlement spending. So how is it that nearly 75 MILLION tax returns pay $0. I'm not talking about having more withheld over the year from your paycheck and getting a refund, I'm talking about not being charged a dime. Actually, getting money for nothing. Not a refund, just a check to live.

The wealth gap "fairness" was SUPPOSED to be addressed by make our tax system progressive. That means, you make more, you pay a higher rate, you get taxed at a higher tax bracket. You make less, they take a smaller cut. But you were still supposed to pay SOMETHING. You were still supposed to have skin in the game, be a contributing member of society, a "net positive". But now that's changed. Now almost 50% of taxpayers pay nothing. But we still talk about taxing the "rich" their fair share. They can afford it. I'm not even in that group and I think its a bunch of BS.

You talk to me about THOSE inequities, closing THOSE loopholes and then we can talk about raising taxes my friends.

Sincerely,

Coco

Wednesday, June 29, 2011

A week off

So for a little vacation R&R down in the Dominican Republic and finishing up the old job before moving to the new one, we're taking a little break to get all other affairs in order. Here are a couple of posts I thought were interesting and feel free to go explore past posts if you missed any.

This is about 401k's. I've received a number of questions about 401k's and will expand upon this, but here is all the basics about the retirement savings plan in a good quick read for you to become more informed.
http://beginnersinvest.about.com/od/401k/a/aa122104a.htm

This is about refinancing mistakes. I'm a huge proponent to refinancing your house if you can find a big enough spread between your current rate and the quoted APR's and plan on staying long enough in your home to make it worthwhile. Rates are incredibly low but won't be here forever. But there are some pitfalls, so take a look. I will have a post on this next week with the loan amortization schedule I promised and talk about this more in depth.
http://finance.yahoo.com/loans/article/112995/refi-blunders-to-avoid-bankrate?mod=series-m-article-b

Baby steps are the first steps. A little can go a long ways. Don't stop here but here is some encouragement to get started.
http://finance.yahoo.com/news/Why-Small-Retirement-Savings-investopedia-2593190614.html?x=0

Have a great long weekend and wonderful 4th of July.


Sincerely,

Coco

Friday, June 24, 2011

A joke for you

I was recently reminded of a cute old joke that I had heard. While it doesn't fit 100% in this situation, its how I feel about finances and expenses as a whole. It goes:

There was a priest, an imam and a rabbi walking along a path together. After a while they came across a small chest filled with gold coins. Baffled and with no one in sight they thought what they would do with all this money.

The priest said "this is a gift from God and as such we should give the Lord an offering. I suggest we draw a big circle, throw the money as high in the air as possible and when it falls, whatever falls inside the circle we leave and everything on the outside we keep."

The imam then suggested "well clearly this is an blessing and we should make an offering, but I believe we should draw a big circle, throw the money as far into the air as possible and when it falls, whatever falls outside the circle we leave and everything on the inside, we keep."

They thought about this when the rabbi then spoke "undoubtebly this is God's grace and we should as servants and stewards give thanks and tithe. Therefore, I propose we draw a big circle, take the money and throw it as high in the air as we can, and whatever does not fall to the ground, the Lord keeps."

Happy Friday.

Sincerly,

Coco

Thursday, June 23, 2011

Could Big Oil and Auto join forces?

There has been a nudging over the last decade or so to decrease the use of foreign oil and increase the use of cleaner emitting alternative fuels. While I'm not one to fully embrace the notion that our fuel consumption is going to cause drastic fluctuations in global temperatures, I am a proponent in limiting our dependence of natural resources from areas of the world that aren't our strongest allies. The debate has been endless, deep in thought, superficial in realistic progress and the absurdity of the political brothel that has developed fills a room with foul odors and ill wills at the mere thought. In recent times, with the increase in global crude prices (especially BRENT) and added pressure on car manufactures to produce more fuel efficient vehicles (though not very well supported by consumers on any consistent basis) perhaps now is the perfect time to align two of the behemoths of the industrial sectors to kill a flock of birds with one stone (which in itself could start an ecological disaster that only Al Gore could predict).

This may not be an original thought, but as I have not read it myself, here we go.

In recent history, new technology, in the form of hydraulic fracturing or "fracking" (you can read more @ http://en.wikipedia.org/wiki/Hydraulic_fracturing) has opened the door to originally unattainable sources of crude oil AND natural gas. Recent estimates that I have read say that there is enough natural gas now attainable to fuel the United States for 120 years.

Natural gas, along with coal, is the foundation for the majority of power plants in the United States. Natural gas alone provides 24% of our total energy needs ( see http://needtoknow.nas.edu/energy/energy-sources/fossil-fuels/natural-gas.php for further info).

On the auto industry front, the only real headway that has been made in terms of fuel efficient vehicles that have found traction with the consumer are hybrids and electric vehicles. This ethanol stuff is a bunch of BS that is only alive because of government subsidies and the fact that Iowa (which grows a lot of corn) is the first state to hold their primary (or caucus in this case) for presidential elections (see the correlation).

Some of the main arguments against hybrid or electric vehicles are that:

1. The battery technology hasn't advanced far enough to store enough charge without needed to always plug your car in.
2. You have to throw the batteries away eventually which is an environmental hazard in itself
3. It takes some energy source to actually charge the batteries, plugging your car into a wall outlet doesn't just come up with magic energy, so where do you get this from?
I have no insight on #1&2...just improve this technology...do it now. That's an order.

As far as number 3, Natural Gas is a clean burning energy source, and its cheaper than oil. Actually, natural gas prices have been depressed for some time now. With all of the found reserves now able to be tapped through fracking, there is "the potential" for a great depression in the price of natural gas as supply could skyrocket with no change on the demand side.

So what if Big Oil founded some sort of joint venture with the Auto Companies to build more natural gas power plants to provide additional energy to fill the batteries that power hybrids and electric vehicles, in turn causing demand to rise as you've found a new outlet for demand?

In turn, oil prices and subsequently gas prices drop as the demand for crude products ease which help with the sale of vehicles in the U.S.

The combined effect is most noticeably, the creation of greater natural gas infrastructure for an area of society that does not currently use it that much...TRANSPORTATION. The end result is the US imports less oil, and the cost of oil drops saving money at the pumps. Big oil can start fracking more creating jobs at home and the auto industry can have a clear direction in moving to the hybrid/electric car model and can thus lower their costs with increased economies of scale of production. Farm subsidies for ethanol can be slashed and federal deficits reduced. The only losers are the corn producers in Iowa.

Thoughts?


Sincerely,

Coco

Credit cards can be good

Here is an article I read about a guy with 25 credit cards.

http://finance.yahoo.com/banking-budgeting/article/112976/meet-credit-card-king-with-300000-in-credit-marketwatch?mod=bb-creditreports

While its interesting how they note that credit cards can be good for building credit and earning rewards points, I personally think this is pretty stupid.

Why do you need 25 credit cards?

If you take just the two they mentioned that I know have fees (the Amex platinum and the Visa Black), that's almost a thousand dollars in fees and thats just ten percent of his cards.

Building your credit can be important. It will save you money down the road on interest rates to buy a house or car or pay for your kid's education. But where do you draw the line? This seems like the guy in college who always sat in the front row and would cry if he didn't get the highest grade in every class. If you get higher than an A+ you're just wasting your time. So what if you have a FICO score of 810? If you are over 720-740 there are few benefits a normal person would ever experience or be provided.

Instead, he says he has balances on some of the cards and "I like to pay my bills on time". Are you joking? If you have so many cards that you can't 100% pay all your bills on time, you aren't using them right. And my personal opinion is that if you have a balance on ANY credit card you are throwing money away in interest payments.

Now I can understand wanting to rack up the rewards points (I love them more than most), but they come at a price and are never worth spending extra money on products for. I applaud having a card that gives you 30% off at a retailer or putting all of your business and personal expenses on a card, but at some point, you will only earn rewards by spending money. You must weigh the cost and benefits of these decisions.

There are many benefits to having credit cards. There also come big risks for many in having even one.

Twenty five credit cards...sounds like twenty two too many to me.

Sincerely,

Coco

Wednesday, June 22, 2011

Monday, June 20, 2011

Car Buying Can Be Fun - Step Two

Now that we have our game plan set (Post - Step One) lets go buy a car.

First tip. Never buy new. Its that simple. It looks great, it smells different, the leather seats have no cracks, but as soon as you drive that off the lot, you lose 10%. That's just the rule. In a couple months the smell will be of your midnight Taco Bell runs or you buddy who threw up in the passenger seat (how he's still your buddy is not known- sorry Joel), the leather will be cracked, you may even crack your windshield. STUFF HAPPENS, why pay double for it? LET SOMEONE TAKE THE HIT. On a $30,000 vehicle, that's a $3,000 hit driving it off the lot. That's a lot of Little Debbie snacks or boxes of Kroger brand Mac&Cheese. You don't want to get an old car (its harder to tell its condition and upkeep), but get something that's a year or two old with low mileage and you can pad those gently worn in seats with stacks of dollar bills.

Second, never lease. Unless leasing is your thing, what you are willing to spend lots of money for in life, your one indulgence, and you lease ever couple years, AVOID. The rates are high and they will try to stick you with charges all over the place (such as damage or mileage). You may save cash on a monthly basis, but you have no assets. All you have is a slightly lower monthly bill. Buy the car, buy an asset. Keep it a long time (at least 5 years) and then resell it or trade it in. That's car ownership folks, that's the cheapest way to buy a car. Car companies would not lease cars when they could sell them if they couldn't make money off it.

Thirdly, rarely take the dealership financing. As I stated in the last post, maintenance and financing is how dealerships make gobs of money. They make a little off the car, sure, but the cash cow is from the manufacturer and then from you in maintenance and financing. Thus the importance of getting pre-approved for your own loan at a lower rate. If you can't, then go ahead and get their financing and IMMEDIATELY pay it off or transfer the loan to another banking institution. You could be talking a 3% difference. On a $20,000 car loan, that can be 600 clams a year in savings. That's a roundtrip plane ticket cross country plus a drink in the airport.

Finally, there is a theory that you want to buy a car at the end of the month and more specifically at the end of a model year. The thought is first, that the salesman is trying to hit a performance quota and if he is short at the end of the month, they will do most anything to get you to walk out of there as a buyer, even if that means selling to you at cost. Secondly, at the end of a model year (varies buy manufacturer), the dealer will be trying to unload inventory to make room for the next year's model. Don't be sold by the "clearances" on the radio or t.v. If they want to make more room, they will be willing to come down even more.

The first step at the dealership is finding those cars in your price AND quality range. If you can't find it there, move on. Dealerships are lined up in rows for a reason. If you feel spry, check out all of the dealerships online and check out there inventories at home. Most times, the prices listed on the internet are firm prices; their selling point has to be within the 5 seconds you are browsing, but like we said before, there are always other areas to negotiate. If you do find the car on the lot, take a look online and make sure the price listed online and posted to the window are the same. Don't let them jack up the prices on the lot.

Once you've found your car, its inspection time. First, the inside. Are there tears in the leather or fabric seats. Are all fixtures still fastened properly. Are there floor mats? (sometimes they have the old ones and your last bargaining chip can be for new floor mats thrown into the deal for free). Do all the electronics work? Does the A/C pump cold air? Do the windows go up and down with ease? Spend your time. Don't feel rushed. Systematically go through ever piece of the car are make sure you are happy with it. Next is the same thing with the exterior. Paint, glass, headlights (make sure the blinkers and brakes flash), check under the hood and make sure the engines hoses and other parts look clean and well maintained. You don't want rusty or cracked parts slowly killing your car. Finally, take your car for a spin. Make sure you can speed up and shift gears smoothly. Are the brakes firm? Do all the electronics work (you're checking again). How is the handling and the smoothness of the ride. Your main goal of car buying is purchasing something that gets you from A to B safely and comfortably and that makes you feel good getting there. If you're happy, I'm happy, so make sure you're happy, because I want you to be happy.

Car checks out, time to wheel and deal. You've invested time at this point, but its not too late to walk away. Its never too late to walk away, that should always be in your head. You will give them your car so they can inspect your trade-in and make you an offer. While they are doing so, they will start talking about pricing the current car. I've never done this, but looking back, I would recommend not evening talking price until you get the quote back on your trade-in. By locking in one price, you have less wiggle room on the remaining variables to make it fit into your budget. Instead, ask them about financing options, extended warranty, what the manufacturers warranty covers. If its a used car GET THE CARFAX. Just ask them and spend some time going over the car history. Has it been in an accident? Has it been flooded? Has it been serviced on a regular basis. Maybe it has a problem with its electornics you notice, because the radio has been replaced 3 times in 10K miles, that's a red flag. Use information to your advantage.

When you get the quote for your car, now it is time to start negotiating. Ask them to write down EVERY CHARGE for the car on an invoice. If there are random charges on there, ask them what they are and if they can be removed. If they charge you for laser etching (used as a theft deterance) say you didn't want that and you won't pay for it. If they say every car on their lot has that and its policy to include that charge, tell them to take it off the price of the vehicle then. REMEMBER, it doesn't matter what has to change to get you down to your number, find a place for it. Never take the first number on your trade in. Ask why they valued it so low. Show the Kelly Blue Book number if its higher and say you won't take less than $$$. If they only come half way, its time to start negotiating the car. What things did you notice during the inspection that you didn't like. MENTION THEM ALL. "I love the car, but..." these are negotiating points. Negotiating is not hard. Just understand where they are coming from and stick to your guns. Both parties should leave feeling good about the deal. If the can't do that, they won't do that, so don't feel like you have to either.

All negotiating is the different but based on the same principals. The goal is to get the deal done to the point you are happy when you leave the table. There are so many variables in buying a car, you can manipulate all of them, I can not go through all the ways to negotiate, but the key is stick with your principles. On a quick note, extended warranties are ONLY to be bought for used cars for short periods of time to give you piece of mind and give you surity that the engine won't explode ten minutes after driving off the lot. Its a sucker bet. Other than that, have fun with it. Its a slow process that you should soak in and get better at each and every time. Use this as a foundation. Its all about planning and then showing your patience and self control. Its a car, but its also a financial obligation, don't let it pull you down to the point where you hurt in the rest of your lifestyle. If you have any other questions, please let me know.

Other than that, DON'T BUY A PREVIA!

Sincerely,

Coco

Thursday, June 16, 2011

Car Buying Can Be Fun - Step One

When I was about thirteen years old, my dad dropped me off at Tae Kwon Do practice and left to go look at a car. Five hours later (needless to say I was tired) my mom picked me up and took me to the car dealership where my dad had been the entire time. For five hours he had been picking out the exact model car with features he wanted, learning financing options, warranty plans and then negotiating. We ended up spending another three hours at the dealership when the poor car salesman finally made about $25 dollars over cost and probably cost the dealership that in the endless flow of Pepsi he provided my dad which was used as his CHEAP fuel. I like to think that car salesman got the last laugh because he actually sold my dad a 1997 POS Previa. Don't ask me what he was thinking, he got the numbers to work and that was all that mattered. This is the guy that would use a gallon of gas to drive cross town to save three cents of fuel. Actually he sent me and that's probably I waited so long to get my license. So when I write these posts a true concern of mine is to teach ways on how to save as much money as possible but also ENJOY life and not overdose on stupid penny saving ideas.

Car buying can be a lot of fun. It takes patience, self-control and legwork in doing your homework, planning and calculating. But at the end of the day, you are buying something that is typically worth a lot to you, that you will have a lot of pride invested in and will be tied too financially for a long period of time. There are a plethora of options and its easy to get overwhelmed but the principles are the same as any other purchase. There are just more zeros behind it.

The first step is coming up with a definitive amount that you are willing to spend. This is not just on the car, but on tax, title, license, insurance (usually more expensive on more expensive cars), extended warranties, maintenance plans and don't forget the polished chrome key change from the dealer. There are a ton of extra costs that are associated with buying a car, multiple things the dealer will try to sell you, charge you for or just sneak in there on the invoice. So figure out what you can afford to spend. This is NON-NEGOTIABLE when you go look at cars. If you reach that number (within 1-2%) and can't get there with the dealer, you're done, move on.

Part of this number can include a trade-in. Your first bet is to go on Kelly Blue Book and research what you can get as a trade in value for the most conservative view of your current vehicle and make sure you designate it as a dealer trade (those are lower). If you can sell on the open market yourself, you can definitely make more, but its time consuming and there are risks with poor payments and shady buyers, so I'm just talking trade-ins here. That trade in value is important, but include that to your budgeted number above and forget what Kelly Blue Book says (I will explain later).

Finally, get pre-approved for financing. Do this before you go in, because it will save you a headache and time in the long run. Your best bet is your current banking institution or particularly a credit union. Also, investigate Costco, for a $50 membership they have financing plans that may or may not be cheaper, but a fraction of a percent can save you a lot of money depending on the amount you are financing and over how long. I promised on an earlier post to put a loan amortization schedule that will calculate all these financing costs (for both a car or a house) and I will get it up, but not quite yet. But they have some programs online that will help you calculate financing costs and most dealer websites will have a crude version as well so you can prepare. Include these interest costs into your budgeted amount.

At the end of the no one component matters at all. If you find a cheap car but they give you a lowball trade-in value its ok. If they give you a great trade-in value but nickle and dime you on the vehicle it doesn't matter. Just know what you are willing to pay in the end for the car you want for what you are trading in and you have wrecked their selling strategy. The dealer will try to confuse you, will try to twist things and thow a ton of different numbers at you. They'll tell you they can't do any better, that they are making nothing, that it's a great deal. NONE OF IT MATTERS. If they can't hit your number (and this assuming your number is a reasonable number for what a person would spend for the car and be paid for the trade-in) then you say "thank-you", stand up and walk to the next spot. There is the self-control. You can't get in the mindset of "Oh its only a thousand more and I REALLY want it." Patience. There is always more cars, always other deals. So politely leave and move on.

Now that you are prepped and have a game plan in place, turn in next time for actually buying the car.

Sincerely,

Jonathan

Tuesday, June 14, 2011

Its the Budget...Part 2 - INCOME

Income is the sexy side to any budget, though often times its the hardest to change. It feels good to see that paycheck hit your bank account. Then you think another split second about all the bills and expenses you have to pay, grab that glass of scotch and head to your man cave in the garage to sob. For most people working an 8-5 job, the belief is that your paycheck is it and that your income is pretty fixed and that for any budget you have to live within the strict confines of those paychecks. That doesn't always have to be the case.

In this post I don't really want to focus on finding a second job or offering tips to make money after you get off of work. What I want to look at is how to make money 24/7. "It takes money to make money". Make your money work for you. The compound effect of earnings on your income can be drastic and is the essential key to saving for retirement. Besides being Michael Jordan or Mary Kate and Ashley Olsen (forget about Full House, I'm talking straight to VHS "It Takes Two" baby!!), most of us will not make a vast sum of money in a short time, enough to retire off of. That being the case, it is essential to make compounded earnings build your nest egg and then do your darndest to live off the income that nest egg can produce (I think reading that sentence would make Darwin cringe).

Albert Einstein once said "The most powerful force in the universe is compound interest." You can take that to the bank. Some areas of focus:

1. 401k's
2. Investments
3. Equities
4. Bank Accounts

The 401k is the BASIS for most retirement portfolios. Acting like an investment account it can typically be made up of equities, bonds, cd's etc. and can be tailored to suit your personal risk aversion. More importantly, a traditional 401k is tax deductible, meaning you have preserved the basis of your savings and it can grow that much faster not having been trimmed by Uncle Same. There is a Roth 401k which is the opposite (pay taxes now, no taxes later on the realized gains). Really these two are the same, but have different tax strategies involved which I can go into in further detail elsewhere. There are IRA's, Roth IRA's and other retirment vessels but we won't get that deep now. What's important to take away, is that this is an EASY chance to really save LONG TERM, by having money directly taken from your paycheck and put into an investment account. With certain exemptions (which I will talk about elsewhere) you can't touch it until you reach retirement age, so its really like a caterpillar in a cacoon for 40 years doing nothing but growing into a beautiful butterfly. Here is the best part...MOST companies will match your contributions (percentages will vary) up to a certain amount. ITS FREE MONEY!!! As an incentive program, they will add on to your savings with a company match that will not only provide free money the day you get it, but ALSO earn investment or interest earnings over the life of the 401k. Its truly a beautiful thing in that every time they match your contributions, that "bonus" will keep generating revenue until you retire. If you work somewhere that has a match you are kicking your own butt by not contributing to your 401k. Its leaving money on the table and absolutely foolish. As a rule of thumb, I would shoot to put at least 7% of your paycheck in your 401k, more is always better and if you get a raise, rather than having more spending money, bump up your contribution rate.

Investments are a key to any retirement portfolio. Unlike a 401k, having your own investments provides greater liquidity and access to your money without any penalties should you need or want it before retirement. The key to managing your investments is diversification. Spreading it out over a number of assets (assets that appreciate - cars and watches don't count). Retirement is based a lot on luck in the sense that your portfolio could be way up or way day right at the time of your retiring. Someone who retired in 2007 probably did not feel good in 2009 with the market collapse that would have eaten away at their retirement cushion with no income to fill the gap. Conversely, someone ten years away from retirement in 2007 could be investing in a number of things at historic lows and ride the gravy train until their retirement under the assumption you usually make the most money in your life right before retiring. Diversification is the way to avoid as much of this "luck" as possible, its all a timing issue. Spreading your wealth over equities, bonds, real estate and commodities can provide you with growth opportunities across the board but not subject you to the harshest of realities should one of those investment platforms tank right before your retirement.

Equities, or stocks are a great start in seeing growth or income. Historically, the stock market has provided the largest returns out of any investment vehicle. With it comes more risk and bigger fluctuations, but if you are young, a suggestion would be to invest more heavily in equities as you can ride out the ebb and flow of the market over very long periods. Additionally, focus on large cap multinational stocks with good balance sheets and large DIVIDEND YIELDS. This is where a company pays you for every share you own a certain percentage of what they make. With companies like AT&T paying around 6% or Pepsi and McDonalds each paying out 3% each, even in a flat position in stock appreciation, you will still be earning more from the dividends that you would in a money market or CD account.

As you get older and become more risk adverse (avoiding risk) bonds and real estate may be a better play. They still carry solid historical growth, though smaller than the stock market but typically carry less risk. As long as you structure these investments so that you have access to your funds down the road, this may be a more solid investment strategy than stocks in the latter part of your career. But the key is to always own as many of these as possible. The percentage of your portofolio it makes up is what you will tweak as you markets change and as you come closer to retiring.

What you should try avoiding is first NOT SAVING and secondly HOLDING CASH. Putting large amounts of cash in your Bank of America account will do nothing for the growth of your income and increasing your potential budget. I'm not saying don't put anything in the bank, but if you have more cash than you have budgetted to spend in the next 6-12 months, its time to think about what that money could be earning somewhere else.

Think of it this way: If you had $10K cash making 1% in the bank (that's generous right now) you would make $100 over the course of the year. THAT'S EXTRA INCOME, this is a good thing when you compare it to spending it on a car or buying a bunny hutch for your office. But lets compare that to buying $10K in large multinational stocks paying an average dividend yield of 3%. We won't speculate as to whether or not the stocks go up or down. Just keep in mind that more often than not they go up but you can't rely on that. That 3% yield has now generated $300 in income. Finally lets take that $10K and put it into commercial high grade bonds (such as GE debt) at 5%. Now in a year, your savings makes $500. That's a lot of scotch or butter, but lets continue down this path. If you didn't spend that income but reinvested it in the same product, that $500 dollars would generate $25 the next year, so your original $10K investment would have earned you $500 in year one and $525 in year two. That's compound interest baby. You extend that out 20 or thirty years and you're talking about some serious income.

That, ladies and gentlemen, is how you boost the Income side of your budget. Its slow, its not as sexy and you have to show some self control. But in a world of making choices, saving and investing your income can open a whole lot of doors for you down the road.

Sincerely,

Coco

Monday, June 13, 2011

The Statistical Tide of Demographics

Here is a well written and interesting article sent by one of my favorite followers. It won't take long to read, but will provide some real good insight to long term macro-economic trends you might want to think about.

http://unitedcp.com/VRFiles/Moneysmart_July_Article.pdf

Let me know your thoughts.

Sincerely,

Coco

Saturday, June 11, 2011

Cost of a home - Entry One - Budgeting for your new home

It quickly became apparent to me the responsibilities that came with home ownership. Financially, work wise, planning, etc. owning a house was a far greater endeavor than I originally anticipated. I used to ask a certain family member "So how is married life treating you?" and his response would be "Man, I've got a mortgage payment now." At the time, I would laugh, taking it as a joke. When the tables were turned, the sincerity of the comment became all too familiar. Having been married for almost a year (three weeks away) without a doubt I would at least compare the responsibility of home ownership with that of the commitment made at the alter. Not the vow to love, cherish and honor yada yada yada, but the need to work as a team, communicate, plan and compromise.

Whether you are married or single, if this is your first home or you have owned a home before, whether you are buying something to live in short-term or long term, there are a number of things to consider before making what for many is the biggest investment in their personal portfolios. Not doing your homework could cost you THOUSANDS and could destroy a budget. Taking all the necessary steps could bring with it untold earnings in home appreciation, savings and just personal satisfaction. One of my favorite past times is watching other people move. As I look on with a cold beer in my hand I'm just overwhelmed with the satisfaction that I don't have to be doing all that heavy lifting and packaging on a beautiful weekend. So before you buy a home, do all your homework, so you don't have to move more than once.

Some of the things we are going to have to considered when looking to buy a new home:

1. What to look for and budget - What can you really afford? Where do you want to live?
2. Selling your current home - What does it take to get the most out of your current place?
3. Expense and savings of moving in - Now that your in, how do we save some $$$

We are going to start with the planning. The first step is sitting down and preparing a budget. What can we afford? Your can live in a pipe dream, or you can see what you can actually spend on a home. More important than what you can afford to buy, is what you can afford to maintain. I've know folks who bought a home they had the cash for, but couldn't keep up with the monthly payments. Even if you could, do you really want to? I know you love your fancy cell phones with the fancy data plans and fancy blue teeth :) are you prepared to sacrifice some of the things you enjoy for a bigger home than you can easily afford. So think about these expenses:

1. You monthly mortgage payments (principal and interest and possibly PMI)
2. Property Taxes
3. Home Owners Insurance
4. Home Owners Association Dues
5. Utilities (water, gas, electricity, sewer, cable, etc. most get more expensive the bigger the house)
6. Landscaping/Pool Maintenance fees
7. Maintenance (there is ALWAYS some problem with the house)
8. Alarm System

There are a few more but they get smaller in cost. Your need to add all of these up and make sure your cashflow can keep up. As we will talk about on another post, you can find savings in some of these areas since your principal payments are essentially saving and there are currently many tax breaks when owning a home. But we will get more into that later.

I strongly suggest being able to put twenty percent down in cash on the home you wish to buy. In most cases (research FHA and other government loans for exceptions), if you can't put a full 20% of the appraised value of the home down, you must pay what is called Private Mortgage Insurance (PMI) which is an extra fee because you are more of a risk to the lender. It makes it easier to afford a home upfront with less cash, but its going to increase your monthly expenses and put further strain on your budget. If you are short of the 20% but are still comfortable with your monthly cashflow, think about borrowing from your 401K to cover the difference. This will not only help you avoid PMI but lower your interest payments as well. While you will still have to pay interest on the borrowed money from your 401K you are paying the interest to yourself.

A huge area of focus should be your interest rate. There are so many options out there and each have pro's and con's. The traditional 30 year fixed mortgage will make your payments as small as possible and the fixed over the long term, but will most likely have the highest rates. On the other had, if you have great cashflow, think about taking a 15 year fixed mortgage. It cuts the time to pay back your loan in half and avoids a ton of interest expense, but requires your monthly payments to be much more sizable. A third option is to review adjustable rate mortgages (ARM's). While I would stress extreme caution with these, as your interest rates will begin to move (almost certainly up) after the set time frame, if you are certain that you will have sold the house you are buying by the end of the term, they often carry much lower interest rates. They have anywhere from 1-year ARMs to 7-year ARMs.

Within the coming days, I will try to post a picture of a loan amortization schedule from Excel that I created and walk through all the steps in creating your own. It only takes a few minutes, but in doing so, you can easily change just a few cells in Excel and calculate your mortgage payments for a variety of different scenarios.

Property taxes are large payments that many people forget to calculate when buying a home. Most often, the tax rate is only a couple of percent at most, but on a large home that could be thousands and thousands of dollars a year. Usually, this is broken out into 12 monthly payments that you pay your mortgage provider as an "escrow payment" and then they will pay this for you. You usually pay them as part of your monthly fee precisely because so many people forget to save for this large yearly (or semi-annual) expense. However, if you can plan on your own and force yourself to save for that expense, I would recommend not including an escrow payment to your monthly mortgage payment, as having this money sit in your own bank or investment account can generate returns over the year for YOU not the big bank institutions.

Finally, it is key to understand how all the other smaller expense can really add up. From utilities to landscaping, these are expenses that usually get larger the bigger the house you buy. Talk with people in the area to get a feel for how much damage this will have on your budget.

THE MAIN GOAL when planning to buy a house is to figure out what scenario gives you just enough wiggle room so that you aren't stressing every month to pay the bills. You want to be able to enjoy and improve your home, not see it turn into the greatest source of stress for you and your family. That will come when your wife decides she is going to decorate everything in the house and that your role is finished when the keys are handed over.

When my wife and I moved into our current home, she told me I could have a "Man Room" all for myself. Within three months, that "Man Room" had been painted green, pictures of flowers were on the wall, her grandmother's desk and a third generation bunny hutch lined the room and any sense of testosterone had been sucked from the very being that was to be my man room. So gentlemen reading this post, when you are done reviewing your housing budget, prepare to spend your evenings drinking a glass of scotch in the garage where you can cry all of your shame away.

Sincerely,

Coco

Friday, June 10, 2011

Upcoming Posts

So I took a day off to spend some time thinking about topics I think could be "fun" and informative. Some ideas for near future posts include:

1. What you need to know about retirement accounts
2. Basics of finding an affordable home (with a special surprise)
3. Its The Big One....The Budget - Lesson Two (Income)

Should you have any other ideas of topics you would like to read about in the coming days/weeks, please feel free to always drop the lounge a line.

Sincerely,

Coco

Thursday, June 9, 2011

Our First Poll Is Up

After a week of polling, Travel was the overwhelming victor in the battle for personal expenditure supremacy. Traveling is one of the most rewarding experiences/past times/hobbies you can find but can also be the most expensive. I spoke before in earlier posts ways you can save on flights and hotels with rewards points and credit card rewards points. Also, an absolute key to cheaper traveling is flexibility. As I have mentioned before, flying or rooming in non-peak hours/months can save countless dollars. Additionally, many airlines now overbook their flights and often ask people to give up there seats. The plus side is that this sacrifice can come with very nice benefits (free night stay, free ticket and/or cash). Being flexible can definitely save you a ton of money, especially if you are just flying by yourself or with your spouse/significant other.

Flexibility can also lead to fantastic deals. While I never recommend flying on a whim, there are several travel websites that can save you hundreds to even thousands if you can book your trip just a few weeks to months out. Check out Travelzoo.com. This is one of my favorite sites that publishes new discounted trips every Wednesday and they are heavily discounted. But flexibility is key.

Traveling doesn't have to be that expensive if you stay closer to home as well. Think about camping around your house (not in your yard but somewhere nearby). Take a trip to a local resort. Book a 4 day cruise to nearby islands. These things may be far cheaper options that traveling to a different continent. Not just flights, but all the incidentals and other expenses that come with traveling abroad. A "staycation" could be your best bet if you are trying to have a little fun but are on a tight budget.

Whatever you do, keep crying babies away from me when I'm traveling. Cuz that really sucks.

Please feel free to participate in our next weekly poll that will be up shortly.

On a side note, I came across David Kimball's website http://www.household-budget-made-easy.com/household-budget-blog.html#axzz1Ophtxfn9 I have also included this link down below at the bottom of the page. It is a straight to the point informative site on really how to save money and cut back. It is an interesting read and I strongly recommend.

Sincerely,

Coco

We Did It!

Another big thank you for another big milestone. Today we broke 1,000 page views. It took just a little more than two weeks, but for me that's a great accomplishment and I'm so glad to see it. So thank you for all your continued interest and support.

Sincerely,

Coco

Why keep a credit card balance?

One of the things I've noticed as I've traveled some, is the people that most need to hold on to their hard earned dollars are the most likely to be paying higher interest fees. I ask myself, why is this the case? Why would those who need every dollar the most settle for the highest charges? And that just it, because they need it the most. If you walk around any urban area, especially those regions with a lower standard of living, you are much more likely to see signs reading "CASH YOUR CHECKS HERE!!" or "PAYDAY LOANS!!". These establishments are prolific, even though they charge almost criminal rates on loans, because those people need that cash so badly.


For middle America, the same is true for credit card debt. Now I'm not saying that there is never a time to have credit card debit. But there is never a time to have credit card debt. I can understand and even sympathize with hard times, but today I want to look at your options and some alternatives. When most credit cards are charging 10%-20% in interest and fees, its vital that we limit those expenses to a minimum. If you look at this issue on a national scale, the U.S. is paying $500 BILLION a year on just their interest payments. AND RATES FOR THE GOVERNMENT ARE AT AN ALL TIME LOW!!! That's not the case for credit card debt.


One of the clearest, most upfront solutions is cut the CRAP out of your life. If you have credit card debt, this means one of two things.


1. Your financial situation is facing very very hard times. Or more likely
2. You are living beyond your means


The keeping up with Jones's syndrome runs wild in developed countries. What you pay to live today, costs you a FORTUNE in tomorrow's terms. Here are just a few credit card facts:


"There are 185 million bank credit card cardholders and about 75% of
U.S. households have a bank credit card.
Americans have an average of 7 credit cards each (4 bank and 3 retail)
and charged an average of $8,238 during 2003.
44 million cardholders, about 24%, struggle to send the minimum
monthly payment.
The average outstanding credit card balance is now over $12,000
[SOURCE: Dr. Robert D. Manning testimony to the U.S. Senate Committee on Banking
Housing and Urban Affairs, May 2005.]"


An average credit card, where just the minimum payment due is paid can take nearly 20 years to pay off the principal balance. Additionally, you are digging yourself a bigger hole, because the money you spend on interest payments could have been extra cash in you cash flow that could have been helping you AVOID debt in the first place.


There are ways to pay off your credit card balances faster. First think about doing a transfer balance. I'm not a big fan of jumping from card to card, but if all you need is a couple of weeks to pay off the balance than this might be a good way to avoid some interest charges. Additionally, many credit cards reward a transfer balance with rewards points/cash back/low introductory rates.


More importantly, it is hard to believe that you will have any other debt that would have higher rates than a credit car. So if you have a home or car loan, DO NOT pay extra cash on these items first. ANY and I mean ANY additional cash you have should first go to paying off the credit card balance.


A lot about paying credit cards is merely managing the timing of things, so here are some tricks:


1. If you have an IRA retirement fund, you can take sixty days to transfer it from one account to another. If you can close one account, use part of the IRA to pay down credit card balances and then FULLY fund your next IRA within six months you will pay no fees. Another thing to think about is most retirement funds you will have to pay tax penalties on if you withdraw early. But those penalties are usually capped at 10%. It's a lot cheaper to pay a 10% penalty and pay off that credit card debt with an 18% rate. You can also take loans out against your 401k. While a little trickier, if successful, you are paying yourself a market rate. The interest you pay on that loan is to yourself! So pay off those cards and keep the money in house.


2. Change your tax withholdings at work to a lower amount. This will increase your take home pay from your paycheck which you them can apply to paying off your debts. You WILL have to pay taxes on this at the end of the year like normal, but at least you have avoid interest payments on that amount for up to 12 months.


3. Consider increasing debt in other areas (such as a Home Equity Line of Credit) to pay the high rate credit card debt. This is harder to do these days, but its all just offsetting one expense with another, so choose to pay off the higher interest rate debt first.


The true key to avoiding credit card debt is simply to maitain a sustainable budget and to not overspend your income. Think about this:


If you have $1,000 in credit card debt, you could be paying about $150 a year JUST IN INTEREST. Year after year after year, that ads up and that's just $1,000. Think about what we read earlier, that average balance is about $12,000. Thats approximately $1,800 a year JUST IN INTEREST.


Do yourself a long term favor and do whatever it takes to pay off those credit cards as fast as you can. Once you've done that, don't feel like you have to throw the cards away, they are great for building your credit which can save you money when buying a house or car. But be proactive and pay in full the entire balance and avoid carrying any monthly amounts that can be hit with the high interest rates.




Sincerely,


Coco

Wednesday, June 8, 2011

Can You Avoid the Monthly Charges?

Do you ever feel like no matter what you do, you can't really build wealth? That when you get your paycheck and you're all finished paying your bills, you have just enough left to hand over to the school yard bully, AKA the federal government? It's interesting to look at how society has evolved, always providing a relative level of comfort to individuals, but very efficiently separating the "have's" from the "have not's". If the old addage "It takes money to make money" is true, then the vast majority of us are almost destined to fail from the start.

Have you ever gone to a bar and downed a cold one? That cold one was good, but that second one tasted really good too. The third, fourth and fifth were all a necessity at the time because the game was on. The six and seventh one you really didn't need but everyone was still drinking so you figured what the heck. Then the next morning your head hurt and your wallet was empty. Jim, Johnny, Jack and Jose pounded on your skull and stole your lunch money. Have you ever felt like that? That sounds a lot like monthly payments to me.

I want you to think about all of the FIXED monthly bills you pay and what they add up to. If you have a mortgage, go ahead and leave the principal amount off as this in a sense is really savings. Which of these do you have?

Mortgage Interest
Car Loan
Cell phones (voice, text, data?)
Cable and Internet
Home Owners Association dues
Mob/Mafia kickbacks for protection
Home Owners Insurance
Car Insurance
Gym membership
Gaming Membership (like X-Box 360)
Student Loan Payments
Furniture or Electronics you bought on credit
Netflix or Blockbuster Online

What other FIXED monthly expenses do you have? Now I know there are tons of other things you have to pay for, such as food, gas, clothing, etc. but at least those you can control. Not all of these monthly expenses are bad. Some of them can actually save you money. We'll will get much deeper into specifics during the ongoing discussions about the budget and the "expenses" variable, but right now, just imagine how much money you could be saving by ridding yourself of just a couple of these expenses (The Coco Lounge would like to remind you never to cross the mob). Should you invest those extra savings, you could actually be making money and increasing your net worth through, stocks, dividends, bonds, paying off interest loaded balances, etc.

If you bought that less expensive car and rid yourself of a car payment, or cut your phone plans in half, how much could you save? If you never go to the gym, quit kidding yourself and cancel that membership. If you're not going to feel good about working out, then don't feel bad for giving your money away. Or give up the MLB package for a year (since watching 162 baseball games is really all that exciting anyways). All of these things are great to have, but going back to our discussion on the budget, EVERYTHING needs to be prioritized. Think about your long term goals and how much quicker you could reach them without all the sandbags holding you back.

A year after graduating from college, I moved  to another state and only took what would fit in my car. I found the cheapest apartment I could find in a decent neighborhood and my apartment was furnished with an air mattress and a card board box I flipped upside down to set my work computer on. I split the internet bill with my next door neighbor. I bought kitchen supplies so I could save money by cooking rather than going out. But I had no cable. My rent was half of what I was paying before. My cell phone was 3 years old (an archaic flip phone - still got it) with minimum weekday minutes and texting, no data. I didn't NEED that stuff. As a general disclaimer, my dating life was sub par for a while and the line "you wanna watch a movie from my laptop on my airmatress" was never a big hit, but a year later I had met the love of my life and we were looking to buy a house. I couldn't have ever afforded a house without that money I saved that year. I'm not trying to say going to the extereme is the way to go, but think about what's important to you and how you want to get there. Then try to ditch all the extra baggage.

Sincerely,

Coco

Tuesday, June 7, 2011

Thank You!

Thank you all for making today the highest site volume we've had here at The Coco Lounge in our tremendous two week history. I greatly appreciate the support and hope that this blog is of some value to you.

Please feel free to follow The Coco Lounge by entering your email address to get updates of new posts, comment on posts to give some feedback and stay tuned for tomorrow morning's post!

Sincerely,

Coco

Monday, June 6, 2011

I want your comments! Entitlements our doom? What are your thoughts?

Let me be clear. I'm partly a fan of entitlement programs. I think that Social Security, Medicare and Medicaid do have their benefits and I believe the security and safety nets they provide are of the utmost importance when it comes to protecting our economy, society and those that rely on these and other entitlement programs. Yet over the past two decades, these social "promises" that have been made are starting to strangle the very fabric of our economy and government as a whole. As of today, the underfunded portions of these liabilities (the amount we have promised but haven't paid for) are as follows:

1. Social Security - $15.0 Trillion
2. Medicare - $79.1 Trillion
3. Prescription Drugs $19.9 Trillion

Ladies and gentlemen, that's over $100 TRILLION....TRILLION!!! dollars that we have essentially as debt. It may not show up as debt on the government's balance sheet, but its waiting for the gates to open to explode like a bull at a rodeo. It will be the shortest 8 second ride in history and it will end with our faces in the dirt just hoping we don't get trampeled on.

Looking at their effects on just a yearly budget, think about this. The Federal Government has tax revenues of about $2.2 Trillion/year. We have a deficit (we spend more than we take in) of roughly $1.4 trillion/year. The amount of money the federal government spends on just Social Security, Medicare and Medicaid equates to just over $1.5 Trillion dollars ($815 billion for Medicare/Medicaid and $712 billion for social security). Just from an annual expense viewpoint, these three entitlement programs alone equate to about 68% of our income taxes and engulf the entire yearly deficit.

One of the main problems I have as a Republican (actually, I'm a Libertarian, regardless...) is the lack of compassion the Republican party has about this. When a huge portion of the party identifies with "Christian Conservative Values" its completely hypocritical that they would turn their backs on the most vulnerable citizens of our country and demand crazy cuts to most entitlement programs as they scream for fiscal conservatism. This comes after 8 years of President Bush expanding government and ballooning the national deficit. If you asked them "What would Jesus do?" maybe tax increases wouldn't be such a nasty term.

Conversely, Democrats see it as an obligation to coddle the old and the poor. Its almost humiliating as they assert that these individuals can't help themselves, that the government must take up their cause or else. If there is a dollar to spend, the Democrats in Congress seem eager to tear it in half and spend two. It was under Democratic leadership (dating back to Franklin Roosevelt) that these safety nets turned into "entitlements" and such entitlements have outpaced the revenue working folk pay in to cover the cost of those using the services.

It's beyond clear, that these programs are ashes to the wind or at least burning like a gasoline fire. I've never heard any of my friends say they are expecting a dime from Social Security. My parents can't even rely on it to retire anymore. So why do we kid ourselves and the American public? Why does rhetoric overcome sensibility and intelligent discussion? During WWII, we threw hundreds of scientists together in the Manhattan Project to come up with the atomic bomb. The brightest minds in the room changed history and invented a whole new energy source in the face of necessity. Today, we throw hundreds of lawmakers together to help save these programs from a rotten despair, and all we get is an explosion of verbal vomit and school yard shoving matches.

If we can't just click and drag these programs to the proverbial trash can and they can't be sustained in the current forms any longer, where do we go from here? I have a couple of ideas, but let's see if any of you have any suggestions or comments. I haven't yet received too many comments on this blog, so if you are at all interested, now is the time to shout it out.

Sincerely,

Coco

The big one...the budget - Lesson one

This is the big one people...this is where we really start getting a sense of personal finances. In terms of excitement, its up there with the scene in "Wild Things" when Neve Campbell, Denise Richards and Matt Dillon increased the revenue of countless "questionable" websites. Its the budget baby!!! If a family doesn't have this in place, there is really no hope in maximizing the savings, in maximizing the potential of their personal finances.

The most basic premise of a budget is so simple, but it is unwavering. It is always:

Income = Expenses + Savings

There is no getting around it. Millions of families blow it at the most basic of levels. They can't balance the simple equation and with that comes a self-perpetuating cycle of indebtedness, often leading to credit card debt, limited to no savings at retirement, or even bankruptcy. The hard thing about a budget is that there is no wiggle room. It would be like watching Lindsay Lohan explain why her ankle bracelet set of a "false alarm". All the awkward squirming is nothing more than worthless tabloid headlines.

In the coming posts we will explore each of the three variables at length and understand how to maximize the value of this equation. However, it is the fundamental nature of the equation which is the most important. It is a story of self control. It is a story of patience. It is a story of contentedness. A budget is purely about planning so that an individual, family, business or government may MAXIMIZE the utility or benefit of the hard earned dollars coming in the door (well, maybe "hard earned" is a reach for governments). To do so demands the utmost respect and commitment, otherwise you are just wasting your time.

If you or your significant other loves to shop 'til you drop, you better be prepared to slap the crap out of yourself or significant other (The Coco Lounge does not support or condone violence. No money gurus were harmed in the making of this post). If you demand expensive dinners but live on a McDonald's income, you better be prepared to eat Cup of Noodles five days a week. If you have to have the finest electronics, your shoes may very well be Velcro. A budget does not make you frugal, but it requires prioritizing and living within your means without exception. To "be a little bad" or "cheat occasionally" would be like climbing nine rungs of a ladder and sliding back down. It means making sacrifices for weeks, months or years and then watching that progress going up in smoke like herb at a Bob Marley concert.

So as we move forward on this journey together, the one thing to keep in mind is to be steadfast in your progress. As we grow this thing called a budget, like a rare and delicate flower in the midst of beautiful rainbows, we will find some flexibility, but for now, your budget is the chastity belt on the proverbial virgin.

Sincerely,

Coco

Sunday, June 5, 2011

Retail is for schmucks - Step Three

 My wife and I just got back from a two night stay at a top rated resort today. We paid $100 for everything. Part of avoiding retail is paying nothing at all. I won the trip through my company. The prize included a two night stay, a hundred dollar spa credit, and a hundred dollar dining credit. Since the dining credit could be used at restaurants near our home, we just pocketed that for later and the only thing we spent money on at the resort was drinks at the pool and dinner one night.
 I've won a number of contests in the past couple of years that have taken us to various places, including a golf resort and Las Vegas where our expenses have been minimal. These things are out there. One of my family members won a 60 inch t.v. for entering a contest while looking for a car. One of my friends wins concert tickets once a month from radio and web contests. Sometimes they take a little time to enter but they are all over the place. My situation isn't the most common, because my company puts on a contest every year (I've won trip prizes two years in a row), but the point of this post is you can always find free stuff, good free stuff for minimal effort.

Another example is there was a contest on the radio where I had to write into the station's website with a short poem about the "love of my life" for a Valentine's Day contest. Once I did that, I spent a little time getting all my friends and family to vote for my entry in the competition and sure enough I won a one night stay and free round of golf at a golf resort. While we were there, we checked in and went to the room. No sooner had we put our bags down, the front desk called and said they were very sorry but forgot to get our credit card info and asked if I could come down again. When we had checked in, they were giving out complimentary mimosas. I jokingly noted that I would come down for another round of drinks. When I brought them my card I chatted with desk clerk for a couple minutes and asked them how their day was, yada yada yada and when they got my card info they actually gave me a whole bottle of champagne. While I was checking out the next day, my wife was at the spa getting a massage and I asked to have her billed added to the tab to pay all at once. They told me their systems were down and couldn't do that and asked if it would be too much trouble to go to the spa myself and pay there. I had all of our bags on me and it was obviously not what I wanted to do, but I smiled and said no problem. With that, the desk clerk graciously credited our room for our top notch dinner the previous night saving us over $100.

"Killing them with kindness" is the best way to find free stuff. Making someone's day with a positive attitude is hands down the easiest way to find comps or favors. My father in law was trying to change a flight due to a death in the family a week ago. The agent on the phone told him it was going to cost almost a thousand dollars to change each of two tickets. He huffed and puffed and when they did nothing for him, he hung up. I called them back an hour later, spent forty-five minutes saying only nice things and talking out all of our options. At the end of the phone call, they not only found a better rate, but provided a ton of information on how we could be refunded $250 in change fees per ticket for providing documentation of the death in the family. A forty-five minute phone call saved my father-in-law $1300 in fees. Not a bad days work.

If you can't win contests, see what other free stuff is ready available. I work for a restaurant company right now and get 50% off most of my meals at fine dining establishments. If my wife and I aren't using a www.restaurant.com or www.groupon.com coupon, then we are going there and saving $30/meal. Costco recently had a "free" promotion to sign up for their executive membership. They charged $20 to sign up and gave you 2% back on most purchases. If you didn't reach the $20 savings, they would pay you the difference. We signed up and we are on course to make an extra $20-$30 bucks. I signed up in the check out line, took us two minutes and we make money. Its all around you, you just have to look and then "be nice".

I met my wife in an Southwest airlines terminal and proposed to her two years later to the day. We told our flight attendants a wonderful story and how much we love Southwest and they returned the favor with a free bottle of champagne. I haven't paid for a drink on Southwest in a year and a half since I first told that story. Everyone wants to feel good and for making them feel good, they will try their best to return the favor. That's human nature.

A couple of months ago I was standing in line to talk with a movie theatre manager about getting tickets to the wrong show and missing the start of the movie I wanted to see (their fault). The guy in front of me had the same thing happen and was irate and yelling. The manager comped his ticket. When i spoke to the manager I was as friendly as can be, told him mistakes happen, we just wanted to see the next flick available. He comped my tickets and then gave me two more passes with a smile on his face.

"Kill them with kindness". I'm not always a happy camper. Often low on patience and quick tempered I'm not trying to paint a picture of me being a cheery saint. But I can be pleasant, engage someone in a conversation, and put a smile on their face. That's how I got my wife to marry me and how I take part in step three of avoiding retail.

Sincerely,

Coco

Friday, June 3, 2011

Dow Down 400 Points in 3 Days

 The markets look to be dropping faster than a drunk girl in stilettos. With the S&P 500 testing a support level at 1300, it will be interesting to see if it can hold. News as of late seems just pitiful and political strife around the globe is looking gloomy at best. Lets list it out:

1. Debt crisis in the EU still uncertain
2. Debt ceiling political games in the US
3. Obamacare/Tax Hike uncertainties
4. Worthless jobs reports/manufacturing reports/housing reports/reports overall
5. Supply chain issues still faced in Japan
6. Oil uncertainty in the Middle East

 It goes on and on. There is a hazardous chicken/egg conundrum occurring. Consumers are starting to spend less again and job creation is starting to slow again. Which causes which is up for debate, but the end result is both are bad news. Its pretty clear after the jobs report today that the market stimulation the Fed has been providing through QE1 and QE2 is lackluster in success at best. So you would think they would turn off the pumps and the flow of money would dry up. WRONG!!! Instead, our brilliant government is going to look at QE3 now.

So now you have a situation where not only is the economy limping along, but the government is nearly out of all bullets to shoot at this monster looming in front of us. The Fed's balance sheet looks as strong and reassuring as Screech and Steve Urkel combined. Corporations have trimmed just about as much fat as they can on the cost side before they start looking like Joan Rivers. Congress finds stalemate on everything, and the housing market looks as bad if not worse as it did 3 years ago. With about 28% of homes underwater and the values of those not having been slashed significantly, I am not expecting the median American family to step out on a limb and get this economy rolling again. I'm not suggesting where you put your money. But I am saying that this looks like a long long bumpy road with few pit stops.

Sincerley,

Coco

Thursday, June 2, 2011

My Views on the Economy

I don’t know if you all are aware of this website at http://www.usdebtclock.org/ . It tracks US debt real time as displayed below with all sources of information identified if you put your mouse over the individual item. Anyways, some scary things come to mind along with what I’ve been reading from various sources. None of this may come true, but its always best to stay informed. And if you’re bored, well this may lead to a fantastic nap.

If you look in the upper left corner at the US Federal budget Deficit ($1.37 trillion) this is the current one year spending deficit. You might ask where you could make cuts in the budget to save $1.37 trillion. If you look at the box below that number “largest budget items” you’ll see that the vast majority of the $3.56 trillion in total spending coming from just six items (Medicare/Medicaid, Social Security, Defense, Income Security, Interest and Pensions). These 6 items make up just over $3 trillion. This leaves all other spending less than half of the actual yearly budget deficit. So synopsis 1 is that entitlement programs and interest on debt are strangling the US and its abilities to pay for what we buy and even if we find a way to plug this deficit, which currently is HIGHLY unlikely, there is little to no chance of actually paying of the debts we already have. We would simply stop accumulating more.
With that being the case, let’s look at the actual national debt which is the first box in the upper left. At $14.4 trillion dollars, this is 97.8% of GDP (which is located on the right, one box down). What isn’t usually discussed on the news is the box at the bottom middle entitled “US unfunded liabilities”. This is everything we have already “promised” citizens that we don’t have the money to pay for. We are paying those “entitlements” with the money paid in by people currently working but only covering the costs of those who aren’t. Eventually we wont eve have enough for that and then it all goes away. Even with both parties saying keeping or getting rid of Obamacare will save so many trillions of dollars over 10 years doesn’t even come close to touching the $114 trillion in underfunded medical entitlements we are currently facing.
The scariest part about this is that even while we print currency to pay for these things, all of these debt balances are still headed in the wrong direction which means we can’t even get out of this by devaluing our own currency.
The only way we stay afloat now is because we have the unique ability to print money which we use to fund our way of life, because many goods and trade (especially energy) is valued in US dollars. If you look at the section below labeled “trade numbers”, you can see that foreign countries own $4.5 trillion of our debt and the current trade deficit is nearly $700 Billion dollars. When was the last time that you could remember this being a surplus? So synopsis 2 is that our current fiscal and monetary policy barely keeps our heads above water today and there are gigantic flood waters approaching.
There have been a lot of doomsday predictions since the mortgage crisis, and I’ve read most of them. Individually they are shocking but can seem out of proportion. But what happens if any of the following happens (I only list three, but obviously a number of other events could likely occur):
Other countries stop buying our debt? – Interest rates begin to soar. The $209 billion in interest a year on the debt explodes to 2, 3, 4 times current levels drowning our budget with red ink. Home mortgage rates skyrocket as a result, destroying a fragile housing market, depressing home prices nationwide, leading to massive unemployment and foreclosures.
Goods are no longer indexed to the dollar – A large reason oil prices rose to $150/barrel was because of the depressed values the dollar saw compared to a basket of other foreign currencies. As a result, many countries started looking into using a basket of other currencies to price not only oil but a range of other commonly trade commodities and goods. The result would be an overnight jump in oil prices. You think a 30 cent increase is bad, try 2 bucks, overnight. Don’t think that’s feasible? Look what most every other country that imports oil pays. ($5-$7). Instantly this would cause prices of most every other commodity, service, and transportation to jump. If you think about what it costs to manufacture and transport goods from trucks to airlines this would make sense. Already with the current rise in oil, we have seen a steep increase in commodities ranging from cotton to copper. Overnight, the consumption capacity of American families would be hit by a large percentage, with the majority of households already living in debt or beyond their means.
Municipalities and State governments begin defaulting on loans – State and local governments are in an even worse situation that the federal government because they have no monetary policy, they can’t print money to kick the can down the road, they can only incur more debt. Look at California, NY, Illinois. The budgetary gaps are so large there are double digit cuts to most every social program, CA actually issued IOU’s for tax refunds. If the states are allowed to default, there will be massive unemployment and deterioration of already earned and future projected pensions leading to a further deterioration of these economies. Should the government step in and assume these debts, the federal government would see a drastic increase in their liabilities and interest rates would soar overnight.
A host of smaller events could ignite any of the above. While the housing crisis may be behind us, there are still very uncertain views of commercial real estate busting, the refinancing of mortgages or a second drop in housing prices with a mere flicker of inflation. The current Middle East turmoil spreading into Saudi Arabia could fuel (no pun intended) consequences related to oil. A double dip recession could wipe out a number of “too big to fail” companies as the government most likely wouldn’t step in to bail them out again after the backlash from the first round. The list goes on and on.

It’s alarming that there is little mention on a national scale about most of these issues or how to fix them. Instead our government at all levels seem to have given up. Even with the Republican influx after the 2010 elections, their focus has primarily been on curbing discretionary spending. Any talk of entitlements (as proposed by Paul Ryan) is met with fierce opposition, FROM BOTH PARTIES. The Fed is still implementing QE 2, printing money as fast as possible to continue to buy bonds to deflate interest rates to encourage lending and borrowing to stimulate the economy. There is even STILL talk about QE3. The mere fact that we are now starting to hear from both the Fed and the Treasury similar claims “there is no near term fear of inflation” or “we will not devalue our currency” these common attempts to dispel concern tend to in fact occur more often than not.

Feel free to view this as muckraking as I have no clear opinion as to how to fix it, but maybe the people much smarter than me will eventually start to discuss it openly. The only other thing I can do is try and protect current assets from any pending calamity. It’s my belief that the end game in any of the mentioned scenarios above lead to one result. INFLATION baby, and lots of it. Whether working or not, its my firm belief that avoiding dollar denominated assets is the key. Bonds, CD’s and cash primarily used by retired folk seem riskier than ever. Surrounding oneself in foreign assets and currency, commodities, tangible goods (real-estate) and jewelry, etc. is the safest bet. Global stocks (large corporations with international revenue streams) and or funds seem the play in the stock market. Also, if you have a job, it may not be a bad idea to assume as much debt as you can take on now (such as buying a bigger house or more land) at fixed rates, for if there is mass inflation, those debts become much easier to pay off. And if none of the is does end up happening, well at least you have forced yourself to save and invest in your future.

Sincerely,

Coco