Keeping The Rich White Man Down!

tax-moneyDid you know that certain private equity firms and hedge funds only have to pay 15% on their capital gains? Shouldn’t firms like Blackstone and Fortress Investment Group have to pay 35% like every other law abiding corporation? I think so and so does the government.

Congress is currently considering a bill that would close these loopholes and potentially increase tax revenue by $4 to $6 billion. Currently, private equity firms like Blackstone and Fortress can be organized as partnerships and thus subject to the 15% tax. The new bill would remove this privelage and bump their tax rate up to 35%. Of course, Blackstone is crying all the way to the bank citing that, “the Senate bill, which would effectively raise its tax rate to as much as 35% from 15%, would hurt profitability.”

I, for one, think duh it should hurt your profitability. That 20% should be going to the rest of us as a “tax” on allowing your company to grow and prosper because of the opportunities it has been given by the United States. It shouldn’t be going to pay that multi billion dollar reward to your boss.

What rate? OMG, I’m confused!

I am trying to set up a debt reduction plan where I pay off the account with the highest interest rate first, then move to the next highest, etc.

My question is, which interest rate on my credit card statement do I use for this prioritization? There’s an Annual Percentage Rate and an Effective Percentage Rate and then I think there was still another. On one of my cards, these range from like 8% to 29% depending on which one you look at. It’s a shame I’m such an idiot when it comes to these things ! Thanks for any help…

Good question, you shouldn’t feel so bad about not knowing what is what when it comes to credit cards. They can be a dangerous tool as I’m sure you are now finding out. You’re right on with trying to reduce debt, starting with the highest intrest rate and working yourself down.

Both rates, the annual percentage rate (APR) and the effective interest rate (EIR) are both the same rates. Confused? So is the majority of everyone else.

An APR is a way to standardize and compare interest rates among lenders. It is an annualized rate that takes into account the total cost of borrowing. It is intended to standardize rates, as stated before.

The EIR is the rate you’re paying compounded X number of times per year, usually 12. Compounding means that every month, your balance is averaged (depending on the card and terms and conditions) and that amount is used to calculate the finance charges next month.

The other interest rates are probably rates like balance transfer or cash advances, etc. Don’t worry about those when comparing the cards.

To answer your question, in terms of comparing to another card, you should use the APR. The card with the highest APR should be paid off first, repeat this until you’ve got it all paid off.

How much do you need in retirement?

Sure, you’ve heard that you need just $1 million to retire comfortably. That may be the case for many people, however, that’s a very generalized number. It doesn’t take into account your personal situation or the kind of life you want to live while in retirement. This post will try to teach and examine what you need in retirement. While I try to be as close with my numbers as possible to the average norm, they will vary based on whom you ask. Consult your financial advisor if you have any more in depth questions. This is just a simple guide to figuring out what you need.

First, lets make the assumptions:

  • You’ll live on 80% of your pre-retirement gross-income. This is a good number that is recommended by a majority of planners. Here’s the reasoning – when you retire, job related expenses decrease (food, clothing, fuel, etc). Some expenses can rise, like travelling but if you average it out, you don’t travel much when you’re 80 years old.
  • The family will make $100,000 per year combined, they are aged 30 and wish to retire at age 65. Just makin’ it easy on myself here.
  • Inflation will be 3% and you expect to get an average return of 10% from your pre-retirement investments and 7% from your post-retirement investments (I know, after re-allocation closer to retirement your return decreases).
  • You both expect to live to age 90 – it’s good to be conservative to avoid running out of money.

Let’s figure this out, I always hated these problems in my college courses. In order to figure this out, we need to use the time value of money formulas. Read up on that wikipedia article if you don’t understand what it is. I’ll use excel for the calculations, you can use a regular calculator, but why make it hard?

First step – find the present value of your retirement needs from age 65 to 90 (25 years).

PV = ?
FV = $0 (we want to spend it to 0, if you want to save money for an inheritance, it’ll cost you more)
N = 300 (That’s 25 years times 12 payments per year, we want monthly payments, not annual).
i = .33% (7% minus 3% inflation divided by 12)
PMT = -$6,666.67 (80% of $100,000 divided by 12)

Put all that in your nifty excel spreadsheet or calculator and you get a PV at age 65 of $1,267,226.61. What does that mean? It means that the $1 million generalization is pretty close for these people.

No, how much do they need to save per month (assuming they have $0 saved right now) from age 30 to 65 (35 years)?

PV = $0 (they have nothing saved right now)
FV = $1,267,226.61 (use what you found in the first part)
N = 420 (35 years times 12 months per year)
i = .5833% (10% minus 3% inflation divided by 12)
PMT = ?

Put that in your excel sheets or calculator and you get a monthly payment of $703.60 per month. A reasonable amount if you can budget properly.

So you might be wondering to yourself, “well I guess the $1 million generalization is a good one.” Let’s see what happens if our family wants to retire at age 60 and then age 55 (I’ll spare you all the numbers).

Age 60

The present value of retirement assets needed at age 60 is now $1,401,062.96 and the payments per month needed is $1,038.74.

Age 55

The present value of retirement assets needed at age 55 is now $1,510,675.35 and the payments per month needed is $1,564.34.

So if you take everything into consideration, people with different goals and spending requirements do not always meet the $1 million generalization. Another interesting side note is that moving retirement from age 65 to 60 only requires about $300 more per month in savings while moving it from age 60 to 55 requires about $500 per month extra. This is why compounding is your friend and you should start saving early. Had we made their current ages 25, what would happen to their monthly payments?

7 tips to saving more on apartments

Ah, moving season again. It seems like every year I’m moving into a new apartment. As an avid apartment dweller since 2002 I have seen many apartments – some good, some utterly horrible. Here’s some advice on how to save some money when looking for an apartment and just some general thoughts on the issue.

  • Get your discount off of the rent. If you work for a major company (whether or not its a retail job or corporate job) any respectable apartment complex will offer a discount off your monthly rent. My fiance works for a major hospital and having told that to our new apartment managers, we’ll be getting about 5% off our monthly rent there, or about $34 per month. On top of that, we pay no deposit and no application fee – an automatic $200 savings.
  • Read the reviews that other people leave about various apartment complexes. Granted, most people who bother to write reviews are disgruntled, you can at least get some idea of what’s going on. If I had read some reviews about my last apartment, I would have figured out a.) insulation is horrible and b.) carpenter bees are everywhere. If I had known this, I could have saved myself the $200 per month I was spending on gas heat – that’s for a one bedroom apartment (average around here is about $60 per month in the winter). Two sites I like to check out before renting are ApartmentRatings.com or ApartmentReviews.net both of which have a good list of apartments in your area.
  • Newer is sometimes better, but not always. Newer complexes are generally better on the construction and the overall cost of utilities. They generally feature more energy efficient windows and appliances which can save you money on those monthly utility bills. However, not all new apartments are great. Some have very shoddy construction, poor insulation (between units mostly) and settling problems. If you visit those sites I listed above, people generally will mention something about it. Some older apartments I’ve been in were built in the days when quality was stressed over quantity – ah the good old days. Just keep your eye open when you go to look – look for cracks in the wall, baseboards that have exposed gaps (usually a sign of warped walls), bubbles in the laminate flooring, bugs (if they’re there now, they’ll be there when you move in), etc.
  • You have to spend more to get more. If you go for the bargain, expect to be living with other people who can only afford that little rent. If you move into a complex that caters to college students, expect noisy neighbors. If you move to section 8 housing, expect your car to be broken into. If you want little to no problems, you have to spend more. I have generally found that people who spend more are usually more well behaved and courteous to their neighbors. All apartments have noise problems, but you can lessen it by going with something that has better construction and courteous neighbors.
  • Look for an apartment with a decent fitness center. If you pay to go to a gym, an apartment with a fitness center is a big plus. Having it included in your rent basically saves you that monthly gym bill. Granted gyms are usually a lot better equipped than apartment fitness centers, you can still get your basic workout done. Think of the savings as another discount on your rent.
  • Mind the Sun. If you’re in the south where it’s generally warmer in the winter months, chose an apartment that faces the northeast. If you’re in the north and have predominately colder weather, choosing a southwest or south-facing apartment is better. Why? A north-facing apartment gets less sun, therefore if you’re in the south, you’ll spend less on cooling. A south-facing apartment gets more sun so it heats up better which is good if you live in a cooler climate and want to save on that heating bill.
  • Find out what utilities are before you move. Some utility companies will disclose the average utility costs for the unit or apartment complex you’re thinking of moving into. Give your local company a call and see if they can give you average rates – this helps with your budgeting for your new place.

That’s all the tips I can think of right now. I hope this has helped and I hope you save yourself some money and problems the next time you move.

Don’t Twist My ARM!

You know them, you’ve heard it in the news. Adjustable rate mortgages. With the rising rate of foreclosures, why would anyone want an ARM? That’s a good question with many different reasons. Personally, an ARM would be my last resort. Unfortunately, too many people are duped by lenders or their own lack of knowledge to know what is best for them.

An adustable rate mortgage, for those who don’t know, is a mortgage lending rate that is adjusted at specific intervals according to an economic index + other fees. This means that if interest rates rise, the ARM rate rises and so does your monthly payment on your home.

So why get an ARM instead of a fixed-rate mortgage? Well, ARM’s usually have lower interest rates, sometimes called “teaser” rates that appeal to many low-income people or people with low credit scores. They see it as a quick opportunity to buy a house and get that low payment.

Unfortunately what most people don’t see is that interest rates can and do rise. Below is an illustration of rates since January of 1992.

As you can see by the green line, the ARM was a good choice back in 2003. Rates were lower than fixed rate mortgages and the economy was doing well. Let’s do the math and see how much you paid for a home worth $200,000 in May of 2003 compared to a home in May of 2007.

Year and Type Rate Payment
2003 FRM 5.31% $1,112
2003 ARM 3.63% $913
2007 FRM 5.31% $1,112
2007 ARM 5.57% $1,144

If you have an ARM still, you somehow had to come up with an extra $232 per month to afford your monthly mortage payments. That’s $2,784 per year extra on your housing payments. You could therefore see why it’d be hard for low-income families to come up with the extra money to be able to make these kinds of payments.

Update on the College Cost Reduction Act

Just before I left work today I checked my RSS feeds for some updates. Being the nerd I am, I happen to subscribe to the House of Representatives Committee on Education and Labor RSS feed… (probably 1 of 2 people who do). I also got a nice email from a staff member of the committee (probably 1 of 2 readers of the blog -I’m the other one) letting me know what the vote was and that they put together some videos.

I was happy to see that the House passed the bill 273-149.If you aren’t sure what the college cost reduction act is, I put up a post a while back which highlights some key points. You can also check out the nice summary page at the committee’s website. For anyone with debt or who will be going to college, this is great news as it gives you a lot more advantages to federal loans than what I had when I entered. I also let the staff member know that he should get the representatives to forgive outstanding debt to us bloggers.