More Cheers For Stupidity!

Posted July 6, 2012 by gutlessnation
Categories: Uncategorized

Yahoo just posted an article (http://news.yahoo.com/blogs/sideshow/man-makes-final-house-payment-pennies-144051687.html) about a man who made his last mortgage payment of about $62,000 in pennies.  While this has a certain element of being neat, it’s also utter stupidity.  And of all the comments I read, everyone is cheering this phenomenon like it’s one of the most suave financial moves they’ve ever seen.

You do not need a business degree to understand the flaw in logic here.  There’s a little thing called compound interest that’s been forgotten about courtesy of Ben Bernanke’s Zero Interest Rate Policy that’s been in place for the past several years.  For those people who existed prior to 2008, there was a time where you were actually rewarded for saving.  Below is the information provided in the article:

Home purchase date: 1977.

Length of mortgage: 35 years.

Final Payment: $62,000.

Aside from the fact that they didn’t make 35 and 40 year loans back in the 70′s, I’ll make the assumption there was a refinance or two along the way.  And other than the fact that 492 pennies every single day is quite a lot, I’ll also assume the numbers provided are legitimate.

On to the math.  The standard formula for future value is 1 + I^N, where I is the interest rate per period (typically months), and N is the number of periods.  If you prefer T instead of N, go for it, it’s still a free Country for a little while longer.  I will also assume that an equal number of pennies were saved every day over the 35 year period, and a monthly deposit of $147.62 was made.  While there’s no way this is perfectly accurate, it’s a pretty good proxy considering the time frame involved.  I also have to find a reasonable interest rate to use as the compounding factor.  I decided the 6 month CD rate based on the Federal Reserve Board’s historical values (http://www.federalreserve.gov/releases/h15/data.htm) was the best rate to use for small amounts of savings by an individual.

Based on this math, which may be plus or minus a few bucks, those pennies would have grown to around $166,451 by the time they made their last payment.  So this great financial achievement really resulted in leaving $104,451 on the table.  There are various other factors that could have affected this number such as taxes, the rate at which the pennies were saved, which investment vehicles were chosen, etc., but let’s call it a cool $100,000 which was not received by this family.

It’s not the fact that the family missed out on this $100k that disturbs me, but rather the dozens of comments I saw saying “good job” or “way to pay off your house”, and phrases to that effect.  I would never be condescending towards someone who chooses to save.  I would rather be condescending to those people that don’t do it, and don’t realize the opportunity cost that they’re missing.  Perhaps in our public schools we should teach Personal Finance 101 instead of the mating habits of South African Armadillos.

The Beginning Of The End

Posted June 28, 2012 by gutlessnation
Categories: Uncategorized

As I’m sure you’ve heard by now, the Supreme Court ruled in favor of Obamacare, indicating it’s okay for the Government to force its citizens to spend money.  If anyone else does that, it’s called extortion.  That being said, I’m already beginning to consider the fallout from Obamacare if it’s not de-funded and/or repealed in the near future.  Below are just a few of the potential consequences and unintended effects of this fantastic piece of legislation.  I’m sure I’ll think of more after my nausea wears off, but here’s what I have so far:

1) There is already a shortage of doctors.  This will exacerbate that issue as more of them leave the profession.

2) It will take months, if not years to get an appointment to see one of the aforementioned.

3) For all of the marginally subsistent people out there, this will push many of them over the edge into foreclosures, bankruptcies, etc.

4) This opens the door for our Government to force us to pay money for anything, and call it a tax.

5) There is now a toll to be a citizen of this fine Nation.  People may begin to renounce citizenship and jump ship to other Countries.

6) If people are force to pay for something, they typically want to use it.  Now every time someone stubs their toe, they will run to the doctor.  Although this may have positive intended side effects, like catching serious illnesses earlier.

7) Not really an effect, but it just shows the members of the Supreme Court haven’t actually read the Constitution.  It’s really not that long.  They could read it over a lunch break.

8) If they have read it, their reading comprehension skills are those of a 3rd grader, which is even more frightening.

9) The costs of health care will skyrocket, as evidenced by every other Government-subsidized program they’ve ever created.

10) Taxing the already-overtaxed middle class even more is clearly going to create an economic recovery.  But then it won’t be referred to as a tax, colloquially, it will simply be a fine for failing to comply with the law of the land.

It should be interesting to watch this unfold.

Road Trip – RIP

Posted June 28, 2012 by gutlessnation
Categories: Uncategorized

I recently got back from a road trip of sorts with my wife and son.  We went out to Indiana from Philadelphia to see my newly-minted 1/2-step-nephew twice removed (or something like that).  The drive out there was atrocious.  We hit at least a dozen construction zones, about ten of which were inactive.  Obviously our Government has a ton of money to start projects, but no money to actually fund any of them.  The roads were all fine, and I didn’t see any power lines or fiber optic cables being put in.  It was just a bunch of orange cones left out because no one wanted to remove them.

The most enjoyable construction-induced traffic jam occurred shortly after we entered the paradise known as Ohio.  Nothing for miles except over-sized over-weighted semi’s and dump trucks, and people with barely enough cranial nerve activity to tie their shoes.  For some reason unknown to thinking hominids, this wondrous state decided to close one lane of a two-lane road for the better part of 100 feet.  This caused a 20-mile backup, took over 3 hours to get through, and was there for no sensible reason that I could discern.  I’m debating sending the state of Ohio a bill for our gas that was wasted sitting on that pathetic excuse for a road.  Thanks to our 3+ hour delay, we also got to Cincinnati just in time for the heart of rush hour.  Tack on another hour.  All in, it took us about 15 hours to get to the mecca known as Columbus, Indiana, so I could hang out with some very bizarre religious zealots for the day (yes, I know, bizarre and religious zealot in the same sentence is redundant).

On the way back, we decided to go 100 miles out of our way to avoid the train wreck (no pun intended) that we took on the way there.  It saved us at least 2 hours, probably more.  Needless to say, I won’t be venturing westward toward the flat cornfields of the Midwest any time too soon.

Impressive Net Worth Numbers

Posted June 14, 2012 by gutlessnation
Categories: Uncategorized

By impressive, I mean disastrous.  The Federal Reserve issued a bulletin for June, 2012, indicating the changes to net worth of American families between 2007 and 2010.  Here is a quick summary of the data:

 

Does that seem okay to you?  Me neither.  The median household net worth is down 40% in 3 measly years.  And that only includes 2010.  Despite a tepid recovery in equities (about 9% in the past 18 months), I would guess the numbers are even worse for 2011 and YTD 2012.  Not only is the decline pathetic, but so was the starting point.  The year 2007 was at a high point in the economic cycle, and is up there with the highest net worth estimates of all time.  So at one of the best times in recent history the net worth of people under the age of 34 was a whopping $12,400.  I can’t remember the last time my checking account fell below that number.  And this FELL to $9,300.  Young people can’t save $1,000 a year?  They have so little the equity markets can’t be blamed for much of that loss, and they obviously can’t afford a home.  I’m going to surmise that since there are no jobs that people are raiding their savings accounts to pay the bills.

And the situation is almost as bad for the next age group.  People that are around 40 years of age only have $42,000.  Assuming they’ve had 18 years to work since graduating college, that’s a savings of a whopping $195 a month.  This also assumes zero growth, dividends, or interest in that time period.  For those that didn’t go to college, it’s only $159.  A lot of people are irresponsible, credit-loving dolts.  That’s a fair statement.  But many people would actually like to save, and gain some financial stability while they are still of working age.  So why hasn’t it happened?  Because there are serious structural issues in this poorly-run nation of ours.  There are so many things to blame I’d need an anthology, but here’s a few culprits:

1) Sending our jobs to China

2) Importing far more than we export.  Although we have exported quite a few millionaires.

3) Stagnant wage growth.  Actually, wage declines.  This can be blamed on Wall Street.

4) Wall Street

5) Our good ole’ Government.  Which pretty much encompasses the first four points.

The solutions are simple.  They really are.  They’re just not “politically favorable”.  Reduce the corporate tax rate, slap some more tariffs on Chinese import goods, and get the hell out of our way.  That would solve 90% of the problem.  But no one has the gall to make the tough “politically unfavorable” decisions.  So our net worth will continue to crumble, our nation will devolve into the 3rd world, and we’ll all have to get ready to live out of a cardboard box eating ramen for dinner.  Welcome to the new America, and enjoy the ride.

1st Birthday Party

Posted May 21, 2012 by gutlessnation
Categories: Uncategorized

My little guy turned one about a week ago.  We had to push back his party to the 20th due to a friend of mine getting married.

We did the standard invites – e-vite, facebook, and verbal.  After all responses were received, we tallied up the totals shortly before the actual party.  110 “I’ll be there’s” and 30 “maybe’s”.  So we planned for about 130-140 people.  The number of people who actually showed up?  About 70.  And of that 70, around 20 of them stayed for an hour or less.  My wife and I spent close to $1,000 on this party between food, favors, alcohol, drinks, coffee, etc.  You only turn one once, right?

That being said, we are adults and our feelings will not be hurt if you cannot attend.  I’d rather you just say “no” from the get-go.  If you’re a Maybe or a Yes, you should probably think about the planning that has to go into a party, and have some respect for those throwing it.  We spent about $400 more than we needed to, and wasted at least 10 extra hours we could have used for something more valuable.  This is money not going towards our son’s college fund, and the time was spent not spend doing something “fun”.  We’re very busy and value our free time considerably.

The next time you’re invited to a party, grow a spine and just answer the question.  Maybe is a response for people who like to sit on the fence and don’t do anything for themselves.  Yes is a response that requires follow-through.  If you tell your boss “Yes, I will do that” and you don’t, you get fired.  If you say you’re coming, and don’t show, I consider that disrespect towards my son.  These people should be considered “fired” from future invitations.  Perhaps more people should heed this cautionary tale, and think about the negative effects of not being able to answer a simple question.

Harvard B-School – Only Morons Need Apply

Posted May 16, 2012 by gutlessnation
Categories: Uncategorized

The article below substantiates my long-running theory that Ivy League schools pump out some of the dumbest jackasses the world has ever seen:

http://management.fortune.cnn.com/2012/05/16/student-debt-business-school/?iid=HP_LN

The fact that Dell hired this guy and is paying him six figures tells me I should short their stock.  Their decision-making abilities are obviously lacking.

The whole concept of trying to pay off $100k in debt in a year is just stupid.  The opportunity costs are exorbitant, and you’d screw yourself when it comes to taxes.  And that is exactly what this imbecile did.  This is so dumbfounding I’m having difficulty deciding where to start, so I guess I’ll start at the top.

In the last paragraph of the first section, he checked his loan balance and was “shocked” to see it was just shy of $91,000.  While he was busy getting his Harvard degree, I was learning about the compounding effects of interest, payment acceleration, and amortization schedules at my state school.  I wonder who got the better value.

Shortly thereafter, he says what has to be one of the dumbest quotes I’ve ever heard in my life.  I mean this quite literally, and cannot believe it came out of someone’s mouth who actually finished high school (in theory).  I have reposted it here for your jaw-dropping consumption:

“Unlike a payment towards a car loan or a mortgage, a student loan payment doesn’t go towards something that is benefitting me in a direct way.”

It states right in the article that he obtained a job paying $52,000 more than his previous job.  THAT is the direct benefit, you numb-skull.  You didn’t get a 100% raise because the company likes you, you got it because of your stupid piece of paper.  The car payment is going towards a depreciating asset, so your direct benefit of your depreciating BMW is not as good as it sounds.  Is that car generating an extra $52k a year in cash?  I didn’t think so.

As if that wasn’t foolish enough, the article then goes on to show his ingenious financial moves like stopping his 401k contributions.  Assuming the company has a match, you’re throwing away free tax-deferred money.  And when you’re making six figures, you should probably consider learning the basics of the U.S. tax system.  Or do they not teach that at Harvard?  But it’s okay, he sold his EXTRA car AND motorcycle, which clearly he needed in the first place.  He also sold his stock, which I can’t completely blame him for, if it’s used to reduce debt, but liquidating his IRA?  That’s almost as stupid as the 401k debacle!  There’s a limit on what you can put in, you get a tax break, and the earnings are tax-deferred.  Not to mention the fees, penalties, and taxes associated with early distributions.

There’s also one last thing that no one taught him at his highly-sought-after institution.  Student loan interest is tax deductible.    Oops.  So whether he realizes it or not, he’s keeping a LOT less of his “hard-earned” money than he thinks he is.  And he’s gloating about it at the same time.  It’s people like this that get jobs on Wall Street and accidentally lose their company $2 billion on one trade.

What he should have done?  Accelerate payments on his student interest by a couple hundred dollars a month.  If I assume he had a 101k loan @ 4.5% for 15 years he could have put $500/month towards it and had it paid off in less than 7 years.  An extra $1,000 per month would get it paid off in less than 5.  And since that’s only about 15% of his take-home pay, it’s not unreasonable.  He could then put at least 5% into his 401k, or whatever the company matches.  Sell ALL of his vehicles, and buy a cheap economy car like a Honda, Hyundai, or Toyota, put as much as he can into a Traditional IRA or Roth IRA (If he can keep his AGI low enough to qualify), and just ride out the loan for 5-7 years until it’s gone.  Instead he has nothing in his IRA, a pittance in his 401k, and a huge tax bill.  And more importantly, he has lost a great deal of time.  You don’t need an Ivy League degree to see the lack of value associated with one, or the stupidity of the business leaders they produce.

False Advertising, I Do Believe

Posted May 16, 2012 by gutlessnation
Categories: Uncategorized

On my way to work this morning I heard an advertisement on the radio.  I immediately  thought to myself, “who would believe this crap?”.  It was clearly an example of false advertising.  The great legislators of this Country created a law to prevent that, right?  Oh yeah, here it is:

“Any advertising or promotion that misrepresents the nature, characteristics, qualities or geographic origin of goods, services or commercial activities” (Lanham Act, 15 U.S.C.A. § 1125(a)).

Now I’m supposing the spineless legislators who are owned by major banks and other companies have found it exceedingly difficult to “prove” something false, so that’s why you never hear about any grievances or disputes of this flavor. 

The ad was for a major regional bank, with a nice young couple talking about their trip to Europe that they planned, CLEARLY being paid for by the interest generated from their savings accounts!

I decided to look it up.  I presume they went with the highest-rate and best performing version of this account.  The interest rates range from 0.25% to 0.70%.  Based on the tiers, your first $500,000 would earn you $3,488.50 a year, and 0.70% on anything above $500,000.  Other than the fact that this would be stupid as it’s not FDIC insured at that point and you could lose it instantly, let’s go with it for the sake of my example.

A standard no-frills trip to Europe is going to cost about $4,000/person, and that’s without all the fun extra side trips.  It’s basically to stay in your hotel room.  But let’s make that assumption since no details about the trip were provided.  So the total cost is $8,000 for the couple (I presume they were BOTH planning on going, or else it would be pretty boring).

This would require another $644,500, on top of the $500,000.  Oh wait!  I forgot to account for taxes.  It’s highly probable that a young couple with over a million dollars in their savings account are in a high tax bracket, but let’s be conservative and assume they only pay 15% because they got a huge inheritance.  So now they must generate $9,412 to cover their vacation after paying taxes.

Our final tally is $1,346,214.  This is the amount they must have to fund their boring, no frills vacation at this amazing bank with amazing savings rates.  But there are a lot of people with this kind of money in savings.  Certainly at least some!  Well, per the Census, granted it’s 2004 data, the median assets at financial institutions is $4,700 per household.  It’s been a while, so let’s adjust this with a 3% annual savings rate, compounded, to get a more accurate figure.  Now we’re at about $6,000.  MUCH better.  And only 12.8% of households have $500,000 or more in assets.  And of course this would normally include home equity, retirement accounts, baseball card collections, etc. 

It turns out that only 4% of American households are “millionaires”, and 44% of net worth is tied up in an illiquid form called home equity.  And in case you’ve been living under a rock for the past four years, this particular asset class has not performed in a stellar manner.  So how many homes have over $1M in their savings accounts?  A lot fewer than the number of people who heard that broadcast this morning.  But people love hope.  They love to dream.  They hate logic and reality.  So they’ll all be lined up around the street corner to sign up for that magical savings account that will pay for their next vacation.


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