Do These Things Worry Me? You Bet!

Saving Money Today had a link to a great article about seven things that worry the middle class.  Click here to read the post. 

I thought this was great and thought I’d comment on how I feel about each of these worrisome things, since I consider our family in the middle class:

  1. Falling Income – Last year our company gave no raises and they also cut the match to our 401(k) plan.  Both of these were presented as temporary, but just how long this temporary situation lasts is anybody’s guess.
  2. Reduced Savings / Net Worth – When we bought our home, the value had already dropped 15% or so from when the prior owners had purchased it.  We thought we had swooped in at the right time.  Unfortunately, the decline continued and it’s lost another 20% or so, pretty much erasing our down payment.  Although our net worth in non-home categories has increased, our overall net worth is lower than it was a few years ago because of the anchor that is real estate.  Luckily, we don’t have any plans to move nor do we consider our home an ‘asset’ in the sense of borrowing against it, but it’s still disheartening.
  3. Higher healthcare costs – These definitely worry me.  One upside from our employer is that we have pretty good healthcare, and the out-of-pocket cost increase from 2009 to 2010 was minimal.  Still, costs are increasing and with the new health care legislation, I can’t see this trend stopping anytime soon.
  4. Child Care / Elder Care expenses – My wife stays home with Baby Beagle, so we don’t have the child care costs yet.  Still, pre-school and other costs are bound to be expensive, and that will come up quick.  Our parents are in good health both medically and financially and I’m going to hold on to the thought that this will continue for a long, long time, so the elder care hasn’t come into play yet.
  5. College costs – This is certainly something we’re worried about.  We have started saving for Baby Beagle’s college fund, but if costs rise at the pace that they have for the last twenty years, it’s going to be pretty tough to imagine being able to pay for college at the current rate of savings, especially when you consider that we’d like to have a bigger family.
  6. Housing costs – We’re not moving so this isn’t a factor.  Still, you never know what might happen within a neighborhood or with a job situation, so this is something that could come up and become an issue in pretty quick time.
  7. False expectations – I’m well educated, motivated, and have been told that I’m good at what I do.  It used to be that these things would almost assure you a job and a good wage.  While I have both of those now, I know enough people and have read enough stories who have the same traits but are suffering.  It seems there are fewer and fewer opportunities and more people looking for them, and this wasn’ the way it used to be.

I am not so naive to think that generations before mine did not have the same concerns.  I think it’s natural to worry about money and finance related issues.  Still, I hope that our future allows for people to avoid being crippled by these and other worries.

Taxes Are Done

Our taxes came back from the accountant and I was pleasantly surprised.  I had estimated our federal return using a couple of the online calculators.  I was close but we actually came away with about $200 more than I’d thought.  Our federal return goes as a straight percentage allocated to the following:

  • Debt Payoff – 25% – We are working to be all-but-mortgage-debt-free by the end of 2012 and this will help us take a big step towards that goal
  • Vacation Fund – 10% – We like to go on vacation now and then, and this will help pay for our trips
  • Home Repairs / Renovations – 25% – Our house is just a touch over ten years old, so I expect that bigger ticket repairs will start piling on in the next few years, such as roof, windows, driveway, furnace, water heater, etc. and this will help defray some of those costs
  • Car Repair – 5% – This is to defray unexpected car repairs, insurance deductibles, or big ticket repairs like brakes or tires
  • New/Used Car Fund – 25% – We don’t have any car loans and I’d like to keep it that way.  We purchased a used car last year, so we should be set for a few years, but this will allow us to start re-building this fund since it was depleted with our recent purchase.
  • Family Expenses – 10% – We had built a nice fund when we had Baby Beagle so that we were able to pay for big ticket items that we didn’t receive as shower gifts.  We have future plans (nothing imminent, I promise) to continue to grow our family, so this will help defray some of those costs for when the time comes.

As you can see, our federal return goes largely towards paying off things that we haven’t purchased yet.  This is done intentionally for the simple reason that, as we work towards our goal of paying off debt, we also have a goal not to take on any new debt if at all possible.  Saving money for expenses we know are coming will help us maintain this goal.

Our state refund was also a couple hundred dollars bigger than we had expected.  With our income falling from 2008 to 2009 due to my wife working only part of the year, we qualified for a bit of a refund on our property tax expenses that I hadn’t been anticipating.

Our allocation of this will be for more current items:

  • Debt Payoff – 25% – It’s our standard to use 25% of cash inflows to pay down debt and we plan on doing the same with this.
  • Carpet Cleaning – We would like to get our carpets cleaned annually and it will be time in the spring
  • Lawn Mower Repair – My lawn mower is a couple of years old and I’d like to have a general repair done.  We have a lot of nuts and twigs that fall on our grass, so I’m sure that the blades need to be sharpened, and there’s a local place that does a tremendous job with yard equipment.
  • Furnace Tune-Up – I’m embarrassed to say that we haven’t yet had our furnace cleaned and tuned up, and I know that most guidelines for reducing heating/cooling costs tell you that this is something you should do every year or two.
  • Tree Trimming – This is something that, with many trees on our yard and near our house, needs to be done every two to three years.

We may not get to everything from the state return, but we should be able to get a big chunk of our list done, and all of the items are things that my wife and I agree need to be done to keep our house and yard in the condition that we desire.

Now, we just have to wait for our returns!

Moving Back Into Demand Notes

The bank that we use for depositing paychecks and paying bills has a horrible interest rate.  It’s practically non-existent actually.  So, we’ve always had a savings account for our long term savings and emergency funds.

For the longest time, I’d been using a GMAC Demand Notes account.  Basically, that was a money market account that paid a higher interest rate than any other account I’d ever seen available.  There were two catches.

First, you had to be an eligible GM employee or relative to participate.  I come from an automotive family so this was no problem.

Second, the account is not FDIC insured.  So, it’s considered along the lines of a stock or mutual fund that it could be devalued at any time.  Traditionally, this wasn’t a concern, and so in the heydey of higher interest rates, I was more than happy to take a return of 5.5% or more on our long term savings.

Last year, when both GM and GMAC were in trouble, I started to worry about the possibility of GMAC defaulting on their demand notes.  So, I pulled a pretty sizable chunk out and moved it to a new ING Direct Orange Savings account.  At the time, ING was paying almost identical rates to the Demand Notes account, and was aggressively pursuing new customers.  We even got a $25 sign up bonus!   Since ING Direct is FDIC insured, we had the best of both worlds!

Since then, ING has cut rates a lot so that they are no longer what I consider a top-tier payer of interest rates.  They are currently paying 1.25%.  GMAC Demand Notes, on the other hand, is currently paying 2.15%.  That’s a 72% premium.

I have been watching everything closely, and I believe that the risk of GMAC Demand Notes defaulting is minimal.  GMAC has received government bailout funds a couple of times, so I believe that the government has no interest in letting them fail or default.  I also believe that they’ve strengthened their balance sheet and are on the road to recovery.

So, while I don’t think that GMAC is out of the woods, I believe that the risk has been minimized to the point where we are slowly increasing our balance in our GMAC Demand Notes account.  Basically, our strategy to date is to make payments out of our ING Direct account (our winiter property tax bill was the most recent payment) and make new contributions to the GMAC Demand Notes account.

As our ‘most afraid’, we had about 95% of our long term savings in ING Direct.  As of right now, we’ve lowered that to about 85%.  I’m not sure what blend I feel comfortable with.  At this point I don’t think I’ll ever be comfortable with 100% in an uninsured account again, but I could consider a 50-50 blend being reasonable depending on market conditions.  The extra interest income is sure nice as well as long as I believe the risk to be minimal.

Did The Banks Force You To Sign Your Mortgage?

My Two Dollars posted an article last week that made me see red.  In the article, David (the author) said that he’s changed his mind and that he now thinks that it’s OK to walk away from your mortgage if your property value has declined to where you’re underwater on your mortgage.

Even if you can afford to pay.

Huh?

His argument (and he links back to another article in the NY Times that advocates the entire thing) is that the banks have been unwilling to help the borrowers out who they know are underwater, so turning around and ‘sticking’ it back to the banks is fair play.

I think that’s baloney.  I actually think it’s a lot more than that, but the words I’d like to use are ones that I try to stay away from in a public blog.

First, two wrongs don’t make a right.  Just because the banks are being ‘big meanies’ doesn’t mean that walking away will somehow wrong that right.  There are other ways to go about dealing with this issue.  Keep working with your bank.  Try to sell your house.  Or, keep making the payments.  I mean, to act all flabbergasted that the banks are not jumping up and down to work with you, are you serious?

If anybody really thought that the banks were their buddies just because they acted all buddy-buddy to get a mortgage deal signed, well, give me a break.  Banks are in the business to make money, and they do so largely in part by signing loans.  Why do you think that the bank owes it to you?  Let me ask this of anybody who thinks that it’s OK to walk away: If the value of your home had continued to go up and you sold it for a nice profit, would you have ‘shared’ that profit with the bank?  Didn’t think so, but how is anybody throwing a tantrum because the bank won’t ‘work with them’ any different?

Second, nobody forced you to sign the papers in the first place, did they?  As far as I know, a lot of people signed a lot of papers agreeing to pay a lot of money for houses that, as it turns out, were not going to hold their value.  While I agree that this is bad news, the fact is that there was nobody from the banks or the mortgage company holding a gun to anybody’s head (except maybe on the Sopranos).

Let’s face it, many of the same people that bought houses inflated in value was because they saw it as an investment.  Just like any investment, a stock, a bond, whatever…there’s a risk.  But, instead of these people dealing with their losses like they would in any other investment, they would now rather  leave someone else to deal with their losses.

That’s baloney.

Third, the short-sightedness is unbelievable in the logic that David uses. Why? Because banks aren’t the only ones that lose here.  Yes, you might be ‘sticking it to the bank, but let’s think for a minute of all the other people, real people that aren’t hiding behind corporations or skyscrapers, that get screwed every time someone walks away that could afford to keep paying:

  • Neighbors – Anybody around the vacant home now has to deal with an empty house that will, more often than not, turn into an eyesore as the lawn goes uncut, the snow doesn’t get shoveled, and gets open to all sorts of problems such as infestation, scavenging, broken pipes, or any other number of things that even a few months of neglect can bring on.  And usually these sit for more than just a few months.
  • Neighbors – Yes, I’ll mention the neighbors again because now what happens is that the bank will have to foreclose and this will usually lead to lower values in the neighborhood.  So, every one of your neighbors watches their own home value drop when you walk away.  You think the bank is the one eating your loss, but chances are your neighbors are even more.
  • The municipality you live in – I’m guessing that when you walk away, you’re going to stop paying the property taxes.  Since most municipalities rely on property tax collections to fund their operations, you’re leaving them with less for as long as the foreclosure process goes on.  That means less money to provide police and fire safety, less money to keep up infrastructure such as roads and other essential services in a time when many cities are barely scraping by as it is.
  • The kids in your school district – Where I come from, property taxes also fund the public school system.  You leave, and there’s less money to fund the schools.  At least here in Michigan, educational spending has already been cut a few times, largely in part because of declining property values AND less property taxes collected because of people who enter foreclosure.  To think that there are people contributing to this willingly is simply nauseating to me.

I wonder if anybody that walks away simply to screw the bank  looks in their rearview mirror as they’re driving away and sees all the rest that they’re leaving behind.  Because, there are a lot of other people affected by that selfish decision, not just the bank.

Let’s also mention the circular effect. As I mentioned, walking away typically leads to a foreclosure, which more often than not leads to a decline in the home value on the abandoned property and all the properties around this.  These declining values will then lower values so that someone else goes underwater.  Then, they walk away and that depresses the value even further, which leads to someone else walking away, and so on and so forth.

When does it end?  Are we supposed to become a nation of renters because if things kept going and going, that’s the end game.

I think I’ll pass on that one, thanks.

If we want this real estate mess to stop, there has to be personal responsibility.  There has to be sacrifice in order for this cycle to stop and for us to start the process of stabilizing the real estate market for good.  It amazes me when I see blog posts and news stories like David’s who either want to delay this process, or want to make it someone else’s problem.  In the end, that’s all it’s doing every time someone walks away is making it someone else’s problem.

Let me put a disclaimer or clarification on all this.  If there are circumstances where you can’t afford your house, say you lost your job or you have a medical expense, or something else that’s put your finances in the tank, none of what I said applies to you.  I understand there are thousands of people who had to walk away from their homes because they had no other choice.  I’m not chastising you in this article.  What my comments and my anger are centered around are those people who still have their jobs, who can still afford the payments, but choose to consider not making them simply because things didn’t work out like they planned.

One of my favorite bloggers is Funny About Money.  Funny lives in Arizona and until the end of 2009, she worked for Arizona State University, but found herself out of a job due to budget cuts, and is now effectively retired.  She now lives on her banked time and unemployment, and will soon be living on Social Security and a small-to-modest retirement account.  She will be scraping by.

She also has a house that is worth a lot less than she paid for it a few years ago.  Yet, she plans on staying there and in all the months that I’ve read her blog, she’s never once seriously considered walking away.  It would be the easy thing to do.  It would probably help her out.  But, she’s never considered it because she knows it would be the wrong thing to do.  I feel bad because she’s definitely feeling a big impact in her life as a result of the real estate declines.  But, I’m proud of her because she makes the right choice, even if it’s the difficult one.

If someone in her position can make the right decision, even though it puts her in a tough circumstance, why is it so hard for others to comprehend doing the right thing even if it means sacrificing?  People in generations past made a lot of sacrifices that, while they were tough, led to opportunity.  Now, people want the opportunity without the sacrifice, and there are way too many people encouraging this mentality.

So, please, can we stop already with the sympathy to those who choose to walk away from their mortgages even though they can afford them? OK?  It’s baloney!

Getting Our Tax Information Ready

I think this is the earliest I’ve gotten everything together.  We have an accountant that does our stuff, so it’s all packaged and ready to get dropped off.

This is the earliest I think I have it all ready.  I know this because every year when I finish things off, I create a little Word document that has miscellaneous information that doesn’t have documentation, and the ‘Save’ date was five days earlier than I’ve had in years past!

It was pretty easy to get everything together.  Here’s the process we used:

  • Get a file folder for tax stuff – As soon as the first piece of information came in the mail, I grabbed a file folder and started putting everything into that
  • Create a checklist of old stuff – There are certain things that happen every year that I know we need before we have all the information.  W-2’s, interest statements, investment statements, student loan statements, etc.  It’s pretty easy to gather a list of everything you had in years past especially if you peruse last year’s returns.
  • Create a checklist of new stuff – If you opened any new accounts or had anything life-changing, make sure this is accounted for.  We had to add Baby Beagle’s information to our recordkeeping, as well as information about our 529 plan that we opened for him, since we’ll get to write those contributions off against our state taxes.  I also reviewed our car transactions (selling a car, purchasing a new one) to make sure that there wouldn’t be any possible tax implications. 
  • Use online resources – More and more access is available online, including year-end tax statements.  In year’s past, some stuff would get sent out on January 31st, but I found that the statements were available online well in advance of that, so I was able to print out the couple of items that hadn’t yet arrived.
  • Estimate – I plugged in our numbers on a couple of the websites that let you estimate your return, so I have a general idea of what to expect for our refund this year.  It’s always helpful to know that.  Although I could probably do it myself, I find that I’m just more comfortable having a professional do it, just to make sure that everything is squared away.

Happy taxes!

Is 7-11 Full Of (Cold) Air?

It’s summertime and that means that it’s time to enjoy frozen treats of all kinds.
One of my favorite summertime treats has always been the Slurpee, which is an icon and one of the things that instantly comes to mind whenever anybody mentions the 7-11 convenience stores.
However, experiences over the recent years have made me question whether 7-11 is full of cold air.
Let me explain.
If you’re unfamiliar with how the Slurpee works, you take a cup, put the domed lid on and fill it through the hole in the top. This ensures that you get a full cup.
What I noticed, a few times that I recently went, was that although I filled the cup to the top of the dome, that it was significantly lower by the time I paid and got out to my car.
Yes, of course I take a few sips while in the store, but was I really sucking enough down to where it was below the level of the plastic dome? It didn’t seem possible.
So, I tried a little experiment and didn’t take any sips to watch what happened to the level. Got my Slurpee, stood in line, paid, and went out to the car.
Took a look, and…..almost to the bottom of the dome!
What gives?
Well, after thinking things through, I determined that the Slurpee machines were most likely adding a bit of extra ingredients to our frozen treats:
Air.
If they add a bit of extra air, it fills the cup with less product, which can probably add up to quite a bit of less product used when you consider the millions of Slurpees purchased every year.
Still, air is free so why I am paying for it?
After I figured out their trick, I would actually fill my cup, do a quick lap around the store, and then add a bit more to fil up the cup after the air settled out. Only then would I add my straw and start drinking (so that I didn’t add any of my germs to the machine).
This is one alternative, but I found another that I like even better:
Get a ‘Speedy’.
If you’re lucky enough to have Speedway gas stations near you, you’ll find that they most likely have a frozen drink machine. They can’t call them Slurpees, but they do the same thing.
There’s a few reason I like them better:
First, they don’t add air. When we first discovered that they had the frozen drink machine and tried one out, my wife and I filled them up and did out quick lap around the store. When we went to fill up the cups, we discovered that we didn’t have to! There was barely any settling. This told me that Speedway is giving you what you pay for!
Second, they’re cheaper! The frugal shopper in me noticed right away that their prices are generally 10 to 25 cents less. Granted, this difference won’t make me rich, but the way I see it, I’m getting a better product and for less money. I think shoppers should give their business to the stores that provide this distinction whether it be for expensive items like TVs or cheap items like frozen treats.
Bonus: Speedway is running a summer special for the second straight year (that I’ve noticed anyway), at least in the Michigan area. All fountain drinks and frozen drinks are 89 cents, regardless of the size! So, the price difference is even greater during these summer months when a frozen treat is especially rewarding.
Oh, and in case you didn’t figure out from my opening sentence in this section, my wife and I have dubbed the frozen drinks from Speedway as the ‘Speedy’. Though maybe not as catchy and iconic as the Slurpee, I venture to say that you won’t be disappointed should you have the opportunity to try one.
Happy frozen drink hunting!

Not Understanding Withholding Rates

Something has been sort of bugging me, and today I ran some numbers to verify that I should be concerned. I noticed after I changed my marriage status from SINGLE to MARRIED after getting married last year, that my take home pay increased.
I didn’t add any allowances from what I’d filed with when I was single. Nothing else changed, so I’m confused as to why the withholding rates suddenly change. I verified today that in years past, they took out about 18-20% in federal withholding. I’m making the same as last year, yet it’s only around 14%. Yet, somehow I have a hard time believing that I’m going to pay less taxes.
My wife’s withholding is even worse. She makes less, and for last year, they took out about 15%. Now, they’re barely taking out 5%. What the heck???????
This shouldn’t affect us too much, because when I noticed the increase, I started simply taking the ‘extra’ amount in my paycheck and putting it into savings. I figured I’d just combine that with whatever return we got to get our ‘total ‘return, and it wouldn’t end up too much differently than what we got as a total refund last year.
Still, this seems rather dangerous to me, because it seems to me that a couple that didn’t save that ‘extra’ money might spend it and end up owing money to the government come next April 15th.
Am I missing something totally obvious here?

Wall Street Meltdown: What The Government Should Do Next

After another brutal day on Wall Street, the question will surely be raised as to what the U.S. government should do next to try to stop the bleeding and the meltdown that is occurring day after day.
I think I have the answer. Are you ready for it? Here it is:
Absolutely nothing.
That’s right. Nothing. No more interest rate cuts. No more providing additional loans or credit to banks. No more bailing out insurance companies. No more promising to buy risky debt. Nothing. Zip. Nada. Zilch.
Why?
Because nothing they have done so far has worked. The government has tried tactic after tactic to try to calm the markets, but it isn’t working.
These investors that are hitting the panic button have it in their heads that they need to drive the market down day after day. No rate cut, bailout, insurance company rescue, or anything else seems to stop them from panicking. They’ve made that clear.
So, I say let’s just stop trying.
My opinion is that these ‘traders’ who are choosing to let hundreds of billions of dollars disappear from our economy every day are the equivalent of crying babies.
When a baby cries, you can do many things to try to make it stop crying. You can feed it. You can change its diaper. You can rock it. You can give it a pacifier or a rattle. Most times, these things or others will make the baby settle down and stop crying. But, not always. Sometimes a baby is just going to cry no matter what. In those cases, you have to make the decision at some point to just let the baby cry itself out until it’s done.
Basically, these traders driving the market down are the babies of our economy right now. The government has fed these babies (bailout), changed their poopy diapers (interest rate cut), given them their rattles (extended additional credit), and everything else that you provide to a crying baby.
But, these babies have made it clear that they just need their time right now to cry. And cry they will.
So, I say let them cry. Let these sellers bawl their little eyes out. Let them sell and think that they’re accomplishing something. Let them wail at the top of their lungs until they can’t wail anymore. Eventually, just like a baby, these sellers will tire themselves out. And they’ll quit crying.
Then, and only then, the government can get back involved. At that point, maybe the investors will appreciate the steps being taken to try to calm the waters. But for now, there’s no appreciation.
Only the sound of babies crying.

One Lenders Take On The Bailout Proposal

A very good friend of mine is a commercial loan officer for a bank, so it was interesting to see his take on the bailout proposal. The bank he works for is not one of the ‘high risk’ banks that is in trouble because of the many bad loans. They kept with a conservative and safe loan structure, even as other banks were loosening credit and getting into trouble.
But, as my friend pointed out, even their bank is getting affected negatively now, and banks like his could be at risk if the ‘troubled’ banks do not get help. The point being that once things start going south, there won’t be anything to protect any bank or financial institution. Thus, even though it will in a sense reward those institutions that made bad decisions, he believes that the bailout is necessary because of the bigger picture.
With his permission, I am including some of his feedback on the situation. Given that his job is to directly with issuing credit, he has firsthand knowledge of what’s going on and the potential impact. His insight was refreshing and eye-opening.

Currently with all of these bank failures, there have been days when banks have stopped lending money to each other, due to liquidity shortages. [This relates to] supply versus demand. This in turn has force the LIBOR funding rates to go to record levels. What this means for each of you, is that for every tick it goes up, banks are forced to increase interest rates. Do you want 20% interest rates again? The only reason banks are failing today, is that there isn’t enough capital currently in the markets. Their requests for capital can’t be met. This in it’s self is scary. If the bailout doesn’t happen, several banks that made good sound decisions could fall into the same group of failing banks, which I believe we’d all agree is not the approach we want to see.
So basically, I’m saddened by anyone that says to hell with all of the people that made bad decisions, because it’s much bigger than that. The thing you have to remember, is that the federal government isn’t going to do anything where they aren’t going to make a buck out of it. They are basically going to be purchasing non-conforming loans from institutions for primary residences only, NOT investment homes that people took risks on. These loans that are deemed to be “non-conforming” were loans that were being paid as agreed until the rates jumped up to 20% or whatever the crazy rates are. If the government buys these, and is able to give a rate in the 5-6% range, which is todays market rate anyways, how is this not a good idea? I’d rather keep families in there homes rather then giving them no other option than to walk away. That’s not good for home values or anything else.
Big picture I view this plan, if structured properly, as a good thing. These are my main reasons:
(1) It hopefully stops the rapid decline in home values by keeping millions of people in their homes.
(2) It helps stabilize a volatile interest rate environment. Trust me, you don’t want to see what will happen if this plan doesn’t get approved.
(3) Banks will be able to have capital needs, hopefully with stricter regulations, to continue operations at least for the time being and hopefully years to come.
Hopefully I did a good job to explain how this is a much bigger issue than us just bailing out stupid consumers, because it’s much bigger than that.

I think he did a great job and thank him for his contribution.