Real World Finance$

This is the third and last post in my International Perspective series.  Each of these was based on a single lunch time conversation at work with co-workers from Brazil and India.  The other posts can be found here:

International Perspective - NAFTA

International Perspective - Consumerism

Our conversation during lunch eventually drifted into the debt of most US consumers.  My colleague from Brazil made the comment, “If you wanted to buy a house back home, you saved and BOUGHT the house, it was paid for.  The same thing with a car, if you needed one you BOUGHT it and it was paid for.”  There is very little access to debt, credit cards, mortgages, etc. in a large part of the world.

My friend from India said something very similar.  “There are very few scholarships to college and no government money to help pay for it.  Your parents sacrifice and pay for your college.  Though they don’t ask, your first thought after graduating with your degree is how fast you can pay them back for your college.”  He said something even more interesting about buying a car or a house, “If you have to borrow money to buy a car or house, you first think about how quickly you can pay off that money.”

Isn’t that amazing?!  They first think about how quickly they can pay off debt, while us greedy Americans typically first thinking about how small we can get the monthly payments!  What a difference in philosophy.  That really stunned me to hear that when I realized what he was saying.  How different would the US economic situation be if consumers were more concerned about how quickly they could pay off debt rather than how long they can stretch it out to keep their payments low?

This is part II of my series on International Perspective.  These are based off of a single 1 hour lunch I had with co-workers who were from Brazil and India.  You can find Part I at the link below:

International Perspective - NAFTA

Our lunch conversation eventually drifted into consumerism here in the US.  Isn’t it strange how so many of us could live on so little money while in college, and can’t seem to get by on our large paychecks later on in life?  To the same token, it’s a sad testament that someone is not able to get by on a minimum wage job in this country while much of the world is able to survive quite well on pay lower than that.  What makes the difference?

The consensus between all 3 of us that day at lunch was the consumer mentality of people in the US.  When you get “old enough” (typically out of HS or College) you are expected to have your own car, your own job and your own place to live.  Add to that the expectations of cable tv, cells phones and the like and the “basic necessities” make up a large chunk of income.

Yet, it many foreign countries, extended families live together for a much longer period of time.  Our “necessities” are either not available at all or are luxury items.  Because of our own consumerism, we have set expectations of peoples possessions that are pushing them to live beyond their own means.  We are making our poor poorer not because they don’t make enough money to survive, but because they don’t make enough money to buy the things that are required of upstanding citizens.

My family has 1 car and no cable or satellite TV.  I can’t tell you the number of times I’ve gotten strange looks or an, “Oh” when I mention that to people.  They truly don’t get that it’s even an option for people.  You HAVE to have a car for each person in the house and you HAVE to have cable tv.  How many conversations at your workplace are about some show that was on a cable channel last night?  I bet it’s a lot more than conversations about that great book I read last week!

The sadness of this all is that our desire to keep up with others and give appearances of being middle class have lead many to buy things they don’t need and can’t afford.  Our financial industry has made that possible with easy credit through credit cards and home equity loans.  We are SUPPOSED to have lots of stuff and with that we are also SUPPOSED to have lots of debt, evidently.  Which leads us straight into tomorrows final discussion on the international perspective of debt.  Swing back in and see what others around the world have to say.

I took the time at work recently to actually sit and eat with a couple of co-workers.  One is a transplant from India and the other from Brazil.  Eventually, our conversation turned to economics and politics since our cafeteria is always showing CNN.  It was extremely enlightening to hear the perspective of people who grew up in countries that are not consumerists by breeding.  I’ve decided to do a bit of a series of posts over the next few days to talk about our conversation.  Amazing what you can get from 1 hour of lunch huh?

With the recent Democratic debate in Ohio both Clinton and Obama bashed NAFTA.  The link I provided is from a story in a Canadian newspaper by the way.  NAFTA(the North American Free Trade Agreement) is essentially a free pass to make and distribute products within Canada, Mexico and the US.  Having worked for a company with factories in Mexico, I also understand the requirements to prove that a majority of the product and labor was from North America.  In other words, you can’t buy something from Japan, slap a sticker on it in Mexico and ship it to the US without tariffs.  In that case, it’s still considered a Japanese product.

I remember being in my undergraduate microeconomics class in 1994 when this bill was passed.  At the time, both of my parents worked for a local manufacturing company.  My father had moved into management and my mother was still a union worker.  The union was telling my mom that NAFTA was going to send her job to Mexico, so be afraid of it.  I was telling my mom that the job was likely to go somewhere else regardless but that it would help the country overall and we would all have more affordable products because of it.  As it turns out, her job ended up in Alabama, not Mexico.  Both my parents are now out of the manufacturing sector and have been happily employed at Wal-Mart for several years now.

From the newspaper story above, “Clinton acknowledged NAFTA has helped boost the economy in other parts of the U.S.”  Why then must we “Opt-Out” of NAFTA because people in one industry or part of the country are negatively effected?  If it is helping out the majority of people more than it is hurting the few, then it’s the best decision for the country.  Isolationism isn’t going to keep us growing.

So, on to my lunch conversation.  What do you think people from a lower wage country would think about this issue?  When “high paying US jobs are relocated to low paying countries” what’s the impact there?  Well, they both seemed to not see the big deal.  From their viewpoint, the “low wage” people are getting in their country is actually a decent living and typically better than they could do otherwise.  They did not see it as “slave labor” or anything like that, but a decent job, just like they were here in the US. 

Sure, labor standards may not be high in another country, but they weren’t here either 80 years ago.  Keep employing people and those things will take care of themselves.  As there are more jobs, people want more money to do the same work.  You breed competition for those jobs and raise not only wages, but working conditions as well.  After all, that’s how we got the working conditions we have now. 

In the end, they seemed to think a lot of it came down to how US workers and consumers view their “needs” for stuff.  I’ll get into that part of the conversation in my next post.  Stay tuned!

A recent article on CNN money touts four ways to Fool Yourself into Saving Smarter.  Here are their 4 methods with my own explanations:

• Put it on Autopilot - This includes automatic 401(k) deductions as well as setting up your own automatic withdraws to savings or investment accounts.
• Reward Yourself - Give yourself a treat if you meet your savings goal.  People use this kind of thing for losing weight, so why not try it with savings.  Seems a bit odd at first to buy something if you manage to save a certain amount of money, but if done right it could definitely give you the motivation to get started.  I wouldn’t recommend it long term though.
• Wield a Stick- Just the opposite of the last one.  If you respond better to negative reinforcement just punish yourself for not reaching your savings goal.  They also mention a website called stickk.com that will make automatic payments for you for not reaching your goals.  Their example was say an automatic $100 contribution to the NRA for an anti-gun person if they don’t make a weight loss goal.  How about that for some motivation?
• Invest in a Roth- I don’t know that this one is really a fourth option, it sounds a lot like the first one to me.  They encourage investing your tax savings from pre-tax 401(k) contributions into a Roth IRA.  So, if you would have had to make $13,000 to put $10,000 in an after tax Roth, put 10,000 in your 401(k) pre-tax, save the 3,000 in taxes and put that amount into your after tax Roth.

In a way, I’m doing this at home as well.  Not only am I contributing to my 401(k) plan, but with our new checking accounts, I only have direct access to the money that we are allowed to spend.  The rest is stocked away in our other checking and savings accounts to pay bills and earn interest.  The automatic thing is the best method for me.  Putting the money aside and away from me up front is helping me to live within my means. 

Most kids I grew up with and knew had a savings account from a very early age, I was no exception.  My parents started a savings account for me at like 2 or 3.  Of course, I never really knew much about it, and definitely didn’t understand how it worked until much later.  Plus, the savings account was a custodial account with my parents actually controlling the money and my name was basically on there for fun.

But when did you get your first bank account that was all yours?  I was thinking back the other day and realized I got mine when I was about 16.  Growing up I had always had some sort of job.  I sold greeting cards door to door before I was 10 and made extra money to buy myself a radio and one of the very first Nintendos to come out (yep, got one with R.O.B. if you remember those).  Then at 13 or so I took over my brother’s lawn mowing business cause he could drive and got a “good paying” job at a fast food restaurant.

Those summers of mowing I was meticulous with my bookkeeping.  I kept a ledger book and recorded every dollar I made from mowing (eventually raking leaves and snow shoveling as well) and subtracted off all my expenses in gas and oil for the mower.  I even bought a weed-eater the next year and upped my prices to add that to the service.  For being 13-14 in a small town of $600 and make a couple thousand dollars in a summer without having to walk more than 4 blocks from home, I think I did pretty well. 

That experience convinced my parents it was okay for me to get a my own checking account when I was 16.  The went with me down to the local bank and talked with them about it being okay for me to open an account without them as co-signers.  Doubt you can really do that nowadays, but back then at a small town bank it was okay.  Most of my other friends had their own checking accounts before they got out of high school as well. 

What about you?  When did you get your first “all on your own” bank account and what experience did you have with your personal finances prior to that?

I’ve had several posts recently on income taxes and wanted to dig a little deeper.  Here are a couple of my previous posts:

• Tax Credits are Awesome - This will give you a review of the difference between adjustments, deductions and credits when it comes to taxes.
• Taxes and the Rich - This gives some detail on what we are going to talk about including this great link over to an article at Free Money Finance

To get some more detail, I downloaded some tax data from the IRS and used it to do a bit of analysis.  The IRS provided information gives a year by year tax summary from 1986 to 2005.  Here is a summary of the tax data by income group for the year 1986.

Most of these numbers come directly from the IRS with the exception of the Avg. Real Income.  For that number, I took the Total Income, subtracted the Total Income Tax and divided that by the number of Returns.  Here you can see that the top 1% of earners had 15.24% of the income and paid 25.39% of the income tax at an average tax rate of 21.78%.  In contrast, the bottom 50% had slightly higher total income of 15.55%, but paid only 6.67% of the income tax at an average rate of 5.61%.

For 2005:

Here the numbers have changed a bit.  The top earners now have 21.79% of the income, and pay a considerably higher 38.42% of the taxes for an average rate of 21.39%.  The bottom 50% have now dropped in income share to only 12.62% and pay even less of the income tax at 3.17% at an lower rate of 3.05%.

To put thing in perspective, here is the percent change of each of these numbers over that time period.

• Number of Returns - As expected, the number of returns grew at the same rate for all categories, which is the same rate of growth of the population.

• Income- It seems that the income gap has increased as you move up the ladder.  I’m sure part of that has to do with the fact that higher income individuals not only have a higher income to increase, but also are more likely to have investments earning income that lower income individuals are less likely to have.

• Average Income- Even on average, the income for the top 1% has grown over 200%, but way overshadows the 71% growth of the bottom 50%.

• Total Income Tax - It appears that this might help wipe out some of those income gains from the upper brackets.  The top 1% of earners are paying a whopping 285% more income tax with only 200% more income.  That compares to a mere 21% income tax increase for the bottom 50% of earners while they received a 71% income growth.

• Average Tax Rate - And people say the rich are getting all the tax breaks? How about a 1.79% decrease in their average tax rate compared to 45.58% decrease for the lowest 50%?

• Income Share - You see here what we had noticed before on the average income growth, the lowest 50% actually dropped in their share of the total US income while the top 1% showed gains.
• Income Tax Share- In comparison to the income, the groups shares of income tax paid were polar opposites.  The bottom 1% are paying 50% less of the income tax while the top 1% is paying 50% more.
• Real Income- Here’s more of the real test.  The bottom 50% of earners saw their real income gro by 75.85% over the 19 years while the top 1% had real income growth of 203.17%.  To put that in perspective, I figured the annualized growth rate for each category as well.  The bottom 50% saw their real income grow at 3.02% each year, barely outpacing inflation.  The top 1% saw their real income grow at 6.01% a year.

You can see from the above, that really both sides of the tax argument probably have valid points.  Yes, the rich are getting richer as their real income is growing faster.  The poor however, aren’t getting poorer, they just aren’t getting richer as fast.  There are plenty of very valid reasons for that as well. 

I did a little math though on the 2005 tax numbers.  If you were to take the total income tax paid by the bottom 50% of wage earners and divide that among the number of returns filed in all the other brackets, you would get an average additional tax bill of $613.41 per return.    Without giving people in the bottom 50% more money, taking away all their taxes is about as much as you can do tax wise.  That average amount seem pretty minimal and I personally wouldn’t really notice it as I’m getting back more than that on my refund this year. 

Of course, then the next group up would surely complain about their tax burden and so on.  Someone has to pay taxes and there is bound to be some disparity.  While I would like to see some simplification of the rules, I think the current breakout works pretty well.  What do you guys think?

Over the weekend, the wife and I were out shopping for a new printer at home.  Our small laser printer had finally bit the dust a few weeks ago and we were limping along having me print stuff at work and bring it home. 

We had been looking at the ads in the Sunday paper for a few weeks but hadn’t done anything about it yet.  So, Sunday morning we sat down and looked through the ads from several of the large stores to see what was available. 

Originally, we were thinking we would go with another laser printer.  We have a small 4″ x 6″ photo printer, so color isn’t that important to us.  However, we also wanted to get a multi-function so we can toss our scanner which is many years old and doesn’t work very well with our updated computers and operating systems.  Knowing that, we looked through the ink-jet multi-functions and found some lower costs as well.  That seemed to be a bit better.  Lower cost up front, but more on ink over the life of the printer.  Our laser printer that just went dead, did so immediately after replacing our toner cartridge the first time (to the tune of $80 toner on a $100 printer).

So, after looking at the options and seeing what seemed to be a good deal, my next stop was Amazon to see what people were saying about them.  The one we were most interested in had mostly good reviews, but there were a few bad reviews.  The bad reviews said the companies customer service was poor when they had to return the unit, it didn’t work with Mac Leopard OS, it printed slow and wasn’t very good quality.  I always expect bad customer service with consumer electronics, that’s just par for the course.  We don’t own Mac’s so that was no big deal.  The printer clearly states it’s 22 ppm black and I was fine with that.  Finally, I’m not printing high quality marketing stuff.  A few pages a week which are mainly directions and recipes so who cares if it’s the greatest in quality.

So, the models we were interested in were all at Office Max (they were Brother brand).  I went upstairs and found some coupon’s for $10 a $10 purchase we had recently received.  They were for a new store that opened up about 4 miles away.  We have one about .2 of a mile away and planned to go there.

We got to our closest store and started looking around.  We were asked if we needed any help and told him generally what we were looking for.  The guy showed us around to the 3 function machines (copy, scanner, print) which were mostly HP.  He told us about the differences and drawbacks.  Then he took us to the 4 function (added a fax) which had the Brother units on sale we were interested in (but we didn’t tell him that).  He said it sounded like these would work best for us with our actual printing needs and that HP is having you pay more for their little name and some better quality which it didn’t sound like we needed.  He actually pointed us directly to the cheapest one they had (which happened to be our original first choice as well). 

I pulled out the coupon that said good only at the other store.  Before I could get my question out of my mouth he said, “We’ll accept that here.”  Sounded good to me.  He offered me an extended warranty which I am normally opposed to, but I’ve had very bad luck with printers in the past and with my $10 coupon it was a wash. 

All in all, we got a pretty good deal on something that met our needs.  It was refreshing to have someone actually listen to our needs and not try to push better quality down our throats.  I was expecting someone to show us how great the HP’s print and how much better they look when we didn’t care about that at all. 

Coming up here soon this blog will be 6 months old.  I started this as a way to hold myself accountable for actually making a difference in our finances.  As I’ve put together our plan and started implementing some of the changes it has been quite refreshing to have this outlet. 

As my own financial plan has evolved so have my goals for my blog as well.  More and more I am realizing what an outlet I have to help teach others the real basics about personal finances.  Considering that I have been teaching college level courses part-time for about a year now, I think this could be a great tool for me. 

More than that though, I believe there is a real opportunity to extend the learning beyond the web into my own community.  I see a real need in my community for some very basic instruction on personal finance.  Understanding that, you are going to start seeing some changes to this blog.  I am going to use this as a sounding board topics and strategies for teaching personal finances in small groups.  You’ll still see a lot of the stuff you see here presently, but I am going to add some new posts along the way. 

Over the remainder of this year, I would like to build up a considerable amount of teaching/training materials that I can put to use in community classes. 

I’ve looked around and found a few of these types of programs around my area.  However, I haven’t seen any that really focus on reaching the people.  The programs are mainly available to other community groups and organizations if they ask for it.  I would like to build an organization that has a primary mission of reaching people in the community for this singular purpose.  My vision is to have some developed course and find a local place where I can offer classes.  Even if I have to stand out in front of any one of my local pay day loan places to try to draw in students, that’s what will be done. 

Here are a few topics I know I want to start working on:

• Opening and Managing Bank Accounts (Checking and Savings)
• Creating a Budget You Can Live With
• Preparing to Purchase a Home
• How to Save Before You Spend
• Plan For Your Retirement

I know there will be several other topics I’ll want to put together over time, but these are going to give me a good place to start.

Now I ask the rest of the PF Blogging community out there.

• Is anyone else involved in teaching PF within their local community?  If so, what is the organization and how do you go about it?
• Do you have any ideas of other topics that could be covered as well?

I look forward to getting some feedback on my ideas!

With getting paid yesterday, I sat down to update my Microsoft Money file last night.  I downloaded all my recent transactions and categorized them.  I was shocked to see that my net worth was up over $3,000 at this point of the month!  I looked through what bills we have yet to pay thinking maybe something hadn’t come out, but that wasn’t the case. 

We still have about $1,100 in bills yet to pay this month.  Add to that the $600 “allowance” we give ourselves every 2 weeks and we still have less than $2,000 expected to spend.  I still have a paycheck from my full time job and a double paycheck from my teaching job to hit the bank yet this month.  So, that’s going to add another 4 grand or so to the accounts by the end of the month! 

That means, by the end of this month we will easily have the four thousand we planned to pay off on the AC in March or  April before we move that balance.  We should still end up with some money left in savings after that as well.  Now I’m looking forward to our estimated tax refund of two thousand along with our “economic stimulus” check of another fifteen hundred as well. 

I admit, after seeing last months results, I was a little worried that we might not make our debt and net worth goals for this year, but things are starting look up!

So, as I’ve mentioned from past posts on my budget, we are giving ourselves a fixed amount to spend every 2 weeks between paychecks.  We’ve done this by splitting the direct deposit from my paychecks between our “spending” account and our “bill-pay” accounts at different banks. 

Currently, we are giving ourselves $600 to spend during the 2 week period.  The hope has been that we won’t typically use all of that and will move some of it to savings when the 2 weeks is up so we can save for larger expenses (such as summer clothes shopping) that don’t occur regularly.

Our first 2 weeks we spent nearly all of the funds.  However, that did include our first trip of the year to Sam’s Club to stock up on paper products and included the membership fees.  We also had a vet visit for the dog with shots involved.  Those 2 things drained it a bit, but we still made it by. 

I just got paid again this morning and looked at the account.  With expenses that had been transacted, but not cleared yet, we still had $150 left!  I was very excited.  We had also gotten our escrow account refund and deposited it in that same account a couple days ago, so both those amounts got moved over to the new savings account for now.  It’s a good feeling when a plan starts to come together!

If you want to know more about how we budget and manage our money, just check out the banking and budgeting categories of the archives!