It's Just Money

So, Warren Buffett is in favor of keeping the Estate Tax, huh?

Doesn't make for scintillating blogging, but I gotta say it.  I agree with the Oracle of Omaha.

A little background for those not familiar with the estate tax.  When you die, everything you owned at death is tallied up, life insurance proceeds are added, and that sum is called your estate.  Your estate is everything you are leaving behind.  Under current law, if your estate is more than $2 million, the federal government imposes a tax on the amount that exceeds the magic $2 million mark.  The tax rate goes up to 45%.

The arguments against the tax go like this.  "The death tax is an opportunistic penalty on those who have been successful and accumulated significant assets.  It disproportionately penalizes small business owners and family farmers who often have most of their net worth tied up in those businesses and no liquidity with which heirs can pay the death tax.  Heirs are forced to liquidate or sell the business in order to pay the IRS."

Arguments for?  Equalizing opportunity across generations.  As Mr. Buffett puts it, "You don't get to be a quarterback ... because your father was a quarter back 20 years ago."  In other words, without the estate tax, the families who currently control most of the nation's resources will continue to do so by birthright rather than merit.  Money, as we know, controls business, politics, and even academics.  Thus generations of wealthy descendants from one successful individual will continue to wield a disproportionate amount of power.

On those points, I agree with Mr. Buffett.  But there's more.  This is my view as a financial planner.

Car vs. House, good perspective

It's no secret that real estate is generally a good investment, while cars are almost certainly not.  I say "generally" for real estate because it is very possible to turn real estate into a terrible investment.  Flippers, sub-prime buyers who can't handle the payment reset, and someone who overpays in a hot market are cases where real estate could end up a poor investment.  When is a car a good investment?  Well, almost never.  I knew a guy in high school whose dad was a mechanic.  They used to buy used cars, fix them up and sell them for a profit.  In that rare instance, or perhaps selective collectibles, a car might be a worthwhile investment.

Otherwise, while they are both "use assets," a house is likely to make you better off in the long run, and a car is not.  Again, no big surprise.

I was listening to Dave Ramsey today, as I often do if I am in my car during the afternoon.  A 25 year old woman called in.  I don't remember her name, but we'll call her Kathy.  Kathy asks Dave if she should get an apartment or build a small starter house.  Naturally, Dave asks her two questions, "do you have any debt?" and "how much do you make?"

Not long ago she was debt free, but just recently purchased a new car, and financed the whole thing.  Also, she bought a small piece of land on which to build a small starter house.  The car was $31,000 and the land was $20,000.  She owes $31,000 on the car, and $16,000 on the land (she put $4,000 down).  Her income is $43,000.

You can imagine what came next.  "Sell the car," Dave instructed in no uncertain terms.  "Today."

"Well," she kind of pleaded, "does it matter what kind of car?"  Of course, we all know the answer.  It's really not difficult.  Spending 72% of your annual income on a car is just silly.

With the car payments, she would have a difficult time financing the construction loan for the house.  Essentially, she was sacrificing a house for a car.  Dave put her situation into perspective very effectively.

"You're 25 years old today, right?  Let's say you wake up tomorrow and you're 35.  Let's pretend that you're still single for the sake of simplicity.  You may be married with a bunch of kids, but that doesn't matter.  At 35, would you rather have a house that you are ten years into payments on, or a ten year old car?"

Well done, Dave.  We don't even need to wait for the answer.

We're having "that conversation" with my folks

With the death that our family experienced a few weeks ago, we have decided that it is time to sit down and have "that conversation."  We're going to discuss the current contents of my parents' estate, the directives of their living trust, their medical directives, long term care insurance and wishes, where and how much they have in assets, and their wishes for final arrangements.  We have talked casually about doing this, but we have finally set a date to hammer it all out.

Luckily, my family tree is not terribly complicated.  My parents have been married for decades, no children from prior relationships, no assets that are not shared.  They started their marraige with virtually nothing, and received from inheritances, or other sources, virtually nothing.  What they have, they have together.

The kids are my siblings and me.  One of my siblings has children, but the rest of us do not.  We'll probably also spend some time making sure that that sibling is covered in terms of life insurance and a will.

On one hand, I'm looking forward to it very much.  The fact there are so many loose ends that would take months to tie up makes me nervous.  I look forward to discussing this stuff now, before it's too late.  On the other hand, I'm very nervous about it.  It's a difficult topic.  Not one anyone ever wants to discuss with their family.

If you have had this conversation with your folks or your kids, advice would be greatly appreciated.

Dave Ramsey Tip: List Your Expenses by Priority

I was listening to Dave Ramsey on XM Radio today (It's okay Dave, I didn't go into debt for XM), and heard a tip from him that I thought I'd pass along.  The caller was a woman who owned her own business.  The biggest problem that she was having was with inconsistent revenue.  Some months she makes more than her planned budget, and some months, she makes less.

The problem that she had was planning her budget with inconsistent cash flow.  This is a problem that is also shared by commission based salespeople and independent contractors.  When you follow Dave's plan, "every penny has a name."  In other words, at the beginning of each month, plan out where every single penny of income will go.  That includes necessities like rent or mortgage payments, food, and utilities.  It also includes discretionary spending such as entertainment, gifts, travel.  It also includes debt service and saving.  Perhaps the last group is the most important.

Most budgets operate on a similar premise.  Allocate your money, don't go over.  However, inconsistent earners find such budgets difficult to maintain.  Dave has a recommendation that I really like.  He told the caller to list all of her expenses.  He then asked her to put a "1" by the most important item (such as food), and a "2" by the second most important item (such as utilities).  The benefit is two-fold.  First, when you have less money in any given month, the most important items on your budget get addressed first.  Second, it gives you an opportunity to apply your priorities and values to your budget.

I have written many budgets, but I have never ranked them in order of priority.  I think it's also a good idea for couples to do this so that you can each see how your priorities match up with your spouse/significant other (it won't).  And where it does not, the two of you have a leaping off point for a discussion in which you may learn more about your spouse/significant other than just money.

Anyway, I have been critical of Dave in the past.  Just wanted to extend a hat tip for this good idea.

LA Money Guy's Goals for 2007

I hate to call them resolutions, but I love the start of the year.  Technically, it's just another day on the calendar.  But there's the feeling of renewal, rebirth, restart, ctl+alt+delete if you will.  Lame, I know.  But this is much like the feeling that I had at the start of each new school year.  What will the year bring me?  What do I plan to accomplish?  It is a time to take charge of our lives, our money, our relationships, and our future.  We're all grow'ed up now, and no longer define our years by September to June, but January to January.  So, here we are at the start of a new year.

Here are LA Money Guy's goals for 2007.

• Financial:  I would like to increase my net worth to $200,000.  I have yet to give my net worth update for the end of the year, but at my most recent update I was at $152k.  An increase to $200k is a total increase of 31%.  At this point contributions will continue to be a large part of the increase, although growth through interest, dividend and stock market growth earnings will be a larger piece of the puzzle than in the past.
• Professional:  Complete the coursework for the CFP and pass the comprehensive boards.  I had originally hoped to take the March test, but I don't think I'll be ready.  I am now planning for the July test date.
• Spending:  Restart the expense tracker.  I was really good about tracking my expenses.  Right until I paid off the last of my debts.  Suddenly, I became a little less careful.  I convinced myself that I haven't been spending more, and indeed, I have been able to save at a pretty good rate.  But I think I can improve that.  So, I will begin by tracking my spending once again.
• Non-Financial:  Lose the gut.  My Fiancee and I had a weight loss challenge several months ago.  I completely lost.  Not pounds, the contest.  Maybe I'll start a weight loss blog.  Public accountability seems to work for money.  Hmmm... I'll let you know.

CNNMoney.com Reader Question

I thought this question, sent to Walter Updegrave of CNNMoney.com, was very interesting.  In two very brief paragraphs the reader reveals that she is tripping over virtually every stumbling block described by behavioral finance.  Here's the question:

We put almost all of our money in the stock market through our adviser in 2000 and we are still down! One account he manages went from more than $80,000 down to $30,000 and now it is back to $50,000.

We originally paid this adviser 1.5 percent a year, but after we complained he lowered the fee to 1 percent. We're thinking of giving him six more months to get us back to where we were in 2000, but we don't want to take our money out at a loss. What should we do? -Linda, Rutherford, N.J.

Walter has a pretty good response, but frankly I'm not so concerned about the response.  I just thought it would be an interesting case study to identify the behavioral finance pitfalls that Linda of Rutherford, N.J. wass falling prey to.  Let's make it multiple choice.  Which of the following apply:

• Loss Aversion
• Status Quo Bias (or Endowment Effect)
• Gambler's Fallacy
• Self Serving Bias
• Cognitive Framing
• Mental Accounting
• Anchoring

What do you think?  I think three clearly apply, you can make an argument for three others, and one doesn't apply here.

Couples Fighting Over Money

I received this email from a reader:

Last night I decided that my fiancé' and I had the last fight about money we will have.  (Well, it I can help it, it was.)  We are getting married this coming May and look at money  a little differently.  I am very uptight about spending money on certain things.  i.e. eating out.    It's crazy, I know.  I grew up kind of poor and started to work at an early age to pay for everything I have.   I think that my uptightness comes from that.  Now, we both have decent jobs and make pretty good money.  However, I am still uptight.  I do not want to carry this uptightness into our marriage and I really want to change.

PLEASE HELP!    I know that many marriages end because of money issues, and I don’t want that to be us.

Any advice on how to give my uptightness with money the good heave ho?

I have a fairly lengthy response to this, but please, please please help this young woman out with additional advice.  Especially from those who have "been there."

My response...

Are you Philanthropic?

Suze Orman has a philosophy that I have heard many times from her.  If you are clenching so tight to the money that you have now, your hands are not open to receive the money that you should have in the future.  I was skeptical when I first heard it.  Let's face it, it's a very touchy feely, new age sort of thinking.  After all, money is simple math, right?  Bring in more than what goes out, and all is good.  Well, I'm not so sure.

Buy versus Lease Part 1

If you spend any time reading personal finance books, websites or blogs, you will quickly see that buying a car outright, in fact a reliable used car, is considered favorable to leasing a car.  I have always believed this to be true, but have never done the math.  So, last night, I took some time to research how lease payments are calculated and the tax treatment if the vehicle is used for business purposes.  Lease payment calculators are available online, but none of them breakdown the math involved.  Believe me, understanding the math is critical in not getting screwed if you plan to lease.  You can check out my buy vs lease calculator.  It may need some work, but it definitely does the math.

The results are complicated because there are sooo many variables.  For example, higher interest rates favor buying, while shorter loan/lease terms favor leasing.  Lower down payments favor leasing, while the ability to deduct a portion of your mileage from income taxes favors buying, unless the vehicle is used for small business purposes.  Fairly obvious, if you keep the purchased car for a few years longer than the loan/lease term, you come out WAY ahead.  That, to me, is the biggest benefit to buying over leasing.

But to get the argument for leasing, I found a site called leaseguide.com.  Their article on lease vs buy was clearly slanted to the leasing camp.  Not a big surprise considering they are a site dedicated to selling a "lease kit" for twenty bucks to help you make a good deal on your lease.  I took their article on the benefits of leasing, and respond to each of their points below.

Buy vs Lease Calculator

I created a spreadsheet to compare the total cost of buying a car versus leasing one.  I will put up another post shortly with my findings, but let me explain the fields and methodology behind the calculator.

The calculator is actually an Excel spreadsheet saved as html with interactivity.  So, you can alter the cells to do your own calculations.  This is the first time I'm doing this, so I hope it works well.

Here's how you use it.

1. This must be viewed in Internet Explorer.
2. Enter only in the unshaded areas.  The gray cells have formulas.
3. The calculator does not assume you will keep the car for the same amount of time whether you buy or lease as most similar calculators do.  Enter realistic lengths of time, both for the loan/lease term and the years to own.
4. The total cost numbers at the bottom are for the period described.  If you plan to buy a car and finance for five years or lease it for four years, leasing will appear cheaper.  But you have to figure out what you will do at the end of the fourth year if you lease.  I cannot create a calculator for that, as the options at that point are infinite.

Please let me know if you are able to use the calculator and if it makes sense or needs adjustments.  Also, if you know a better way to convert spreadsheets into html, I would love some feedback.  Either make comments here or send me an email.  Thanks.