Wednesday, July 29, 2015

An Answer (Just for Today)

I asked myself a question, “You have spent the better part of the last fourteen years trying to learn about money. What can you tell people that is important, really important?” I came up with two quick answers. I am certain that if I ask myself the same question tomorrow I will have a different answer, but just for today, here is my answer.

Debt is a Curse. Period. The End. No Arguments Allowed.

The longer I try to help people find their way to financial freedom, the more I want to scream at the top of my lungs, “God says debt is part of the curse and that the ability to lend money to others is a blessing! What is it that you don’t understand about that?”

The Bible, as well as all the evidence, teaches us that, “The borrower is slave to the lender.” What is it that you don’t understand about that?

I am so going against the flow on this one. Everything in our consumer culture is rigged to turn you into a willing debt slave. Our entire financial system is based on debt! Look at the dollar bill in your wallet. It doesn’t say anything about this piece of paper can be exchanged for an ounce of silver. It says in locked capital letters, “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”

Yes, I understand that at times debt is the best available option. A mortgage is the only way most people could ever manage to buy a house, but please understand. When you sign that mortgage you are placing yourself under a curse. Even the safest debt is dangerous. If you don’t believe me, just ask the 7,000,000 plus homeowners stuck in underwater houses. They can’t sell and move to a better life, because they can’t come up with the difference (IN CASH!) between the value of their home and the amount they still owe the bank.

Ask the small business owners who took out “safe” Government subsidize loans using their homes for collateral. Too many found when they lost the dream of owning their own business they also lost their job and their home.

Student loans! Please don’t get me started.

“Great rivers, shady trees, medicinal plants, and virtuous people are not born for themselves, but for the good of mankind in general.”
Indian Proverb

The second part of my answer is totally counterintuitive. I have discovered that learning the art of giving is a key component to finding your way to financial freedom. I have also discovered that the key to giving is found in your heart, not in your hand.

Capital One may be asking, “What’s in your wallet?”

But God is asking, “What’s in your heart?”

I may be totally wrong on this one, but I believe that God is more pleased with a quarter stuck in an expiring parking meter that was given by a heart filled with compassion, a sense of abundance, and a desire to be a blessing than with a check for 10% of your gross monthly salary put into the offering plate with a heart filled with resentment and a legalistic sense of entitlement to God’s provision.

It has been my observation that giving with the wrong motives turns the heart into a hard, dead, little cinder of greed and bitterness.

Generosity isn’t an easy spiritual discipline to master, but you can become a more accomplished giver with practice. If you feel the desire to give something to someone or some organization, just do it. See how it works out. If you have given out a good heart, you will know it; perhaps not immediately, but you will know it. From time to time, check in with God. Ask his opinion on the sense of generosity that abides in your heart. Ask him, “Is there a little more I could be doing here?”

He will answer.

He might ask you to tip more than the customary 15% from time to time. He might impress upon your heart to take a depressing and depressed coworker out to lunch. He might even instruct you to give a special one time gift to a person in need. Of course, He might just ask you to stick an extra five dollar bill into the plate on a weekly basis.

We are told the queen of Sheba gave King Solomon an hundred and twenty talents of gold, of spices very great store, and precious stones. The narrator goes on to observe that there came no more such abundance of spices as these which the queen of Sheba gave to King Solomon. The king, by the way, returned the favor. This is what kings and queens do, even in this day. They give out of a sense of abundance, knowing that there will be plenty more where that came from. After all, basically they own an entire country.

If you are a Son or Daughter of the King of the Universe, generosity is your birthright.

Monday, July 27, 2015

Movement and Life

“The velocity of money (also called the velocity of circulation of money) refers to how fast money passes from one holder to the next. It can refer to the income velocity of money, which is the frequency at which the average unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.”

One of the measures of health in the economy is the velocity of money. When money is on the move, people are happy. The investor puts his money to work in the economy. The businessman is using that money to build factories and hire workers. The workers are getting their paychecks to buy products from businesses that then return their profits to the investor in the form of dividends or capital gains. Savers are adding to their bank accounts. The banks are making loans to people with jobs to buy houses, cars, and educations. When the loans are repaid, the savers get their interest. The banks get their profits. The investors get their dividends. The workers get a new home.

Of course, the velocity of money like the movement of water can get out of control causing inflation or assets bubbles. If there isn’t enough movement the economy stagnates, causing the bifurcation of America that has been a source of a great deal of rather heated political rhetoric over the last few years.

During my morning walk, I thought about the motion of water. From the swirling mists of heaven to the sound of ocean waves in the night, motion is the natural state of water, of money, and of life. In its journey from the sky and the mountains, water seeks to find its natural path until it becomes one with the sea. Man can harness the power of water, but can never ultimately control even this softest of nature’s elements.

Thirty five years ago while I was attending engineering school, I heard civil engineering students discussing the eventual destruction of New Orleans by a hundred year flood on the Mississippi or a category 5 hurricane. Much of the city of New Orleans is located below sea level. There is simply not anything the Army Corp of Engineers can do to stop the flow of water into the city during events of exceptional proportions. Since New Orleans is built on mud, the higher and heavier the levee, the faster it will sink into the sediment.

Individuals and Governments believe they can control the flow of money in every possible situation, although all the evidence is to the contrary. In spite of the best efforts of the Federal Reserve Bank and the Treasury, the business cycle still turns. With the introduction of new technologies, the economy goes through predictable seasons of growth and decay. Consider the effects of low cost steel, the railroads, skyscrapers, automobiles, radio, television, the personal computer and the Internet. Each revolution kicks off cycles of boom and bust.

Consider your own life. In the natural scheme of things a stagnant pond will become a swamp, a place were earth and water are one. For a few centuries or more it will serve as a home for many creatures and plants, ultimately transforming into a piece of prime bottomland intersected by a creek. If your life is stagnant, you are on your way to becoming a home for worms, before you are made one with the earth. That will happen to all of us someday, but hopefully, not today.

Look at your money and your life. Do you like what you see? Are you finding your natural path from the mountain to the sea? Like a great river, are you a source of blessing to those with whom you come in contact? Is your money in motion? Are you making investments in the economy that can benefit others? What percentage of your income are you donating to worthy charitable ventures?

There is often a stench associated with a life that is not in motion, money that is not in motion, or water that is not in motion.

Thursday, July 23, 2015

Everybody is Kung Fu Fighting

“When the student is ready, the teacher will appear.”
Zen Saying

All kung fu movies follow a pretty similar pattern. It starts when something evil befalls a nice young man. Often at the start of the movie the arch-villain sends four or five of his henchmen to extort some money from the hero’s family business. His father resists and is subsequently murdered in the first fight scene. Our hero was brave, but his kung fu was ineffective against four professional hoodlums. Cast out of his home our hero wanders aimlessly until he has the good fortune to meet a dirty, long haired tramp who turns out to be the last living master of some obscure but deadly form of kung fu. Impressed by the young man’s good character and potential the old master becomes his personal trainer putting the young man through a fitness regime that mixes slapstick comedy with apparent sadism.

When the student is ready both student and master return to the student’s hometown. First they return to the family business, now run by the four hoodlums. After the young hero litters the floor with the shards of large broken ceramic pots and the broken bodies of the four bad guys, the master smiles at a job well done. Then the hero progresses up the chain of command, killing and beating ever larger numbers of more skilled fighters. Finally, they penetrate the personal estate of the arch-villain. In the halls of his enemy’s mansion the young hero first kills the big boss’s hatchet man, usually a freakish large and muscular Asian and then in the climactic fight to the death the hero kills the big boss himself.

The master walks off into the sunset, his job finished. The young hero marries the hot young neighbor girl who worked at his family business while faithfully waiting for his return.

I guess kung fu masters must outlive their wives. After a few years there will be new job openings for homeless kung fu masters on the look out for promising students.

What does any of this have to do with personal finance or any other serious issue of your life?

First, if you are getting your ass kicked by payday loan companies, credit card companies, and the banks, you need to find a teacher. If the teacher knows his stuff, he won’t force his wisdom down your throat, but when you are ready, he will be there.

The training regime necessary to get out of debt seems sadistically unpleasant, but if you persist you will learn the basic art of financial freedom. As you progress, you will learn the darkest secrets to avoid debt while saving and investing your money.

Once you have defeated the loan companies and your credit cards, you will move on fighting bigger and badder enemies like the thirty year mortgage, the 529 College Savings Plan, and the dreaded preparation for retirement.

The day will come when you are ready to face Gordon Gekko himself in the halls of his mansion in South Hampton out on Long Island.

At some point in this process you will no longer need a teacher. It is time to take responsibility for feeding yourself. Whether you are undertaking a spiritual discipline or just growing up and starting a family of your own, the day will come when you will need to take responsibility for improving your own life. It is called becoming an adult. At this point a wise teacher is still nearby, far enough away to stay out of your hair, but close enough to keep an eye on you.

Finally it will be your turn to become a teacher to someone who is ready to learn.

Ultimately our purpose is to care for, counsel, support and encourage those whom God places in our life, to become wise (particularly for me) in the area of finance, and to share that wisdom with others.

I believe that as we realize our purpose, our lives will become more meaningful and we will find healing in our minds, bodies, and spirits.

Wednesday, July 22, 2015

Car Loan Numbers

Car Loan Numbers (Q1 data from Experian):
• Average loan term for new cars is now 67 months — a record.
• Average loan term for used cars is now 62 months — a record.
• Loans with terms from 74 to 84 months made up 30% of all new vehicle financing — a record.
• Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
• The average amount financed for a new vehicle was $28,711 — a record.
• The average payment for new vehicles was $488 — a record.
• The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

Zero Hedge is reporting the latest car loan numbers from Experian. The total outstanding car debt in this country has passed the $905 Billion mark. 84.9% of new cars carry a note and 55.6% of used car owners are making those monthly payments. About 72% of these loans are considered prime or better. That means 28% are considered something less than prime.

What could possibly go wrong?

I see great opportunities for the repo-man. By the way, lists the average salary for a repo-man at $82,000 a year. Not too shabby for a job that doesn’t require a degree.

Unless you need a $3,000 car to drive to work, pay cash; even if you need a $3,000 car to drive to work, pay as much down as possible.

The rule of thumb for car depreciation: A new car will lose approximately 20% of its value in the first year. Then it will lose 15% per year until it is worth about 10% of its original cost. Going into long term debt to buy something that is absolutely guaranteed to drop in value is—Insane! Don’t do it. Buy the best used car you can afford.

Let’s say you buy that $3,000 clunker. I bought my first car in 1973 for $600 cash. That would be about $3,000 in 2015 money. I managed to squeeze roughly seven years and over 70,000 miles out of that rust bucket, before I sold it for $50. Let’s go back to the list of current factoids found at the top of the page.

$488 (average monthly car payment) X 7 Years X 12 Months/Year = $40,992

Dear Lord have mercy! If you paid yourself that monthly car payment for seven years, you would be able to pay cash for a BMW 428i, base model $40,750 MSRP.

The monthly car payment is a middle class curse. It is simply unnecessary. You need to get to work. You need to get to the doctor’s office and Walmart. You don’t need to become a debt slave to your automobile.

Remember what Mr. Goodwrench told us, “It’s not just a car, it’s your freedom.”

Reform Yourself

“Reform yourself. That way there will be one less rascal in the world.”
Thomas Carlyle

Is there something you don’t like about your life? No doubt you have a lot of problems. The world is not always a very friendly place. Other people don’t have your best interests in their hearts. Life is unfair. There are people who are born smarter, richer, and prettier than you.

That’s just the way it is. So now what? Is it more productive to attempt to change the world financial system so it will give you what you want, or would it be more productive to change something a little closer to home? Look inside yourself. What do you believe about yourself and the world? What stories do you tell yourself? If you tell yourself you are a victim, that there is nothing you can do to make things any better, it is unlikely that you will try to do anything to make your life any better. If you try, you may fail. If you don’t try, you are already a failure.

Have you ever heard of an unemployed heart surgeon? Why is that? Maybe because he offers the marketplace a rare exceedingly valuable skill set. How did he get to the place in life he can collect fine German automobiles the way an average person can collect Pez dispensers? We just see the results. What we don’t see is decades of hard work, thousands of hours spent memorizing, practicing, preparing for exams, then surviving an absurdly unhealthy internship that makes Marine Corp boot camp look like a cakewalk.

Perhaps it is easier to understand that in athletics, talent is only the beginning. Great athletes are all notorious workaholics. No one ever beat Michael Jordan by practicing more or spending more time in preparation for a game. Muhammad Ali didn’t start to count sit ups until he was in pain from doing too many sit ups.

It starts on the inside. After you have spent some time honestly listening to your stories about life, gently, ask yourself, “Even if this story is true, is it useful? Will it help me live a better life or make my world a better place?” You may feel frustrated because your boss is a jerk. OK? So now what? Does your frustration make him less of a jerk? Does it make you a better, more productive person? Stop. Examine yourself. Is there anything you can do better that would make your boss less of a jerk? If not, would it be more useful to look for a better job or curse a jerk?

It won’t be easy. You have spent a lifetime listening to the stories of hopelessness you have been told by others as well as the useless stories you tell yourself. You believe them and in some way they must have proven of some use. After all, you are still above ground sucking air. No matter what you want to change about your life, my advice is the same, “Start small. Start today.” You want to retire before you die? Go down to your personnel office and sign up for your company’s 401(k). You want to lose some weight? Put down that can of beer, put on your tennis shoes, open the door, and go for a walk.

Telling me what you can’t do or why you can’t do it won’t help you or your world. Tell me what you can do. Then, as the Nike commercials tell us, “Just do it!”

When you have changed yourself, you will find that you have also changed the world.

Thursday, July 16, 2015

The Ruminations of a Grumpy Old Man

I don’t know.
It’s not my job.
But we’ve always done it like that.

Three lame excuses given by sorry employees working for subpar organizations; how I hate to hear any of those words when I am in need of help or direction. Unfortunately, I heard them all too often during my career as a Government employee. While attempting to unravel financial and legal issues during our recent family emergency, I was convinced beyond a shadow of a doubt that Government bureaucrats do not hold a monopoly on sloth or intransigence. Bad behavior can be found in banks, insurance companies, transfer account management, and the billing offices of hospitals. Thank heavens I had access to a good attorney and good accountants.

The words, “I don’t know,” are fine if they are followed with the words, “But I will try to get you answer by (fill in the date).” In fact, I wish ministers of the gospel would use those words on a more frequent basis. The world would be a better place.

It may really not be your job, but that is not an excuse. It is a reason to find out who in your organization is empowered to take care of this problem. If you know the answer the correct response might be, “You need to talk with our patent attorney, Joe Smith. Hang on a second and I will give you his contact information.” Or if you really don’t know, tell the customer, “I’m not sure, but I think I know who handles this sort of question. I will make a few calls. When I find the right person, I will give them your contact information. Then I will get back to you.”

“But we’ve always done it that way,” Is a death sentence. There is nowhere to go once those words are spoken by a low level, disempowered slug. It is time to hang up the phone and try another approach.

I have found the more impersonal the contact the more likely you are to hear these words spoken over your problem. 800 number service centers are often worthless, especially if there is no way to get back to the same employee with follow up phone calls. My experience with the IRS back when we first bought a house sent me running to our neighborhood CPA. I asked the same question to two different IRS agents and received totally different answers that didn’t match up with my understanding of the pertinent publication. But really? What can you expect from people stuffed into a cubicle farm (often in a country where English is a second language) earning low wages?

Even if you have a business card in hand while sitting across the desk from a particular individual, there is no guarantee you won’t hear those hated words. During our family emergency I had to deal with numerous different banks. In some instances I had to interact with employees at multiple branches in different states as well as their central offices. I think I only lost it once. I was rude. I apologized. The person at the other end of my bad behavior told me that she was a wonderful employee who had gone far beyond the extra mile on my behalf. In fact on that particular day, she had managed to hit the trifecta. She used all three forbidden phrases during a single interaction.

I don’t know.
It’s not my job.
But we’ve always done it like that.

I note (not without some malicious satisfaction) that particular branch of that particular organization has since ceased operations. I wonder why?

If you find yourself using any of these sentences, repent. If you are dealing with an organization that frequently resorts to any of these ploys, take your money and your business elsewhere. If you can’t avoid dealing with the organization in question, keep trying until you find someone who knows what they are doing, then praise her and thank her at every opportunity. Who knows, maybe she will give you the number to her direct extension.

Wednesday, July 15, 2015

The World Ends Every Twelve Years

One of my readers sent me a link to an article and a video that predicted the end of the financial world as we know it. Although this particular prognosticator has a dubious track record, many of the facts he presented were accurate. Then his speculations moved on to a perfect storm that would result in a 50% drop in the stock market, a 40% drop in the value of American real estate, and hyperinflation that would peel off 30% of the dollar’s value—ALL IN A SINGLE YEAR! Then it would get worse. Of course the reader’s only chance at salvation could be found in the pages of his subscription newsletter.

I have stated that our economy is ultimately a castle of debt built on a foundation of thin air.

Historically, paper money reverts to its intrinsic value, zero.

In my darker moments I have even speculated that a once in a millennium world wide financial crash would be a perfect setup for the appearance of the Antichrist.

It is unlikely but possible that the end is near. What is more likely is another major correction such as occurred in 2008. These come along every 12 years or so. I have been expecting this to happen for about two years now. The market is juiced with funny money from the Federal Reserve. The Shiller PE index is dangerously high. By lowering interest rates to unnatural levels, the Fed has essentially recapitalized the banks at the expense of the small saver. The money that should be in insured Certificates of Deposit has gone off chasing returns in risky stock market speculations.

The market may continue to go up for a few more years or this bull market might end tomorrow.

If you choose to invest in the stock market, you must decide in advance, that you are willing to loose half of what you put at risk in any given year. The American investor lost about 40% in 2008-2009. That is why no sane person is ever, “all in.” When the prices crash that is the time to buy more shares. The stock market has always recovered from these crashes and then gone on to higher levels in terms of real dollars.

This is why relatively safe dividends are so important. If your shares are producing a steady stream of income, their instantaneous value at any point in time becomes much less important.

How I choose to diversify between cash, fixed income instruments, equities, and real estate is a decision I can control. I try to plan, knowing I can not predict the future.

As Solomon observed:
“Ship your grain across the sea;
after many days you may receive a return.
Invest in seven ventures, yes, in eight;
You do not know what disaster may come upon the land."

I can't control what politicians choose to do to our economy. Ultimately, if they want to destroy me, I am destroyed. I try to do my best, the rest I must leave in the Lord's hands.

Anytime anyone is selling anything by appealing to fear or greed I am suspicious. There are reasons to be concerned. If you want a better understanding of why you should be worried and a bit cautious, I would suggest the writings of John Hussman, an extremely erudite fund manager, responsible for the well being of several billion dollars entrusted to his care. He isn’t peddling snake oil.

Here is a link to his weekly market column:

Hussman Funds Weekly Market Comment

Sunday, July 12, 2015

The Magical Metaphysical Money Jar

This morning with my coffee, I watched a video by Brian Tracey. I found the manner he presented one of his ten components of success interesting and a bit unusual. Early in the video Tracey distanced himself from the book and movie, The Secret. It turns out the author of this best seller attended one of Tracey’s seminars before she became famous. The Secret is based on what metaphysical teachers term the law of attraction, the notion that like attracts like. An example would be the old saying, “It takes money to make money.” Tracey’s problem with the book is the word work does not appear even one time in the entire text. The notion that one can just sit around and achieve success through positive thought is, nonsense.

Tracey, however, believes that money is an essential component to success because it allows one to take advantage of opportunities. That is certainly true in investment. In such cases it does take money to make money.

We live in a consumer society. We are constantly bombarded by sophisticated marketers attempting to convince us we need to live beyond our means. Consumer credit is widely available. In this society debt is encouraged. The most recent studies indicate that more than 62% of Americans do not have enough money on had to cover a $500 car repair with cash.

This is atrocious. We are not a nation of savers.

Tracey considers the ability to save money a spiritual disciple. He quotes W. Clement Stone, “If you cannot save money, the seeds of greatness are not in you.

Tracey relates a story from one of many financial disasters that occurred during the early years of his marriage. After they were forced to sell their home, his wife demanded in no uncertain terms that she would be allowed to put the proceeds from the sale, $10,000, into an account in her name where Brian could not get his hands on it. Since they had just been blessed with their first child, Tracey understood his wife’s need for security and did not argue the point. He believes that this decision was one of the turning points in his life. They never ran out of money again and they never had to touch that money. He believes that the presence of that money had some kind of metaphysical power to attract more money into their lives.

Is that true? Well? I am not so sure, but Tracey’s claim did make me think about my own life. In the early years of our marriage we managed to stay out of debt, but we got pretty close to broke a couple of times. In my mind, back in those days, it seems that if our cash reserves dropped below $1,000 I would take some kind of dramatic action to stabilize the situation. There was always at least $900 that didn’t get touched.

Once I graduated from engineering college, I had the Government equivalent of a 401(k). Money started flowing into that account. That money began to grow in my little tax favored greenhouse. Now that I have retired, no more money is flowing into that account, but what is there is still growing.

By the way, don’t be tempted to use the money in your 401 (k) or your Roth for any purpose other than your retirement. Even if facing bankruptcy leave it alone. Money in retirement accounts is generally protected from seizure, even in bankruptcy. Once that money is withdrawn, it can be confiscated by your creditors.

Many years later, I opened my taxable Schwab brokerage house account. Money started flowing into that account. So far, with few exceptions, the money that goes into that account stays in that account. I consciously moved one block of money into that account with the intent of using it to buy our retirement home. I seem to remember that at least once I moved some money from my Schwab account into my Vanguard account. At some point in the future, I expect some of that money will be used to finance some aspect of my retirement, but not yet.

What if you had a magical metaphysical jar for money that, like a piggy bank, had an in slot but no easy way of getting the money out? How could that change your life over the course of time? Imagine yourself establishing a spiritual disciple of saving rather than wasting your money on the foolishness of our consumer society. How could that practice make you a different person? How could that money ultimately change your life, the life of your children, and the life of your community?

Just asking; what if?

The Brian Tracey Video:

The Keys to Success

Friday, July 10, 2015

The Original Slick Willie

Willie Sutton (aka Slick Willie or Willie the Actor) was a notorious bank robber active during three decades of the Twentieth Century. It is estimated that over the course of his career he stole over $2,000,000. To put this accomplishment in perspective, today it would take $17.36 to buy what $1.00 would buy in 1935. Although he was incarcerated for over half of his adult life, he did manage to pull off three pretty spectacular prison escapes.

The story goes that once a reporter asked him why he robbed banks.

He responded, “That’s where the money is.”

This answer has gone down in business theory, as the “Willie Sutton Rule.” In activity-based costing the law stipulates where the highest cost are incurred are the activities with the highest potential for over-all cost reduction. (Wiki) The Willie Sutton Rule could also be applied to individuals looking for a better job or executives making strategic investments for the future profitability of their corporation.

If you want more money, it makes sense to find out where the money is located.

While this quote is pretty much considered apocryphal, Willie did write the following passage in his autobiography. “Why did I rob banks? Because I enjoyed it. I loved it. I was more alive when I was inside a bank, robbing it, than at any other time in my life. I enjoyed everything about it so much that one or two weeks later I'd be out looking for the next job. But to me the money was the chips, that's all.”

“Go where the money is...and go there often,”

I guess that is the key to making your job a meaningful part of your life. Find something that makes you feel alive and do it; provided there is some money to be had in doing it.

Then go there often.

Of course there is more to success that doing what you love in the presence of a demand for your product or service. Willie reminds us, “Success in any endeavor requires single-minded attention to detail and total concentration.”

At this point I would normally say, “Go thou and do likewise,” but I am afraid someone might take me seriously.

Thursday, July 9, 2015

Taxes and a Financial Crisis

Sally Herigstad, CPA offers some interesting suggestions in “Help I Can’t Pay My Bills,” such as using tax law to help in a financial crisis. The IRS is not generally considered a friend during times of crisis or any other time for that matter, but knowledge of tax codes can actually help in seriously desperate situations, one more reason to have a CPA on your side when filing your taxes.

Most middle and lower middle class Americans intentionally over pay their taxes during the year, as an enforced savings program. I certainly did this in the early days of our marriage. The author is adamantly opposed to this practice. If you can’t make the ends meet on your monthly budget, adjusting your withholding can provide a little extra when needed. For most Americans, she suggests withholding at the same rate as would have generated a zero balance in the previous year. No refund, nothing owed is the goal. For higher income families (over $150,000 a year) she suggests last year’s taxes owed plus an additional ten percent. In her experience many of her clients are over paying their taxes and carrying a balance on their credit cards. This means they are lending the Government money at 0% interest while paying credit card companies 18%, certainly a bad idea. In addition, she notes that many of her customers do not use their tax refunds wisely. Instead they are inclined to use the money on something like a family vacation that not only spends all their refund but adds to their credit card balances.

One subject she doesn’t cover in this chapter is the 1099 employee. Most of us have our taxes withheld by your employer who then provides us with a W2 form at the end of the year. Employees considered independent contractors do not have their taxes withheld by their employer. At the end of the year they receive a form 1099 instead of a W2. If they haven’t filed and paid their estimated taxes on a quarterly basis, they can face a really ugly financial emergency on April 15. Not only do these people owe taxes like everyone else, but they will be hit with a double Social Security and Medicare bill, the so called self employment tax, since their employer paid nothing toward this tax burden.

Estimated taxes are also a problem for those who have enough investment income to raise their tax bill far enough beyond their withholdings to trigger the penalties associated with inadequate withholdings. Watch out for this one following the death of a family member. Inheritances that generate unpaid taxes can create unforeseen liabilities; talk to your CPA whenever something the least unusual occurs in your financial life.

Herigstad believes that the Earned Income Tax Credit (EIC), a program for low income tax payers, is the most often overlooked opportunity for a larger return. This credit can lower or even eliminate your tax bill if you meet all the necessary criteria. However, it does require that the tax filer submit an extra EIC form. Government statistics indicate that only 25% of the filers eligible for this benefit file the necessary form to receive this benefit. She notes that this benefit can be used in calculating your withholdings. It is estimated that only 0.5% of those eligible for this benefit ever receive it. Imagine how even a few extra dollars a month could help in a financial emergency. She also offers tips for those eligible for the EIC including the dependency exemption for children. In the case of a divorce where both parents are contributing to the support of their children, both parents, if eligible for the EIC, can claim an exemption for their child or children.

The author has found that she can often help out a client in dire straits by filing a 1040X amended tax return for up to three previous years. If you have overlooked certain deductions you may be able to get back some money from previous years.

Frequently overlooked deductions include:

Social Security Withholdings: If you have worked for more than one employer during the course of a tax year, it is possible that you have overpaid Social Security.

Noncash Charitable Contributions: If you have put anything in the Goodwill box and failed to claim it on a tax return, you can claim it on your amended tax return.

Education Credits or Deductions: If you had educational expenses during a tax year, you may be able to take a deduction for part or all of your expenses. While this is a frequently overlooked benefit, what can be claimed looks a bit complicated for the do it yourself filer. When in doubt, talk to your CPA.

Sales Tax Deductions: This deduction will allow you to take an itemized deduction for state and local income taxes or state and local sales taxes but not both.

Child Care Credit: You might be able to claim a deduction for the cost of child care.

Volunteer Expenses: If you have worked as a volunteer you can claim a deduction for expenses associated with your charitable efforts.

Bad Debt: If your no good brother-in-law failed to repay the money you loaned him, it is possible that you can claim this as a deduction in the year it became worthless.

If you potentially have any money due you from the three previous years because you overlooked some deduction, it might be worth your while to file amended forms for these years. The author has been able to rescue some of the people she helps with refunds from years gone by.

As always, my advice is that if you are facing an unusual tax situation, look for professional guidance. Do it yourself computer programs such as Turbotax seem to work fine for most people most of the time, but don’t be afraid to pay a professional for their advice when confronting tax complexities or a time of crisis.

Tuesday, July 7, 2015

You Don't Own It

God tells us that he owns all the money in the world, “The silver is Mine and the gold is Mine, declares the LORD of hosts.”

Since the Bible was written in the social context of an agricultural society, the Lord reminds those who view their livestock as money, “For every animal of the forest is mine, and the cattle on a thousand hills.”

In the second chapter of Genesis we are reminded that God created gold and declared it to be good.

Think about it. Can an individual or any of the world’s governments ultimately control the creation, destruction, or flow of money in this world for even a ridiculously short period of time—like, a thousand years? Can you take any of it with you to the grave?

In this world we are stewards of God’s wealth. It is a very serious responsibility. At the judgment, I will have to account for how I earned money, how I spent it, and how I invested it. I will also be held accountable for how I gave, where I gave, and how much I gave. There are plenty of scriptures that indicate if you screw up in this arena the consequences could be pretty serious.

Before you make a significant decision involving your interactions with money, stop and say a prayer. Ask God for wisdom. Ask God for guidance. Don’t be hasty. If you mess things up in this world, money mistakes can be quite painful. If you mess up things in the world to come, you may be in trouble for all of eternity.

There is no need to get neurotic about this, the Bible says, If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you.” As for the question of giving, talk to God about it. Christianity is a religion of freedom and grace. How much you give and where you give, those are questions you need to discuss with your creator.

Many years ago, I listened to Larry Burkett, the Godfather of Christian personal finance gurus, on the car radio during my drive home from work. He received phone calls from women (always women) who wanted their family to give more to their church or some ministry than their husband. His advice was always the same. Tell your husband to pick a number that he is comfortable with that is a little higher than your current level of giving. Tell him agree to give at this level for a year then take a look at our financial situation in comparison to our current state. If it has improved, we can talk about giving more. If it is worse, I promise never to bother you about giving again. Burkett claimed that while he received many phone calls from families who improved their situation by taking this challenge, he never received any from people who did worse.

Psalm 112

4 Light shines in the darkness for the godly.
They are generous, compassionate, and righteous.
5 Good comes to those who lend money generously
and conduct their business fairly.
6 Such people will not be overcome by evil.

Sunday, July 5, 2015

Taxes and Debt Forgiveness

As is often the case, our tax code is so complex that attempting to understand what you actually owe is not something that can be determined without professional assistance. I like to say that I would no more attempt to do my own taxes than I would attempt do-it-yourself open heart surgery. Abraham Lincoln had it right when he said, “He who represents himself has a fool for a client.”

As the stakes are raised so is the need for competent counsel from a CPA and/or an attorney.

Consider: When you or a third party acting on your behalf settles a credit card debt for less than the full amount owed, the IRS considers this a taxable event. In such cases you will receive a form 1099-C listing your forgiven debt as income. Just when you thought that you were through with your problems, you must list the amount found on the 1099-C on the “other income” line of your 1040, a nasty April surprise.

Or is it? With the IRS, one never really knows for sure. notes that there are six general exceptions.

1) If a debt has been discharged in bankruptcy, the forgiveness of that debt is not a taxable event.

2) Mortgage debt that is forgiven due to foreclosure is not taxable income, maybe. This exception is part of the 2007 Mortgage Forgiveness Debt Relief Act. It was set to expire in 2012. Congress extended this benefit through 2014. However, I don’t know if it was extended again in 2015.

3) Debts that were canceled when you were insolvent are not taxable income. What does that mean? Determining “insolvent” requires a calculation. Here is the example given by

“Trisha owed $30,000 in credit card debt, which she settled by paying $5,000. She received a Form 1099-C showing canceled debt income of $25,000 ($30,000 minus $5,000). She had no other debts. Her assets at the time were worth $10,000.

Canceled debt: $25,000
Total assets: $10,000
Insolvency amount: $15,000”

4) If your student loans have been discharged by service in an approved Government program, the forgiveness of that debt is not taxable as income.

5) Interest that would have been tax deductible if it had been paid does not become taxable income after that debt is forgiven. Example: If you owed the interest on a business debt that could have been deducted as a legitimate business expense, you don’t have to pay taxes on that part of the debt when it is forgiven.

6) Finally, if a family member cancels your debt as a gift, the IRS will not tax that forgiven debt as income. If this involves parties who are not family members, this will not fly.

Don’t worry; it gets worse. The following information comes from, a legal advice website.

Most tax debt can’t be discharged in bankruptcy. In Chapter 7 bankruptcy, you will owe the taxman until the case is settled. In Chapter 13, you will have to repay in full.

These debts can only be forgiven in Chapter 7 bankruptcies in cases where a number of rather complex legal criteria have been met. I really consider this beyond the scope of a blog article or my understanding of the subject.

I am not terribly happy writing an article of this sort due to the inadequacy of my personal knowledge. While I always try to give credit to my sources, I am not sure that you should be taking legal advice from a website.

I once asked my CPA what seemed to me to be an innocuous question of the sort that must be frequently asked by her clients. In a very serious tone of voice, she told me she would need to do some research before she could answer my question. Nothing is simple which involves our tax code, but before you pay, make certain you are actually obligated.

Thursday, July 2, 2015

There Are No Secrets!

I have had trouble coming up with a topic for my next blog post. After writing over 700 posts, it is hard to come up with anything that is entirely novel. I thought about writing a post on the Greek and Puerto Rican defaults. How can a personal finance blog author go wrong excoriating debt, whether public or private? I may change my mind if these situations heat up, but today foreign sovereign debt seems a bit too far off topic. However, my ruminations did lead me to this subject.

People believe that managing money is a big secret known only to those who have money to manage. More than once I have wanted to scream, “There are no secrets.” In the pages of this blog, I have shared everything I know. That was enough to help get me to a more than comfortable retirement.

I tried to remember where I had first heard the phrase, “There are no secrets.” I thought it had something to do with the martial arts or meditation. It turns out that it comes from a book title, “There Are No Secrets: Professor Cheng Man Ch'ing and His T'ai Chi Chuan.” I can’t remember if I read this back in the days when I practiced T’ai Chi as a martial art. However, that is where I first heard the phrase. It certainly is appropriate. Martial arts students firmly believe that their teacher is withholding secrets from them that would allow them instantly to become stone cold killing machines without any effort or practice.

One of the reviewers on Amazon observed, “Master Cheng Man-Ch'ing once said there are three ingredients for progress in the study of tai-chi: natural talent, perseverance and correct teaching. Natural talent is the least important. A gifted student has certain obvious advantages, but the untalented need only work hard and it will come.”


There are no secrets, but financial freedom requires a lot of hard work. When we were first married, I had $900 in the bank, a car worth less than the $600 I paid for it a couple of years earlier, and a stereo worth roughly the same as my car. Ten years later, we had maybe $2,000 or a little less in the bank and a car worth about the same as my bank account. At that point we did have a combined total of four college degrees without any debt, so we were better off than many 34 year old couples living in today’s world.

Stay out of debt unless absolutely necessary (four exceptions)

a) Just about no one can pay cash for a house
b) Medical bills come whether you have money or not
c) Borrowing for school is potentially dangerous. Even in a field with high pay and the near certainty of employment, be careful. Scholarships and work study grants are better.
d)Starting a new business or expanding an existing business. Keep that cash flow positive.

Don’t use a Credit Card unless you can pay it off every month.

I have started reading still another personal finance text. This one is titled “Help! I Can’t Pay My Bills,” by Sally Herigstad, CPA. I have read about one third of the book. It looks pretty good, but there are no new secrets to reveal. The author assumes the reader is being hounded by collection agencies while teetering on the verge of bankruptcy, a course of action that she generally considers a bad idea. She then recommends that the reader calculate their net worth. Then make a formal zero based--to the penny--monthly budget. No excuses! If you don’t have enough money to budget, you absolutely need a budget. If your income is irregular, you absolutely need to budget. Then set out to build an emergency fund by selling your stuff or taking a second job. Like all good authors she has an idea or two you are not likely to see elsewhere. She recommends turning into a one of those evil heartless bill collectors. Go after family members or friends who owe you money, especially that ex-spouse who is behind on his child support payments. She also recommends that people with financial problems get rid of their pets. I have only heard that from one other author, delivered in the form of a joke about his marriage.

OK. You have an emergency fund. Now start paying down those debts. My personal favorite is the debt avalanche. Pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last. If you prefer the debt snowball that starts with the smallest debt and works to the highest debt last, that is an excellent, psychologically sound approach.

Once you have your debts headed in the right direction, start saving for retirement and other large purchases. Again, there are no secrets. You don’t need to be the next Warren Buffet to find your way to financial freedom. If you have money deducted from your paycheck before you see it, a small amount invested every month in a boring unimaginative portfolio of stocks and bonds will build into an impressive total over the course of a 40 year career, even you never receive a particularly large income. Small consistent investments, plus time, multiplied by the miracle of compound interest produces amazing results. If you don’t want to learn anything about investments, all you need to know is three little words, Vanguard Lifecycle Funds. Vanguard is no longer the only low cost player out there, but it is still worth your time to check out their offering before making a decision.

Give something to God without expectation of return. It is good for your heart.

That’s pretty much all there is to it. Now just remember what Bruce Lee had to say about practice, "I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times."