Do Middle-Schoolers Really Need a Cell Phone?

Ok, I’m weird.  I think I am one of about a thousand people in the country who doesn’t carry a cell phone.  The main reason is that I like to “be where I am.”   When I am at work, I want to be at work without the distraction of people calling or texting about other things.  When I am home, I like to be home and not have people calling about work (ever notice that you would never call someone at home before cell phones unless it was really critical, but no one gives any thought before calling at dinner time or nine at night to talk about things that could wait for the next day since people started carrying cell phones?).  Also, I really don’t know why someone would pay for a movie and then sit there and text throughout it, or how someone could be so rude to people on stage and fellow audience members to text during a live performance.  Actually, I still think it is rude to talk on a phone (or have it ring and then spent thirty seconds seeing whose calling while your annoying ring tone plays before answering the thing) in a restaurant or to text when you are with other people.  Of course, I understand this is the norm and won’t pretend that I can change the world.  You are all addicted and need your digital fix.

My wife, on-the-other-hand, has moved on with technology and has an iPhone.   This has been fine except that it has changed her view of things.  For example, the other day when I came back from fishing she was complaining that she couldn’t call me to ask about dinner plans or something.  The thought of being out at the river enjoying nature and needing to pick up the phone and talk about dinner reinforced my desire not to have a phone.

There is another annoying trend emerging, however.  My son, who is in 6th grade, has informed me that he is the only one left in his grade who does not have a phone.  This made me wonder less about my decision to not get him a phone than to question other parents’ decisions to get their kids phones.  I mean, I’ve seen kindergarteners with their own phones.  Is this really necessary?  Does a five year old need to be reached at a moment’s notice?

There are also a lot of undesirable things that have come from putting this type of technology in the hands of kids.  We’ve seen a rise in cyber bullying largely because of the number of cell phones in the hands of middle schoolers and high school students.  These devices have allowed kids to spread gossip, take and send embarrassing photos (including nude shots of themselves that will haunt them forever in later years) and videos, and plan mean pranks on other students.  In class they are used for cheating and are generally a distraction.

Financially that extra money being spent on a cell phone may be part of the reason no one seems to have the money for college anymore or to even pay off their homes before they retire.  Growing wealthy requires you to go against the norm because the norm is broke.  This means paying cash for used cars when all of your coworkers are taking out loans to buy new cars every four years.  This means eating in a lot while everyone else is going out five nights a week and doing take-out the other two.  This means buying a smaller house that you can make a big down-ayment on and pay off in 10 years while everyone else is buying a McMansion with a bonus room and an office by taking out a forty-year loan.  It may also mean not having a cell phone, or having a cheap phone with minimal features and not giving your kids their own phones until you have enough saved that it really isn’t a significant expense anymore.

My son has confided in me a couple of times that he appreciates that I care enough about him to not get him a phone because I feel it is better for him to experience “being where he is” while he is growing up.  I don’t know if he realizes or appreciates the freedom he has since he can be with friends or out on his bike without us checking up on him.  (Given that most parents use their kid’s cell phones as a virtual leash, I’m frankly surprised so many kids still want them.)  Note, however, that he still expects a cell phone when he gets to high school.  We’ll see….

Does anyone else out there not have a cell phone?  If so, what are your reasons?  Anyone out there want to explain while anyone under 16 really needs a cell phone?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Tale of Two Home Buyers. Why Waiting Matters.

In the last post I advocated saving a 20% down-payment and putting no more than 25% of your take-home pay towards your mortgage.  I also advocated using a 15 year fixed loan to reduce your interest rate and be able to pay off the house before your kids start college.   Some readers took exception to limiting the mortgage payment to 25 % of your take-home pay.  After all, the standard mortgage has been 30 years, and even in these low-interest rate times 30-year mortgages are more common than 15-year mortgages.  Raising a 20% down-payment, which is needed to avoid paying mortgage insurance each month, is also no longer the norm.  Individuals instead typically take out two mortgages (one which provides the 20% down-payment, and then a second that pays for the rest of the house), put almost nothing down, and go ahead and pay mortgage insurance.  This allows individuals who cannot come up with a down-payment to get into a house right away and start “living the dream.”

A couple of generations ago people started out in small homes or even rented an apartment for a long time before buying a home.  Many couples today, however, are looking for their first house to have everything that the home they grew up in had.  A large backyard.  Three or four bedrooms.  A bonus room.  An office.  They therefore want to jump right into a $200,000 mortgage, but certainly don’t want to wait until they can save up $40,000 for a down-payment.  Loan agencies that qualify individuals for huge loan limits certainly don’t help.

Despite this advice being out-of-the-norm, I still advocate for a 20% down payment and a mortgage no bigger than 25% of your take-home pay. The reason for this is that unless you limit your expenses you will not have money to save and invest.  To illustrate this, take the tale of two guys.  Both guys are 21 and make $50,000 per year and put away 15% for retirement.  After funding their 401K’s and paying taxes they have take-home pay of about $32,500.

The first one, Joe Average, buys a home with a mortgage of 35% of his take-home pay.  He takes out a 30-year mortgage on a $204,700 home.  His payment is $948 per month on a 3.75% fixed rate loan.  He is very normal in his choice of home but abnormal in that he does not take any equity out of his home – he just pays his payments until he pays it off at age 51.  After that, he invests his mortgage payment, getting an average return of 12%.

The second guy, Crazy Fred, opts for a home with a mortgage of no more than 25% of his take-home pay.  He therefore finds a first home for $94,700 and a mortgage payment of $677 per month on a 15-year fixed loan.  Because of the shorter term, his interest rate is 3.5%.  (Note that he could have also opted for paying rent for the first ten years and little would have changed financially, which might have been the thing to do if none of the homes for under $100,000 were in safe neighborhoods.)  He saves the extra 10% and invests, earning a return of 12% on his investments.  After ten years he takes the money he has built up through investing, sells the home he has, and uses the home equity he has built up ($57,486) and the money he has saved through investments ($95,926) and uses the money for the down-payment on a bigger home.  Not wanting to increase his mortgage payment, he takes out another 15-year loan for the same amount ($94,700), meaning that his new home is worth $248,000.  In other words, he puts $153,300 down on this new $248,000 home.

Here are the amounts Joe Average and Crazy Fred will have in investments and in home equity during their lives:

	Joe Average		Crazy Fred
Age	Home Equity	Investments	Home Equity	Investments
21	$0.00	$0.00	$0.00	$0.00
31	$44,805.00	$0.00	$57,486.00	$95,926.00
41	$109,959.00	$0.00	$210,898.00	$95,926.00
51	$204,700.00	$0.00	$248,000.00	$412,519.00
61	$204,700.00	$218,076.00	$248,000.00	$1,457,400.00
71	$204,700.00	$937,815.00	$248,000.00	$4,905,910.00

So, at 51 years old, when Average Joe is just paying off his $204,700 home, he only has the equity in his home.  Crazy Fred, on-the-other-hand, is paid off his $248,000 home four years earlier and has built up more than $412,000 in investments. 

In ten more years at age 61, Average Joe has built up a respectable amount in investments since he has been contributing what he used to contribute to his mortgage to investments (meaning he is not sending kids through college or anything).  Crazy Fred, however, now has more than a million and a half-dollar net worth, including $1.4 million in liquid assets that he can use to generate about a $60,000 per year income easily.  This is in addition to his retirement savings and his job.  Note that Crazy Fred continued to contribute only 10% of his pay to investments when he paid off his home, so he also had his $677 per month that he was paying for his mortgage to spend as he wanted.

By the time they reach 71 years of age, Average Joe has finally become a millionaire, but just barely (not counting his retirement savings, which also would have been a few million dollars since he was putting away 15% per year).  Crazy Fred, however, has more than $5 M just from the money he made from investing rather than buying a big house to start.

But wait, Average Joe made more in equity because he had a larger loan, right?  Assuming that the price of the two homes went up 5% per year, Average Joe would have made $2,143,377 in appreciation on the home value.  Crazy Fred would have made about $1.5 million between his two homes. So yes, Average Joe would have made more on home appreciation, but only $600,000 more.  This is nowhere near enough to make up for the $4 M difference from investments.

So, is it normal to buy a $94,000 house instead of a $200,000 house?  No.  Are there plenty of excuses to buy the larger house to start?  Of course.  But this is why most people don’t become wealthy.  Two individuals can have radically different outcomes given the same middle class incomes.  The difference is that those who become wealthy don’t settle for the excuses and do what is needed to save and invest.  Everyone else doesn’t.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Sympathy for the Boomers

Normally I am not a fan of the Boomers (the Baby Boomers, those born between about 1944 and 1955).  I’m sure there are a lot of great people in your generation who worked hard and did a lot of great things.  But there were also a lot of people who really messed things up.

The trouble was, in rejecting authority and not “trusting anyone over 30,” you threw out a lot of good stuff with the bad.  You threw out great art and gave us dung thrown at a canvas.  You threw out great symphonies with beautiful melodies and gave us songs where musicians beat on their instruments and “performance pieces” where the musicians just sit there.

Financially, your generation has been a train wreck.  Still scarred by the Great Depression, your parents were one of the most financially responsible generations ever.  You made more wealth than any generation before you, and yet many of you are heading into retirement still owing a mortgage on your home.  You bought pet rocks and expensive cars and remodelled your kitchens and bathrooms dozens of times, but never saved for your children’s college or your own retirement.  Maybe at 55 or so you started to get worried and saved a bit, but much too late.  (Again, this is all crass generalization and I’m sure there are exceptions.)

That said, fate has also not been kind to your generation.  First it looked like the vast expansion of the 1980′s which went well into the 1990′s would provide the stock market gains needed to salvage a good retirement despite your spendthrift ways during your youth.  Unfortunately that lead to a bubble that burst and took 50% of the stock market value with it.  For many .com companies, the damage was 90% or 100%.

Next, low-interest rates and easy credit lead to a housing bubble, with homes growing in value more that 20% per year.  Again, it looked like Boomers would be able to sell their homes and downsize.  They would then have plenty of cash for a comfortable requirement.  Again, however, the bubble burst, and many Boomers who used their equity to take vacations and remodel their kitchens found themselves underwater.

At this point, they were hit with low interest rates caused by a Federal Reserve that decided to set fund rates at zero and buy long-term debt to spur the economy.  The trouble, however, was that the very business unfriendly climate caused by unprecedented government intrusion into business affairs, a vast expansion in regulations, and a gargantuan expansion in healthcare requirements that will make coverage unaffordable for most workers, there was very little demand for loans to make use of that loose credit.  Instead, Boomers who were retiring saw their interest returns on CDs fall through the floor.

Now, Boomers have rushed into bonds to try to get some sort of return for their savings.  That has caused bond prices to soar, leading to another precarious situation.  When interest rates rise, which they will once inflation starts growing or a change in policy at the Federal Reserve takes place, Boomers will see their bond investments decimated.

Those who have saved up enough to be able to invest largely in equities — those who have enough in assets to be able to weather a decline and still have enough to meet expenses — will be able to keep enough in cash to meet obligations for several years and then sell equities when prices are up and hold when prices are down.  The rest, however, are in a very risky position, particularly with the Government’s ability to continue to pay Social Security and Medicare claims very much in question.  The next decade may not be pretty.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Love your Job or Leave It

I have a secret, I love my job.  I love going in on Mondays because I have the whole week ahead to try to make progress on my projects.  I get kind of sad on Fridays when I didn’t get as much done as I wanted.  It isn’t that I hate weekends, or don’t like to be around my family.  It is just that I really like what I do.

I am a rocket scientist, literally.  I think it is fun to think up things that don’t exist and then work towards building them.  I love seeing things through from a problem to be solved to something that actually flies or controls something or otherwise does something that nothing else has ever done before.  I love to look through data from a test and discover something that no one else knows.  I even like planning out projects, trying to take the big problems and break them down into little steps and little challenges that can be solved.

You may be thinking that I just love my job because it is a cool job, which is true.  But I have people around me in very similar jobs who hate their jobs.  They are always talking about Friday and can’t wait to hit the road at the end of the day.  The thing that kills me is when I give someone else a problem to solve because I just don’t have the time in the day to work on it only to have them do a lackluster job on it.  These are things that I would love to do – why wouldn’t someone jump into this with both feet?

Then again, I’ve met people who work other jobs that I would think were boring, but they are having the time of their lives doing them.  I’ve met janitors who are always smiling and whistling.  Perhaps they like having the same sort of routine each night and not having the pressure of making a lot of big decisions.  Maybe they like to be left alone and enjoy the solitude that comes from empty cubicles and darkened hallways.

The fact is, we’re all different and like different things.  Some people would love to be policemen, or air traffic controllers, or truck drivers.  Others would think it was boring or stressful.  Some people could care less about the work but love the people around them.

The fact is that we spend far too much of our time working to be doing something we truly hate.  But then again, people are only going to pay you if you are meeting some need they have, not doing something you want to do.  No one can make a living lying in a beach chair no matter how much you love doing it.  The trick is finding something you love to do that also meets a need.

It is not always even necessary to leave a job to find another you like better.  Many companies need a lot of different things done.  Often if you do a good job and simply ask you may get a chance to do something different with the same company.  Just remember to be patient but persistent.

Sometimes you have the power to make a better job for yourself without even changing positions.  Maybe you like planning but you are involved in day-to-day operations.  Maybe you can develop plans to make the day-to-day operations run smoother.

Another thing people do is to be involved with after work activities.  Someone who never moves beyond an entry line job may be in charge of a church group or a civic organization and get to shape the group exactly as they would like.

Everyone should find something they like to do.  What is your passion?

Do you love your job?  What do you love about it?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

It’s (Past) Time to Switch to the Fair Tax

It’s tax time again.  Once again people are gathering receipts, getting their 1099′s together, and either spending their weekends with TurboTax or going to an accountant to have their taxes prepared.  It is likely that most people are spending something like $400 on tax prep fees and/or between ten and twenty hours pulling together the paperwork and filling out forms.  Some have payments due and will need to find the money to write a big check.  Others will be getting a refund, which sounds great until you realize that you have made an interest free loan to the government.  Given that refunds are going out later this year due to the uncertainty at the end of the year, that means the government is keeping your money an extra month or two, still interest free.

The saddest thing is that it doesn’t need to be this way.  If the current income tax (and Payroll taxes) were replaced with a national sales tax, all of the hassle surrounding the filing of taxes would be eliminated.  April 15th would just be another day in the Spring.  You wouldn’t need to set up special tax-deferred retirement accounts and worry if you’d made your yearly contribution.  You wouldn’t need to launder your prescription money through Health Flexible spending accounts and be accused of being a meth maker because you were buying a bunch of cold medicine to avoid losing your remaining balance.  You wouldn’t need to worry if selling a stock would trigger taxes, or buy special windows or appliances to save on taxes.  And finally, you would never need to worry about the IRS or need to keep seven years of receipts handy just in case they call you in for an audit.

The answer is the Fair Tax.  Here’s how it works:

1.  The income and the payroll taxes would be eliminated, meaning that you would receive your entire paycheck.  There would be no need to worry about taxes, fill out W2′s, or track anything for tax purposes.  Without all of these taxes, your paycheck would be at least 25% bigger.

2.  Anytime you buy any new goods or services, a sales tax would be charged.  In order to keep collecting the same revenue as the government currently does, this sales tax would be about 23%.  This sounds hefty, but again your paycheck would be 25% bigger, so you should be saving at least $1000 per year on a $50,000 salary.  If you didn’t spend your entire paycheck, you would save even more.

3.  Unlike the VAT which is being pushed by some to use in addition to the income tax to generate more revenue, goods would only be charged when sold retail to the consumer.  This means that companies could lower the amount they charge since they would not be paying corporate taxes on their income and they would also not need to pay for all of the tax planning they do.  They wouldn’t need to pay for the big HR department to handle tax collections from their workers, meanig they could hire more people to actually make things!  This savings would be passed along to the consumer, in part, meaning that the price of goods would fall.  It is speculated that much of the 23% tax would be offset by the reduction in the cost of goods due to the savings created.

4.  To prevent a regressive tax system, a “prefund” would be sent out at the start of the year.  This would reduce or eliminate the taxes paid on the first dollars of each person’s spending.  For example, if each individual received a $5,000 prefund and the Fair Tax were 20%, no one would be paying taxes on the first $25,000 of their income (because any sales taxes collected would be offset by the $5000 prefund they received).  By setting the prefund appropriately, no one would be paying taxes at all on necessities – it would just be the spending beyond that.  The poor would not pay taxes, nor would people who live modestly and invest for their future while they were building up wealth.

There are a lot of advantages to this system besides not needing to fill out paperwork.  Because it is a sales tax and would be harder to dodge than an income tax, there would be less cheating which means lower taxes for everyone.  Even drug dealers and prostitutes would be paying taxes when they spent their money.  So  would people being paid under-the-table.

Also, it rewards saving and penalizes spending.  Because a society of savers is able to take care of themselves better than a society of spenders, this would make the nation better able to weather downturns in the economy.  It would also mean a lot more investment since investment returns would not be taxed until they were spent, so there would be a lot more innovation and jobs.

If you would like to never worry about keeping track of your income and no longer be in fear that the IRS will come knocking, support the Fair Tax today.  Like this post and share it with as many people as you can.  Tweet about it (#FairTaxNow), put it on your FaceBook wall and talk to all of your friends about it.  Go to the Fair Tax website and learn more.  If you are a blogger, please copy and reblog this post on your site or write your own post about it.  Finally, call, write, and email your representatives and let them know that you want the Fair Tax.  This will be a difficult change to make because people in general are fearful of change and politicians like the current tax system since it lets them reward their special interest groups.  Once people learn the facts, however, they’ll see that it would be a much better system.  Let’s change things this year and let 2012 be the last year you need to file income taxes!

Any concerns about the Fair Tax?  Any ideas on how we could get it enacted?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.