Real World Finance$

It’s that time of the year.  I will be updating the value of my assets (car and home) quarterly throughout the year.  Each of my updates are below:

 Home:

• January Value- $212,000 based on appraisal done for our refinancing.  Appraisal was done in late December for early January closing. 
• April Value - $212,000.  

I looked online with Zillow and with the National Association of Realtors to compare value.  Zillow had our value at 204 when we refinanced and at 212 at the end of March.  NAR showed some declines in February, but their March numbers won’t come out until late April.  However, I compared those numbers to the weekly numbers Zillow showed for my home and it seemed appropriate.  So, since Zillow showed the value going up this last month, I actually just left it alone for now.  We’ll follow the trend a bit further and see what happens in the next quarter.  So far, Zillow has been fairly close to it’s estimate from when we originally purchased to our recent refinance.

Car:

• January Value - $17,165
• April Value - $16,000

I went searching at my favorite auto value place, the Kelly Blue Book.  Unfortunately, since we have a 2008 model, they don’t yet have used car values for them.  So, I looked up the current value of a 2007 model of our car.  I then projected our mileage out another year to see where we might end up.  It showed a reduction in value of about $5000 over the original sticker price of the 2007.  So, because I like round numbers, I divided that by 4 and rounded off to $16,000.  Also, our January value was the sticker price, while the April value was based on Trade-In value. 

I can hardly believe it’s nearly the end of March already!  The last few months have been some good one’s for the family financially and I’m starting to feel a bit of momentum pick up.  I got a paycheck yesterday and sat down last night to enter the amount in MS Money.  I also know that I have paychecks coming on Monday from my part-time teaching job, so I entered those as well.

Typically, after getting a paycheck, I look at my bill pay schedule and see how much I need in my E*Trade checking account to pay the bills until the next paycheck.  I then tack on a extra hundred or so to make sure there is enough for the auto pay bills like the newspaper and Netflix.  Everything else gets moved over to the savings account.  Though the interest rate has dropped to the low threes from the low fives since I opened it in December, it’s still a better deal than most places.

So, after entering all of this last night I looked at our savings account and realized there would be nearly $6500 in there by the end of the month.  I was amazed.  Granted, I’m taking out at least four thousand of that to pay on our AC bill next month and the remaining balance will get moved over to a low interest rate credit card that we will begin aggressively paying on.  Also, I know my next paycheck won’t be as hefty due to my monthly medical insurance being deducted and it will still have to cover credit card payments and the mortgage, so some more will come out of the savings to cover.

Still, after all of that, we should easily still have $1500 or so left.  That’s an amount we’ve built up in only 3 months!  We’ve never been able to save money like that before.  With our tax refund coming (hopefully) in April and the stimulus check in May, then we should have plenty of money to do the work we need to get done on the house and pay cash. 

Since I’m a contract employee, I want to have a little more emergency fund than most people, but I’m projecting to have an extra thousand or two to make extra debt payments by mid-year.  The momentum is starting to show and I’m not noticing a change in our lifestyle.  This is starting to get fun!

I was thinking today about insurance and something struck me kind of odd.  I was thinking about the difference between auto and health insurance.

 Have you noticed that your auto insurance doesn’t cover routine maintenance?  As a matter of fact, if you aren’t good at maintaining your car and cause more serious trouble, it doesn’t cover that either.  It only covers major accidents.  Anyone every try to get your auto insurance to pay for an oil change or new tires?

Yet, with our health insurance, we expect it to pay for every single little thing we do.  From routine maintenance (office visits) to major accidents (broken bones, cancer, etc.)  Now, I know, it’s in the insurance companies best interest to pay for this routine stuff to hopefully prevent major illnesses later.  However, all that cost that goes into managing the payments for those routine things could drastically reduce overhead at both the doctor’s office and the insurance company. 

This kind of program would be great for me at least.  I currently pay about $70 a month for car insurance (1 car) and $700 for medical and dental (3 people).  If I could pay $210 a month for the 3 of us for medical insurance, I would gladly pay for office visits and routine care on my own.  I’d even be willing to submit paperwork that I was doing that in order to keep my rates low.

I recently got a statement from my insurance company about some tests my wife had done at the doctor’s office (done by a nurse, not the doctor).  The billed price for the test was $80.  The insurance company “allowed” rate was $21 and paid in full.  I would gladly pay even twice that to save $500 a month on my insurance cost. 

I’ve seen that over and over again on my insurance statements.  The billed price and the allowed price are so far apart it doesn’t make sense.  If the doctor really wanted $80 for that, why is he accepting the $21 from the insurance company? 

I did a quick search on Google for Cash Only Doctors and found a large number of news stories.  Maybe I’ll have to track one down and see how cheap I can get some coverage for just major medical expenses.

Free Lunch is a book written by David Cay Johnston, a New York Times investigative reporter.  

I had seen a short interview with Mr. Johnston on PBS 6 weeks or so ago.  He was, of course, promoting his book.  With the current election going on, the topics of taxes and government have been on my mind, so this was a very timely read. 

If you are like me, you’ve often wondered why governments lately seem so eager to give tax incentives to businesses to move into their city/county/state.  The common thinking is that those businesses create jobs and generate tax income above the incentives they are given.  As Mr. Johnston shows, there has been little study or regulations to insure that actually happens.  Promises of big businesses to bring in revenue don’t tend to live up to their hype.  In the end, the tax incentives are played off of different cities as an enticement for who will give the most.

I’ve noticed a lot of this here around St. Louis in the last several years.  In an effort to increase the tax base and revenue of the city, they offer incentives in the form of taxes for businesses to relocate inside the city limits.  Yet, we recently had a ballot initiative passed for a half cent increase to sales tax to pay for police and firefighter pension obligations.  Seems we gave away more than we were getting and couldn’t pay for pensions.

Johnston weaves a very elegant story across many industries and parts of the country showing how everyone from professional sports team owners to health insurance companies to home burglar alarm companies are getting a “Free Lunch” thanks to tax dollars.  As a fiscal conservative, I am very pro-market economy. 

To hear is tales of how we are skirting the free market and the end results is very eye opening.  The conclusion of the book is also very well worded and I tend to agree with his point on the best way to fix the problem.  He proposes, in short, that the people of the country pay the full cost of our government.  Including everything from having a house in DC to one in their District to travel and expenses back and forth and other expenses the congressmen see fit.  The caveat to that suggestion is that all their expenses should be transparent and reported publicly on  a congressional website.  He also suggests there should be stiff penalties for ANY kind of gift received.   While more expensive, it should open up the opportunity for the less well off to get into politics as well as cut back on the need to give away things to companies being lobbied for.

While this may not seem to be directly related to your personal finances, taxes are probably the largest single expenditure in the budget of most Americans.  Yet, we often know very little about what happens to that money.  I highly recommend reading this book for an eye opening perspective of what is happening to the 20% of your budget you pay in taxes every year.  One out of every five dollars you make goes to the government for something.  If it was you spending that money, you would watch those expenses like a hawk to keep them under control.  Yet we typically foget those and consider them a sunk cost.  Personally, this book really got me fired up to take control of that 20% of my budget.

I watched a great episode of Frontline last night called “Secret History of Credit Cards”

Now, granted, this show was originally aired in November of 2004, and the “update” at the end of the show said Americans now have more credit card debt than ever.  Big shocker there!

If you follow the link to the show above, they have some really great resources available.  You can also watch the entire episode online!

It was a very interesting show to watch about how the industry got so big, so fast.  Included in the interviews was former Governor of South Dakota (Bill Janklow) who got rid of the usury laws in the 80’s.  That is why you see so many of your credit card payments going to Sioux Falls, SD.  Evidently, laws at the time allowed credit cards to charge the rate associated to where the credit decision was made, not where the credit was being issued.  So, they could avoid credit rate limits in other states by having their operations in South Dakota.

While that may seem sneaky and underhanded, it made a lot of sense back then.  In an interview with the former chairman of Citibank (Walter Wriston), he stated the laws in New York capped what they could charge at 12%, but their cost of getting the money was 20%.  Kind of hard for them to make money that way. 

Of course, sense that time, there have been all kinds of revised laws allowing credit cards companies free reign on the market.  While I believe they shouldn’t be restricted on what they charge, they also need to be forced to be more explicit in what and how they tell the consumers about their credit.  One very good point made was about credit card companies changing rates.  It was compared to changing the price of something after you buy it.  You buy a new TV at 9.99%, and then they decide to raise your rate to 24.99%.  It is an interesting idea, but the consumer has unwittingly agreed to that by not reading their credit card agreement.

In some cases, you can reject a rate increase on a card.  I’ve done that in the past myself.  However, in doing that, I was not able to make any more charges in order to keep my rate.  If I charged one more thing to the card it would hop up to the new rate for all balances.  I paid that card off and closed the account for good.

Some of the most telling parts of the story were the interviews with credit card customers.  The group they talked to actually had the money available to pay off their cards, but didn’t because they wanted the cash on hand in case they lost their job or had another emergency.  I guess they didn’t realize they could build back up their “emergency” fund pretty fast if they weren’t paying that monthly credit card bill!

Another amazing part was the interview with Ben Stein.  Just seeing how full his wallet was of credit cards was absolutely amazing (it had to have been 4-5″ thick).  Of course, he also said he’s never paid a finance charge on any of them and that the credit card companies hate him.

I’ve you’ve got some time some evening, I’d suggest taking to the time to watch this video.

Just yesterday, the local paper here in St. Louis ran a story by Bill Poole, the current (and retiring) President of the Federal Reserve Bank of St. Louis.  His commentary was entitled Financial Education is the Key.

In the story he cites the root cause of the current financial crisis in the US on three distinct groups of people.  (more…)

I wanted to welcome some of the subscribers and visitors to my blog.

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Happy reading and enjoy your upcoming weekend!

I saw this article yesterday at the NY Times. 

Stronger Rules for Mortgages are Proposed

A quick except from the article says:

The changes include tougher disclosure requirements for banks and Wall Street firms, a nationwide licensing system for mortgage brokers and new rules for credit rating agencies,

It’s about time is all I can say.  Why is it that most states have licensing requirements for anyone wishing to sell or broker real estate, but there are not similar laws and requirements for those people who actually sell the money used to buy said real estate?  I would have expected it to be the other way around.  After all, the majority of consumers these days get a mortgage to go with their house.  Very few will EVER buy a house without one.

Of course, commercial and investment real estate is still often done with cash or private “hard money” type of loans, so the need for real estate licenses is also a very real need to protect the consumers there as well. 

If we are talking about a regular consumer of residential real estate, the broker (I don’t use the word Realtor (R) because you don’t have to be a member for that organization to sell real estate) can only go so far without the buyer having a mortgage to pay for the property.  If that mortgage person is licensed and held to tougher standards, it forces the broker (and their agents) to meet those same standards of conducts in order to get business done.

I’ve said before that I would really like to see a mortgage company that offers financial counseling first.  Let’s say they were to offer a financial review and help people with their finances to be prepared to buy a house.  They could charge for those services up front, and then credit that money back to them if they chose to get a mortgage through them.  That way the company isn’t out their time and effort if the people go elsewhere or decide not to buy.

While I am typically a fan of a smaller and less involved government, government oversight into financial transactions is essential to preventing swindlers from making a quick buck.  For too long there has been too little oversight into one of the largest debts taken on by American consumers.

Getting out of debt is a good thing.  You can run all the numbers you want and find thousands of reasons having less debt is a good thing.  Having less debt helps you save for retirement, save for a child’s education, and maybe even afford a nicer home.

However, even though we are talking about money, numbers and reason is rarely the biggest motivator to drive people to get out of debt.  Take me for example, I LOVE numbers, I’m great at math and have spent several years of my life doing financial analysis for a living.  Yet, I’m am in a huge hole of debt. 

Why?

Personal motivation.  I didn’t have the motivation to change anything.  I always manged in the past and figured there would always be a higher paying job around the corner.

Now, things have changed.  I have the motivation and I’m making progress towards paying down that mountain.  My motivation did not come from analytical reasoning, but from an emotional decision.  You see, though my brother and Free Money Finance would both agree that your career is your greatest asset, I personally disagree.

Even my own brother has called me a job hopper and said he wouldn’t hire me if he saw my resume float across his desk.  That’s okay by me.  I am currently enjoying work as an hourly contractor.  Though some would say there is little security in that, I say there is just as little security as an employee.  In Missouri at least, there is no law requiring severance or no employment contracts that will entitle you to your pay regardless of the situation.  Either party can terminate employment for no reason whatsoever at any time.

That being said, part of the reason I enjoy contracting is that I feel more independent.  Though I am not self-employed currently, that is the true goal for me.  It is that goal that was my real motivation to make the changes necessary to get out of debt.  What I’m discovering is that I can really live on a lot less money than I make now.  So much of it goes towards debts that if it wasn’t there, I would have a lot more freedom to work for myself and do something I enjoy.  I’m not sure what that thing is yet, but it’s out there.  I’ve got a few years while we pay down the debt to decide on my next step though.  Here are a few of the things I’ve always wanted to do someday, but don’t pay enough money for my family to survive at the moment:

• Go back to school for a PhD in Economics
• Get certified as  PGA Teaching Professional
• Make custom furniture
• Own a small, local retail store
• Become a landlord
• Remodel Old Houses

These are all things I like to think about or do in my spare time.  Getting started in many of these is very difficult with little or no pay to speak of.  What they all have in common is often a much more flexible schedule to allow more time for myself and my family.  Yes, you can still make money with some of these and spend hours and hours working, I won’t disagree with that.  But with little to no debt, the motivation to make a large income to keep your head above water is gone.

That’s why I’m getting out of debt.  Mine was an emotional decision. 

How about my handful of readers out there? 

What is you motivation to get out of debt? 

What do you want from life when you get there?

I had wanted to do a book review on a monthly basis this year.  I had a book in mind for February, but it was on hold for me at the library until just last week, so I’m in process of reading it for March.  To give you some good reading and catch up a bit, I thought I would share another one I had read recently.

A noteworthy review of this book as listed on Amazon simply said “Required reading.”  That review was by Steven Levitt, author of Freakonomics, my last book review.  Several other reviewers of this book say it is even better than Levitt’s book.  I believe it’s a matter of perspective.  Freakonomics was a little more entertaining and The Undercover Economist (affiliate link), by Tim Harford, is a bit more educational, so, take your pick.

 This book gets really good right from the start.  The first chapter is entitled, “Who Pays for your Coffee?”  While I’m not a coffee drinker myself, it was very intriguing to understand his analysis.  He delves into the old real estate motto of “location, location, location” buy showing why Starbucks seems to be on every corner and how they can do that and still charge $5 for a cup of coffee.

He also delves into the idea of “Free Trade” coffee.  I’ve seen this at some stores around where I live.  Places typically charge slightly more for a cup of Free Trade coffee than regular.  It is supposed to be a charge so that they can pay a higher amount for coffee grown in poor countries to help the farms grow.  Harford here suggests the actual amount of difference they pay for the pound of coffee versus how much coffee they can brew and charge extra for is way out of whack.  It seems the coffee vendor is making a huge extra profit on the Free Trade cups and is only passing slightly more on to the farmer.  Lucky for him, his favorite coffee shop no longer charges a different price.

Later chapters swim into topics of your local grocery store  and on into the reasons poor countries stay poor (that chapter alone should be read if you read no other part of this book). 

As you can tell so far, my book reviews won’t be your typical personal finance related books.  I believe that a strong understanding of markets and economics will help you to make smarter money and buying decisions.  I highly recommend you add this book to your reading list.  I pick mine up from my local library.