Why Is It So Hard To Save?

We have been hearing for years that the nation’s savings rate is either near or below zero.  Frankly, I do not blame people for not saving, especially now.  My savings account with the highest interest pays only 3% APR while the lowest pays just over 1% APR.  Most debts people have, from their mortgages to their credit cards, are at a much higher interest rate.  Worse than that, though, is the bite of inflation.  With the yearly inflation rate around 4%, every year the money in my savings accounts is worth less and less, even with the interest being paid in.  Economically speaking, it is not rational to save when the money you save is decreasing in value faster than you gain interest.

However, all of that is really just mumbo jumbo.  The real reason it is hard to save is because of the way everything we buy these days comes with a monthly payment.

Here is what a typical household’s list of monthly payments may look like:

• Mortgage/Rent
• Gas bill
• Electric bill
• Cable bill
• Home phone bill
• Cell phone bill
• Internet service bill
• Car payment
• Condo/Home owner’s association fee
• Credit card bill
• Newspaper subscription
• Magazine subscription
• Netflix/Blockbuster subscription
• Subscription to an internet site

That is quite the long list.  Add it all up, and it does not leave much room every month for putting aside money for savings.  Sure, lots of people have their retirement money deducted from every paycheck, but nice liquid savings are harder to put aside for a rainy day.

Let us return to an old adage:  Pay yourself first.  Make your savings account one of those monthly payments, and make it a high priority one.  I get “fun money” for myself every paycheck that goes into a personal account of mine, not the joint account my wife and I both use.  I can use the money for anything I want, but I put aside abot a third of it every paycheck into a savings account so I have money to buy birthday, Christmas, etc. presents for my wife.  Otherwise, I would end up spending the money on fun things for myself.  It is the only way I can stay disciplined enough to save.  Try it some time.

401k Me!

Finally.  Finally I am actively investing again.  When I switched jobs, I had to wait one year before I could start contributing to my 401k.  That one year has passed, and as of yesterday, I am putting money into the stock market.

Why am I so excited?  After all, the market is going down and people are running from financial stocks like rats from a sinking ship.  I love investing as the market is going down.  The market will come back up.  It will also go back down, eventually.  However, over the next 30+ years I have until I retire, there is a much better chance the market will continue to rise.  There will be downturns, but the upswings always go higher and higher.

So, I am buying on sale right now.  The last time I got access to a self-invested retirement fund, the tech bubble was popping, circa August 2001.  The Dow Jones had just hit 9000, and I jumped into the market.  After all, how much lower could it go?  Well, it ended up going a bit lower, but by the end of the year I had a 20% return with a 32% return the year after.  I’m hoping for a repeat performance this time around as well.

I am going to keep riding out the market and betting on the long-term, not short-term, success of the American economy

Everyone Wants Me To Help Them Lobby

Recently I have gotten two emails asking me to contact my Congressmen.

The first is from the SETI@home project.  SETI@home uses the spare processing power of your computer to analyze data gathered from the Arecibo Radio Telescope to find anything that might be a signal from intelligent life in outer space.  I have donated the spare power of various computers I have owned over the years to the project.  I help in fits and starts.  I will run the program for a few months, take a year off, and then run it again some more.  It may not be the best way to find extraterrestrial life, but it is better than anything else I can come up with.

So, why are they contacting me? Because apparently Congress is looking to drastically cut the funding to the telescope.  There are two bills before the two chambers to continue financially supporting the the telescope.  SETI@home sent me the link to a letter I can print out and send to my Congressmen.

The second email I received was from an airline.  Apparently they feel that the price of oil is being driven up by speculators in the oil market.  So, they want me to go to this website and contact my Congressperson asking them to regulate the commodity markets more.  I am going to paste the website below so I can address a few points in it:

Tell Congress to Act Now to Lower Energy Costs

The oil price bubble is unfairly taxing American families and restricting our nation’s economic potential. While everyone is aware that supply and demand constraints contribute to price increases, there’s another force at work that, like gravity, is invisible yet powerful. This force is rampant speculation.

Okay, let us dissect this thing paragraph by paragraph.  First up, they call the oil bubble a tax.  Taxes are bad, so therefore the oil bubble must be bad because they called it a tax, right?  As for it hindering our economic potential, the price of oil is directly aiding the oil companies.  Exxon could never have posted their highest profit ever if it were not for the oil bubble.  It is also helping out hedge and pension funds.  So, the oil bubble is not universally bad.  Oh, and by calling it an invisible and powerful force, they are trying to evoke some kind of low-level dread.

Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil even though they have no intention of using the product. As unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.

Hmm, the Republicans have been telling us that deregulation leads to things like lower prices and better service.  Is this necessarily a bad thing?  As for secretive, yeah, that is probably a bad thing in a market of any kind.  Transparency is important to be able to determine the health of a market.  Now, for my favorite adjective here, foreign.  Who cares if the markets are foreign or not?  Are all commodities supposed to only be sold in a US market?  Would that not make those markets foreign to everyone else in the world?  They are just trying to play on a fear of the unknown.

It is not a bad thing if someone buys and sells something they have no intention of using.  Store owners do it all the time, and stock traders do it all the time.  Just because someone makes a profit, even a large one, from buying and selling things they are not going to use does not mean they are doing anything wrong.

Please take a moment and tell Congress to act now. By adopting common-sense solutions, Congress dramatically reduce the price of oil and gas, providing immediate relief for businesses and hard working Americans.

Calling something common-sense does not make it common-sense, especially when you are calling for the immediate and dramatic reduction of the price of something in a market.  Most people call that a “crash.”  Besides, the change in price of oil is not felt by buisnesses and “hard working Americans” (Yo, Joe!) until months afterwards.  It has to filter down through the supply chain to finally affect the consumer.

With that all said, I do think greater regulation is probably needed.  However, the last thing we need is another bubble bursting.  We need to deflate it slowly.  So, we need to hit the problem from three different sides:

1. Reduce demand.  If you are not putting anything in the back of your SUV, minivan, or pick-up truck that could not fit in the trunk of a car at least twice a month, get a smaller car.  It would actually be cheaper to rent a pick-up truck when you needed it than to make the payments on a higher-priced vehicle and pay for the lower gas milage.  Moving from an SUV to a compact car saves a lot more in gas than moving from a compact car to a hybrid, so that is why I am focusing on the big vehicle owners.
2. Raise interest rates.  It strengthens the dollar, reducing the price of oil.  It also makes money more expensive to borrow increasing the price of the leveraged buying hedge funds like to do.  Finally, it pushes people towards smaller cars since it costs more to buy a car.
3. Finally, increase regulation, but do it slowly.  Give people time to gracefully exit the market.

One great benefit of the high oil prices is that alternative fuels are finally getting a fair shot.  It is only when prices get this high that alternative fuel research and adoption becomes economical.  Hopefully we will get enough progress made on them by the time oil comes back down that they will still be viable, economically speaking.

I’m Back

Okay, I’m going to try to keep this up to date again.  I think I have a lot to post on this one. 

First, Greece was awesome.  I have to go back.  However, I will share with you the travel tips I learned:

1.  Before going to Greece, bone up on your Greek.

2.  Even more importantly before going to Greece, get on a StairMaster.

3.  Don’t fly Air France.  Every flight of theirs we took left late, and they managed to lose one of our bags for a few days.

4.  There is less internet access in Greece than you would expect.

5.  There are more historical sites there than you can see in three weeks.

As for more current news, school starts August 25th.  I’m excited to be going back, because now I get to take all the finance courses I want to take, instead of all the other courses I had to take.  I have a very strong affinity for things I want and a very strong repulsion for things I have to do.

Oh, and the economy still sucks.  Again, Steven Pearlstein has a great column on the economy.  I think it’s funny how I’ve been reading how people don’t understand why consumer confidence is as low as it was in the 70s when the economy is better.  What people aren’t grasping is the difference between the micro and macro view.  In the macro world of economics, the broad measures aren’t as bad.  The GDP is still growing, for instance.  However, in the micro world, people are getting laid off, they aren’t paying their bills, and everything is getting more expensive.  So, we have a disconnect between the two sides of economics.  I have a feeling the micro is going to pull down the macro, though.  If peoples’ personal finances are not doing well on a growing scale, then the economy as a whole is going to have trouble recovering.

So, there you have it, my prediction of doom and gloom.  Things will get better once the economy isn’t so levereged.  When people and companies are borrowing so much money, it’s hard to gauge how something like the Fed increasing interest rates to combat inflation will change things.  Let’s hope for the best.

Investing With The U.S. Treasury

Everyone is familiar with savings accounts, CDs, and the idea of investing in stocks and bonds.  (I’ll get into stocks and bonds in a later post.)  However, not as many people are familiar with Treasury bonds, notes and bills.  Here’s a quick primer on them.

Treasury Bills

Treasury bills are short-term investments, and by short-term I mean from 2-weeks to 26-weeks.  The way they work is very simple.  The U.S. Government says, for example, “If you give us $99 today, we’ll give you $100 in four weeks.”  That would be a 1.01% return for four weeks of loaning money to the government.  They usually don’t return that much money, but it is an example.  One benefit to Treasury bills is that the profit you make from them is not subject to sate or local income tax, although they are subject to federal income tax.

Treasury Notes

Treasury notes allow the government to rent your money.  They pay you interest every 6 months on the amount you loan the government.  At the end of the note, they give you all the money you loaned back.  For example, if you bought $5,000 of 10-year notes, at a 2% interest rate, every 6 months, the U.S. Treasury would pay you $500 of interest and after 10 years, they would give you your $5,000 back.  Again, the interest is subject to federal income tax but not state or local income tax.

Treasury Bonds

Treasury bonds, not to be confused with savings bonds are just long-term notes, usually 20-30 years in length.

Since they are backed by the U.S. government, Treasury products are considered extremely safe.  Because of that, they do not give as good of a return on your investment as a lot of other products.  However, that security is their biggest benefit.  They are the closest to a sure bet you can find in the financial arena.

I’ll go into U.S.savings bonds and inflation-protected investments in another post since this one is probably making someone’s eyes cross already.

Gas Tax Holiday?

Sounds like a bad idea to me.  I’m not a big fan of pandering, and this really smacks of Clinton and McCain attempting to buy our votes with money the government doesn’t have.

People say they want the government to be run like a business, but since businesses exist soley to make money (except for non-profits, and even then…) I think that is not the goal we want of our government.  A government should be run like a household.  It should make money in order to provide for the needs of those living under its roof.

Where am I going with this?  Well, say you’re the head of a household.  Your financial situation isn’t looking so good, and it looks like your wife and kids may be losing their jobs.  So, what do you do?  Bringing in less money does not sound like a good idea to me.  Convincing your family’s jobs to give them more money sounds like a better idea to me.

To stop the analogy, real wages have not increased in quite awhile, and I think the economy is starting to feel the effects.  People say that raising the minimum wage hurts businesses by forcing them to spend more of their money on their employees.  However, most of the companies that pay minimum wage are companies that people spend a lot of money at:  retail stores, grocery stores, dry cleaners, etc.  So, giving people more money to spend actually will give those companies a boost.

So, again, I think that companies need to bail out the economy, not the government.

Rent or Buy?

Recently, I was asked by a friend why we had not bought a house yet.  I am working part time to help make ends meet while I finish up school.  We still put away money for retirement, we put away money to cover any sudden large expenses we might have, and we put away money to cover expenses and lost income when we finally have a child.  Even with all that, we still put money away towards a down payment on a house.  It’s not a large amount right now, but we have a few expenses, like a car payment, that will be going away soon, so our saving rate will increase when that is over.

So, we are making more money than we spend, and we save that money.  We’re in a decent position financially.  Yet, we’re not buying a house, why is that?

Note:  These numbers are obfuscated a bit to not reveal too much information about my life.

First, let me guesstimate that the condo we live in would sell for $400,000.  Searching for a loan, I found one at 5.75% APR if we put 20% down on the $400,000 loan (which we do not have right now.)  That works out to be a $2,334 a month house payment.  That is significantly more than we pay now, like around 150% more than we pay in rent, not including condo fees which we don’t have to pay now.

But we save money on taxes because of the interest, right?  Sure we would.  The first year of the loan, we would spend ~$18,000 in interest.  That’s $7,300 more than the standard deduction for a married couple.  Since we are in the 15% tax bracket, that would save us a total of $1,095 a year in taxes.  Even if we were in the 25% tax bracket, we would save $1,825 a year.  So, I could spend ~$7,000 more a year on the place I live to save $1,825 a year in taxes.  This is also the most I’ll ever save on taxes because of the interest, too, since you pay less and less interest every year.

But what about the equity you gain?  Well, with that same loan, you pay about $4,100 on principle.  So, we would have increased our equity in the condo by that amount.  So, we’ve saved $1,825 on taxes and built up $4,100 in equity for a grand total of $5,925.  We still haven’t reached that $7,000 of extra cost yet, though.  The only way to make it up is to hope that the condo increases in value.  Over the long haul, it will go up.  However, there is no guarantee that in the next 5 or 6 years it will go up in value significantly, no matter what real estate people try to tell you.

Let’s assume the condo does go up a few percentage points in value over the course of the year.  That would put the buying ahead of renting in money terms.  However, I’ve only talked about the good parts of home ownership.  There are more costs associated with owning a house than with renting.  Renters don’t have to pay to replace appliances.  They don’t have to pay for upkeep.  All I have to do is call my landlord, and she is obligated to fix it.  Renter’s insurance is also less than homeowner’s insurance.  Oh, and I don’t have to pay property tax.  That saves me $2,900 a year right there.

Frankly, unless we move somewhere lower in cost and more inconvenient for us, there isn’t a large monetary incentive for us to buy a house.  Think about it, do people that own houses really have a lot more money lying around?  I’ve never really seen any evidence of this.  In fact, I’ve seen a few people that were house poor, and we actually had more disposable income than they did.  For now, I’m happy renting, and until we make more money, renting is at least as good of an option as buying, if not better.

Regulation Is The Mother Of Invention

Yesterday The Washington Post ran this article. Treasury Secretary Paulson is calling for more, if only temporary, regulation of investment banks.  He’s finally realized that the investment bank community has come up with a lot of other ways to invest money that flies under the regulation radar.

Does this really surprise anyone?  They came up with new ways to slide money around regulation.  They’ve had so much time to do it, over 30 years.  It happened because regulation limited their ability to make money.  So they invented new ways to make money.

People claim regulation stifles growth and innovation, however greed goes a long way towards compensating.  I think the regulation is needed, given the fact that investment banks have proven they cannot be trusted to regulate themselves.  Of course, any extra regulation that is added will cause them to come up with new ways to bypass the new regulation.  This probably isn’t a bad thing, since it will give rise to new money making opportunities for people.

My Economic Stimulus Package

So, this year the federal government is giving people up to $600 a piece to spend.  That’s crap.

You want to see some real stimulus?  Let’s look at ExxonMobil.

They posted a record profit of $40 BILLION.  That’s more money than any corporation has ever made in one year in the U.S.  What do I think they’re going to do with it?  I’m betting a stock buyback.  It’s one of the stupider moves they could make.  Their stock prices are already flying high, so they’ll be buying those shares of stock at a premium.  One of the first rules of using the stock market is to buy low and sell high.  Buying their own stock now would be buying high.

Second, all a buyback does is raise the equity of shareholders on paper.  They actually have to sell the stock in order to reap the benefits of the buyback, which would in turn lower the price of ExxonMobil stock.  So, you’re not actually giving value to your shareholders.

If ExxonMobil really wants to give back to its shareholders, it should issue a dividend.  Give the cash straight to the shareholders immediately.  Reward them directly for having faith in the company.

However, if ExxonMobil really wants to reward the people that made their record profit possible, they should give some money back to its employees.  After all, if their employees hadn’t done their jobs as well as they did, they wouldn’t have made as much money.   Here’s my recommendation:  Give each employee a $100,000 bonus.  $100,000 is a lot of money, right?  How could they possibly afford to do that?  With ExxonMobil’s 100,000 employees, that $100,000 bonus works out to $10 billion dollars, one quarter of the company’s profit.

It’s a decent chunk of their profit, but there are lots of benefits.  First, any company that gives all of its employees that size of bonus will have wonderful morale and very little turnover.  It would also generate a feeling of investment.  After all, I know I would be more likely to try to generate profits if I knew I’d be getting some of those profits.  Second, the government will suddenly have almost 100,000 people jumping up a number of tax brackets.   So the government will actually get MORE revenue.  Finally, 100,000 people suddenly getting $60k after tax withholdings will be throwing huge amounts of cash into the economy.  They could use it to pay off loans and credit cards, adding liquidity to the credit market.  They could buy large ticket items like TVs, cars, etc.  The least likely thing they’ll be willing to do is invest all of it, effectively negating the stimulating power of the bonus.

Now,  it would take more than just ExxonMobil doing this, but if every company gave 25% of their profits back to their employees, a lot more money would be flowing through the economy.  It also means the government wouldn’t have to get involved and would maybe even benefit financially.

Down With The Payments

Most people think of mortgage companies requiring a down payment as a way to protect the lender. They even require you to buy insurance if you cannot make the 20% down payment requirement. Standing on the outside watching the mortgage meltdown, I see things that could have been prevented if only people had made significant down payments.

WARNING: MATH AHEAD!

Say I bought a house four years ago for $500,000, not too unreasonable for the Washington, DC area. If I borrowed the entire amount with an ARM and a low teaser rate hoping to refinance into a fixed-rate mortgage and my house lost 10% of its value bringing it down to $450,000, I would be stuck with an upward-adjusting interest rate on a $500,000 loan and an increasingly bad financial situation. However, if I had made a 20% down payment, I would have only owed $400,000 on a house now worth $450,000. That would have given me room to refinance and let me prevent a larger jump in payments.

So:

$500,000 - $0 down payment + rising interest rate - drop in house value = you are screwed

$500,000 - $100,000 down payment + rising interest rate - drop in house value = you may be able to pull it off

The other side to the 20% down payment coin is that accumulating enough money to make that down payment requires you to be fiscally responsible enough to gather that money. This is something that has been neglected recently with 80/20 loans, piggyback loans, and/or loans for 100% of the value. They allow people with enough income but not enough discipline to get loans they are unable to keep up with.

Equity is something you should start with in a house, not hope to accrue through a rise in property value and a long history of payments.