Financial news has certainly been a mixed bag recently. Below, take a look at some of the stories making news recently on the international, national, state, and local levels:
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Foreigners Buy Into American Banks
While Americans blissfully buy millions of toxic toys and products from China ( www.magiccoalcity.blogspot.com ), the Chinese are laughing all the way to the bank -- well, actually they're buying the bank!
In an AP news article this morning, Morgan Stanley, the second largest investment bank in America, has written off almost $9 ½ BILLION due to sub-prime loans. (See Indiana's foreclosure rate: www.magiccoalcity.blogspot.com This led to the investment bank taking its first quarterly loss in seventy-three years and to taking a $5 billion infusion from an arm of the Chinese government too.
Morgan Stanley is not alone though. The article goes on to report that a couple of months ago, Bear Stearns took a $1 billion investment from China's government-controlled Citic Securities.
And it's not just the Chinese buying into banks either. Citigroup Inc. received a $7.5 billion capital infusion from the investment arm of our oil-rich friends in the Abu Dhabi government in November.
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Unfortunately, Indiana Makes Top 10
In another AP-written news article, foreclosures are said to be up 68% compared to a year ago: http://biz.yahoo.com/ap/071219/foreclosu...
This hurts you and me both, whether we're getting foreclosed on or not (see www.magiccoalcity.blogspot.com ).
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An Innovative Idea
In nearby Brown County, an Arts Industry Business Incubator opened December 12 in Nashville, according to the Brown County Democrat. The aim of this novel idea is to nurture arts-oriented businesses. Like many traditional business incubators, the businesses will share space and clerical support.
According to the article, the concept is supported by the Brown County Economic Development Commission, Arts Business Development Task Force, and Ball State University.
This is certainly an innovative and "think outside the box" type of idea!
We'll see how it fares in the coming months, but it seems it will dovetail nicely into the image that Nashville has tried to create over the years.
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Our Neighbors Have Good News
Knox County received great news recently!
A press release from Vectren Fuels said they received approval from the Indiana Department of Natural Resources on Friday that they could begin mining operations in Oaktown, Indiana. They have already started site preparation, and they anticipate employing 425 miners with actual coal production in the second quarter of 2009.
Now, that's great employment news this area certainly needs!
Wednesday, December 19, 2007
Thursday, December 13, 2007
Quit Not Quick
I've always been amazed that our school system does not better prepare us to take on life's more costly situations. One such situation is buying a home, and it's arguably our most expensive purchase in life. How I recall, no one ever discussed real estate terms when I was in high school, although it would seem to be an excellent guest speaker opportunity for a Realtor, attorney, or title company employee to share in the classroom.
In any event, while there are many important documents in a real estate transaction, deeds are the most powerful documents in real estate in my opinion because they transfer ownership. When referring to various types of deeds, I've found that it is common to hear someone incorrectly say or write, "quick claim deed." Although it may sound very similar, it is actually called a "quitclaim" deed. It is called a "quitclaim" because it does exactly that: quits a claim to the property it refers to.
Quitclaim deeds transfer the ownership interest or rights in real estate to the recipient without stating what exactly the interest or right actually is in the property. This type of deed also does not provide any warranty of ownership, and that is key.
Commonly, they are used to clear up "clouds" on the title of a property, but can be used to transfer complete ownership -- of course without any warranties. (A "cloud" on the title is any potential lien, encumbrance, or claim that could impair the owner's title to the property, and a "clear title" has no clouds.) It's also common to see them used after a divorce when one of the former couple deeds their share of a property to the former spouse. Sometimes, you'll see them used when people deed property into a trust or a company they own.
By comparison, a warranty deed provides a guarantee that there are no issues in the chain of title (chain of title = way back when the government gave to Owner A, who sold to Owner B, who died and left it to Owner C, who divorced and transferred it to Owner D, who sold to Owner E… and you get the picture.) The seller can provide this guarantee because normally he or she is relying on the previous warranty deed given to them, which contains the same or similar warranties.
Title insurance also allows them to provide this warranty because if something does become an issue in the future, the policy covers the actual loss, subject to the limitations and exclusions listed within it. You'll note that I said "actual" in that last sentence. Just because there is a title issue, it seems most title insurance policies will typically only pay for actual losses.
Title insurance is a whole new topic though!
In any event, while there are many important documents in a real estate transaction, deeds are the most powerful documents in real estate in my opinion because they transfer ownership. When referring to various types of deeds, I've found that it is common to hear someone incorrectly say or write, "quick claim deed." Although it may sound very similar, it is actually called a "quitclaim" deed. It is called a "quitclaim" because it does exactly that: quits a claim to the property it refers to.
Quitclaim deeds transfer the ownership interest or rights in real estate to the recipient without stating what exactly the interest or right actually is in the property. This type of deed also does not provide any warranty of ownership, and that is key.
Commonly, they are used to clear up "clouds" on the title of a property, but can be used to transfer complete ownership -- of course without any warranties. (A "cloud" on the title is any potential lien, encumbrance, or claim that could impair the owner's title to the property, and a "clear title" has no clouds.) It's also common to see them used after a divorce when one of the former couple deeds their share of a property to the former spouse. Sometimes, you'll see them used when people deed property into a trust or a company they own.
By comparison, a warranty deed provides a guarantee that there are no issues in the chain of title (chain of title = way back when the government gave to Owner A, who sold to Owner B, who died and left it to Owner C, who divorced and transferred it to Owner D, who sold to Owner E… and you get the picture.) The seller can provide this guarantee because normally he or she is relying on the previous warranty deed given to them, which contains the same or similar warranties.
Title insurance also allows them to provide this warranty because if something does become an issue in the future, the policy covers the actual loss, subject to the limitations and exclusions listed within it. You'll note that I said "actual" in that last sentence. Just because there is a title issue, it seems most title insurance policies will typically only pay for actual losses.
Title insurance is a whole new topic though!
Wednesday, December 12, 2007
Sweeping Changes to Local Government
Local government will likely see drastic changes soon, as Governor Mitch Daniels asked volunteers to serve on the blue ribbon Indiana Commission for Local Government Reform. Over the past several months these members have been working on examining and developing recommendations, and the commission members recently submitted 27 specific recommendations to streamline local government and reduce costs in their final report.
Of course, changes do not come without hardship, and the Commission acknowledges this. In fact, they say sweeping changes will not be easy and write in their report that their recommendations will be "disruptive, even painful, in the short run". Nonetheless, they also write "We've got to stop governing like this."
Some of their recommendations included:
*Establish a single-person elected county chief executive.
*Consolidate emergency public safety dispatch by county or multi-county region.
*Move the funding of child welfare from counties to the state.
*Reorganize school districts to achieve a minimum student population of 2,000.
*Reorganize library systems by county and provide permanent library service for all citizens.
*Prohibit employees of a local government unit from serving as elected officials within the same local government unit.
To learn more, you can read the entire report here:
http://indianalocalgovreform.iu.edu/asse...
Of course, changes do not come without hardship, and the Commission acknowledges this. In fact, they say sweeping changes will not be easy and write in their report that their recommendations will be "disruptive, even painful, in the short run". Nonetheless, they also write "We've got to stop governing like this."
Some of their recommendations included:
*Establish a single-person elected county chief executive.
*Consolidate emergency public safety dispatch by county or multi-county region.
*Move the funding of child welfare from counties to the state.
*Reorganize school districts to achieve a minimum student population of 2,000.
*Reorganize library systems by county and provide permanent library service for all citizens.
*Prohibit employees of a local government unit from serving as elected officials within the same local government unit.
To learn more, you can read the entire report here:
http://indianalocalgovreform.iu.edu/asse...
Tuesday, December 11, 2007
Indiana Foreclosure Rate: 1 Out of Every 516
The Indianapolis Business Journal reported the other day that 1 out of every 516 Indiana homeowners was in one stage of foreclosure or another in October, ranking the state ninth in the country. They also stated that this figure is up 19.3% from September and 50.7% from a year ago. By comparison, they wrote that Nevada ranked first in the nation with 1 foreclosure for every 154 homeowners.
Monday, December 10, 2007
Court: Be a Man!
As often as we all say that our legal system is broken, this judge's recent court decision may reinstate our faith in it.
In November, the Indiana Court of Appeals ruled that an unwed father must pay back Medicaid for at least 50% of the birthing expenses, according to Indiana statute. Doing so does not violate the father's rights, as he tried to argue unsuccessfully.
The father of the child argued "that I.C. § 31-14-17-1 violates the Equal Protection Clause of the United States Constitution because it requires the father of a child born out-of-wedlock to reimburse the infant's birthing expenses to Medicaid while no similar obligation exists for a married father." (Can you believe he tries to shirk responsibility by using the U.S. Constitution?!)
But it gets even more ridiculous with this excerpt from the case:
"Meneses now claims that he is treated differently from married fathers in that only fathers with children born out-of-wedlock are held responsible for fifty percent of the child's birthing expenses. See I.C. § 31-14-17-1. If unmarried to the mother, a man has no legal obligation to provide any type of support on behalf of the child, until paternity is established; whereas, on the other hand, a familial support obligation is inherently associated with a marriage."
To these futile arguments, the judge wrote in her opinion that requiring men to provide for children born out of wedlock and reimburse medical expenses is a legitimate goal because it requires a man to accept financial responsibility similar to what married men do voluntarily.
For the whole published opinion, please see:
http://www.state.in.us/judiciary/opinion...
In November, the Indiana Court of Appeals ruled that an unwed father must pay back Medicaid for at least 50% of the birthing expenses, according to Indiana statute. Doing so does not violate the father's rights, as he tried to argue unsuccessfully.
The father of the child argued "that I.C. § 31-14-17-1 violates the Equal Protection Clause of the United States Constitution because it requires the father of a child born out-of-wedlock to reimburse the infant's birthing expenses to Medicaid while no similar obligation exists for a married father." (Can you believe he tries to shirk responsibility by using the U.S. Constitution?!)
But it gets even more ridiculous with this excerpt from the case:
"Meneses now claims that he is treated differently from married fathers in that only fathers with children born out-of-wedlock are held responsible for fifty percent of the child's birthing expenses. See I.C. § 31-14-17-1. If unmarried to the mother, a man has no legal obligation to provide any type of support on behalf of the child, until paternity is established; whereas, on the other hand, a familial support obligation is inherently associated with a marriage."
To these futile arguments, the judge wrote in her opinion that requiring men to provide for children born out of wedlock and reimburse medical expenses is a legitimate goal because it requires a man to accept financial responsibility similar to what married men do voluntarily.
For the whole published opinion, please see:
http://www.state.in.us/judiciary/opinion...
Saturday, December 8, 2007
Great Book Suggestions
With this post, I thought I'd list some of the best business and investing books I've found lately.
One of the best on "investments systems" is the "The Richest Man in Babylon" by George S. Clason. It dispenses timeless investment principals and sage wisdom, not the latest investment fad. I'll admit that it isn't the easiest of books to read because of the proverb-style text though.
A great book to prepare for any interviewing situation is "101 Great Answers to the Toughest Interview Questions" by Ron Fry. The title pretty much describes what it is about and how it is written, so just pick up a copy for a lot of superb advice. It's also a great gift for high school and college graduates -- or that seemingly forever unemployed family member that's just holding out for management.
"The Magic of Thinking Big" by David J Schwartz, PhD was written sometime back, and some parts are obviously dated when you start to read it, such as what he considers a wonderful salary for a top-notch salesman. Nonetheless, it's a great book with a very positive attitude, essentially telling its readers that sometimes the only person holding us back is ourselves. There's a lot more to it than that though, and it's such an easy read that you should be able to fly through it in one evening.
One book I like because I can actually put names and faces to the descriptions in this book is "The Cashflow Quadrant" by Robert T. Kiyosaki. In it he describes four different quadrants and who is in each one. I'll warn you that Kiyosaki tends to be wordy and somewhat vague in his series of Rich Dad, Poor Dad books as a whole, but I believe this is one of the best in his series.
Although I don't care for his on-air TV antics, which basically makes it just stupid to watch, Jim Cramer did write a very good book called "Confessions of a Street Addict" about five years ago. I find his intensity is very entertaining, while he gives his readers the real story of how people make money on Wall Street. Before he started pushing noise-making buttons on his show, Mad Money, he was a very successful hedge fund manager with let's call it "psychotic anger management issues".
There you have it: five great books!
One of the best on "investments systems" is the "The Richest Man in Babylon" by George S. Clason. It dispenses timeless investment principals and sage wisdom, not the latest investment fad. I'll admit that it isn't the easiest of books to read because of the proverb-style text though.
A great book to prepare for any interviewing situation is "101 Great Answers to the Toughest Interview Questions" by Ron Fry. The title pretty much describes what it is about and how it is written, so just pick up a copy for a lot of superb advice. It's also a great gift for high school and college graduates -- or that seemingly forever unemployed family member that's just holding out for management.
"The Magic of Thinking Big" by David J Schwartz, PhD was written sometime back, and some parts are obviously dated when you start to read it, such as what he considers a wonderful salary for a top-notch salesman. Nonetheless, it's a great book with a very positive attitude, essentially telling its readers that sometimes the only person holding us back is ourselves. There's a lot more to it than that though, and it's such an easy read that you should be able to fly through it in one evening.
One book I like because I can actually put names and faces to the descriptions in this book is "The Cashflow Quadrant" by Robert T. Kiyosaki. In it he describes four different quadrants and who is in each one. I'll warn you that Kiyosaki tends to be wordy and somewhat vague in his series of Rich Dad, Poor Dad books as a whole, but I believe this is one of the best in his series.
Although I don't care for his on-air TV antics, which basically makes it just stupid to watch, Jim Cramer did write a very good book called "Confessions of a Street Addict" about five years ago. I find his intensity is very entertaining, while he gives his readers the real story of how people make money on Wall Street. Before he started pushing noise-making buttons on his show, Mad Money, he was a very successful hedge fund manager with let's call it "psychotic anger management issues".
There you have it: five great books!
Friday, December 7, 2007
It's Friday, Here's Your 6-Pack!
In the stock market lately, several great names have been at great prices in my opinion.
Companies like Pfizer (PFE), German American (GABC), Cedar Fair (FUN), Kimball International (KBALB), Duke Realty (DRE), and Bank of America (BAC) all have some local ties too. Two are headquartered in nearby Jasper (GABC & KBALB), PFE has a plant in Terre Haute, and DRE is headquartered in Indianapolis. Of course, BAC is everywhere.
All are paying healthy dividends rivaling top-paying CD rates, while having the potential to have a nice run up in the coming years, as soon as everyone figures out if the nation is in a recession or not. Some would even call these picks "defensive" since pharmaceuticals tend to do well when the overall economy isn't, and KBALB has a strong balance sheet to weather some storms too.
Notice that this "6-pack" of stocks is in different industries. (Well, there are two banks I guess, although one is nationwide and the other has a footprint in Southern Indiana only.) This is key because a diversified 6-pack will perform typically as follows: two will perform very well, two will just tread water, and two will lag. You just have to expect and accept that going into it.
Oh, and in case you began reading this thinking you were going to get free beer, you can always try Anheuser-Busch (BUD) as a long-term keeper. After all, they have a great business: when times are good people drink, and when times are bad they drink... they pay a little less in dividends (about 2.5% right now) though.
Companies like Pfizer (PFE), German American (GABC), Cedar Fair (FUN), Kimball International (KBALB), Duke Realty (DRE), and Bank of America (BAC) all have some local ties too. Two are headquartered in nearby Jasper (GABC & KBALB), PFE has a plant in Terre Haute, and DRE is headquartered in Indianapolis. Of course, BAC is everywhere.
All are paying healthy dividends rivaling top-paying CD rates, while having the potential to have a nice run up in the coming years, as soon as everyone figures out if the nation is in a recession or not. Some would even call these picks "defensive" since pharmaceuticals tend to do well when the overall economy isn't, and KBALB has a strong balance sheet to weather some storms too.
Notice that this "6-pack" of stocks is in different industries. (Well, there are two banks I guess, although one is nationwide and the other has a footprint in Southern Indiana only.) This is key because a diversified 6-pack will perform typically as follows: two will perform very well, two will just tread water, and two will lag. You just have to expect and accept that going into it.
Oh, and in case you began reading this thinking you were going to get free beer, you can always try Anheuser-Busch (BUD) as a long-term keeper. After all, they have a great business: when times are good people drink, and when times are bad they drink... they pay a little less in dividends (about 2.5% right now) though.
Thursday, November 29, 2007
Profiting From Another's Gift
Gift cards have become very popular gifts for Christmas, birthdays, and other special occasions. They have also become another profit center for retailers because many are lost or never redeemed for one reason or the other. To put this in perspective, read this eye-opening story from the New York Times, which sums this point up very well:
http://www.nytimes.com/2007/01/07/magazi...
It goes beyond merely misplacing or forgetting about the gift cards given to you though:
You may have received a gift card to Simon Malls in the past. If you have and didn't immediately spend it, you know that Simon takes making a profit from them to a whole new level. They charge a $2.50 fee for each month it is held after six months, while voiding the entire balance after 12 months. This is on top of charging an initial fee to purchase the card and a fee to check the card's balance.
Does this even seem legal? Well, several states didn't think so and have sued them over the past few years. In any event, they're pretty proud of their gift cards to be charging what they do. Why people still buy them is anyone's guess.
So, if you're thinking of giving gift cards this Christmas, it just may be a gift to the retailer instead… even though their name isn't on the gift tag, it's on the card.
http://www.nytimes.com/2007/01/07/magazi...
It goes beyond merely misplacing or forgetting about the gift cards given to you though:
You may have received a gift card to Simon Malls in the past. If you have and didn't immediately spend it, you know that Simon takes making a profit from them to a whole new level. They charge a $2.50 fee for each month it is held after six months, while voiding the entire balance after 12 months. This is on top of charging an initial fee to purchase the card and a fee to check the card's balance.
Does this even seem legal? Well, several states didn't think so and have sued them over the past few years. In any event, they're pretty proud of their gift cards to be charging what they do. Why people still buy them is anyone's guess.
So, if you're thinking of giving gift cards this Christmas, it just may be a gift to the retailer instead… even though their name isn't on the gift tag, it's on the card.
Friday, November 23, 2007
What It Costs To Live In Greene County: Part Four
It's been a little while since the last "What It Costs To Live In Greene County" post, so here's another installment, but let's first recap the previous three posts:
In Part One, I said that I was originally part of a group discussion where the topic was how everyone was tired of reading about how they should put away so much in an emergency savings account every month, allocate a percentage of their wages into a retirement account, earmark funds for that special summer vacation or getaway, and the list goes on and on. In the end, though, it just couldn't be done.
Of course, if you pick up any personal finance magazine off the news rack these days, they are packed with tons of supposed sage advice, penny-wise wisdom, and general financial rules of thumb, but the question is: How practical is it to do these great, glorious things anyway? An even better question I think is: can the "average" person or household do this in Greene County, Indiana?
To help answer these questions -- at least theoretically -- I started putting together an Excel template with the notion that if all of those things you're "supposed to do" couldn't be done on paper then the real-life version would be nearly impossible. So, to put "pen to paper" per se, I looked up some average incomes for the area on the U.S. Census Bureau website and got started.
The median family income in Greene County, Indiana in 1999, which was the most current census information I found, was $41,523.
When I was working more on this template, it dawned on me that I should use these monthly amounts to "back out" into an amount of the original mortgage loan, for example. The thought process being is that a $100 per month mortgage payment sounds spectacular, but what does a $100 per month mortgage payment actually buy you? Say, the area's median home price is $50,000 -- which is the average value for Linton according to the census and another independent housing study in 2005 -- and a normal loan-to-value is 80%, a person must then figure out how much it would take per month to finance a $40,000 loan (80% of $50,000) just so they can own the supposed "average" home in the community.
I tried to estimate true taxes to be paid, not what a person's W-4 tells the employer to take out each pay. This is especially insightful for those who get a large tax refund check at the end of the year -- because basically they've overpaid their taxes for the year to the detriment to their bi-weekly paycheck amount. (Moral of the story: if you get a large tax refund check each year and have lots of high-interest rate debt on credit cards, payday loans, and various loans, get a W-4 form from your employer and change it so you can have extra money each month to pay them.)
It also became apparent rather quickly that there's a lot to think about when defining "average" because it's not as simple as it first seems. Does this include a single-income or dual-income household? How many kids live in the "average" home"? With regard to having children, is it more expensive to raise girls than boys? Does everyone in the house have a cell phone? Will having cable, internet, and other electronic gadgets around the house be considered "average" or not?
Even a family's faith and values can determine where -- and how much -- of their income goes to a church, various charities, sports and leagues, eating out, etc.
To keep moving forward, it really boiled down to the fact that assumptions must be made. Here were some of them from Part Two:
We'll assume the household includes two people, but how the income is split among the two doesn't really matter. It could be that both make $9.98 per hour and work a forty-hour workweek throughout the year, it could be that only one of them brings in $19.98 per hour, or some other combination thereof. The main point is two people live in the household, and the annual household brings in $41,523 -- well, actually, I calculated these hourly salaries of $9.98 each will bring in $41,517, but close enough.
Another assumption will be that there are no children in the household. Yes, I know, it's not likely -- or maybe even "average" -- but kids will complicate this way too much. Their ages alone can greatly sway things; for example, will we be buying diapers or prom dresses? So, let's just argue that they're clearly more expensive and leave it at that. (Some studies have stated it costs more than two hundred thousand dollars to raise the "average" child from cradle through college, so I'll just leave it to those experts to come up with the figures on raising kids.)
We'll also assume that the employer of this "average" couple offers a 401(k) retirement plan and will match 50% of their contributions up to 6% of their pay. This average couple takes advantage of this benefit by contributing 6% of their pay. The employer will also offer health, life, and disability insurance for an assumed rate of $100 per pay period.
Now, back to the calculations:
To start the calculations, the median family income in Greene County in 1999, which was the most current U.S. Census information found, was $41,523. From this, we calculate that if each earns $9.98 per hour, they will earn a combined $41,517 for the year. Like I said before, there's some rounding error here, but it is close enough. Dividing this by the twenty-six two-week pay periods in the year, this amounts to gross combined compensation of $1,596.80 per two-week pay period.
If 6% is contributed to the employees' 401(k) retirement account, a total of $95.81 per pay is removed from this amount before income taxes. Combining this amount with an $8,000 IRA contribution each year (this will be talked about in another part of the series), the retirement deduction for tax purposes should be $10,491.06. On the couple's 2007 tax return, taxable income is further reduced by the standard deduction of $10,700 and personal exemptions of $6,800; therefore, taxable income will be $13,526 for the year. Taxed at the 2007 percentage of 10% for this tax bracket (up to $15,600 per year for those married & filing jointly), total federal income tax should be $1,353 or $52.02 per pay period. The employees' share of Social Security will be 6.2% or $99 per pay. Medicare is 1.45% or $23.15 per pay. Of course, the Governor will want his share, too, which amounts to 3.4% for the State of Indiana or $17.69. The county will get 1.1%, or $5.72, as well.
This leaves $1,203.41 net per pay period, which was calculated as summarized below:
$1,596.80
Gross Pay ($41,517 / 26 pay periods per year)
<95.81>
401(k) Deduction
<52.02>
Federal Income Tax
<17.69>
State Income Tax
<99.00>
Social Security
<23.15>
Medicare
<5.72>
County Tax
<100.00>
Estimated Employer Health, Life, & Disability Insurance
$1,203
Net "Take-Home" Pay (Rounded)
Yearly, of course, this amounts to $31,288.52 "brought home" to spend as needed -- or $2,607.38 per month.
Now, we'll look at "average" monthly expenses from Part Three, which are certainly the most interesting -- and the more subjective -- part of the series. To take out as much subjectivity as possible, we'll use general rules-of-thumb or "supposed to" amounts first. If none were found or exist, we'll use national averages. If no national averages are found, we'll use "guess-timates."
First, let's deduct $260.74 per month for tithing and charity. Now, some argue that this figure should be 10% of gross income, while others say 10% of take-home pay. Still others say that 10% should go to your church, and various charities are on top of that amount. Of course, some do not attend a church nor give to charity at all, so they have no expenditures in this category. All arguments aside, we'll use 10% of take-home pay for church and charities.
Second, let's deduct $8,000 per year or $666.7 per month for IRA contributions for this "average" couple. This fits under the "supposed to" category, as many do not do this, but we're all supposed to be. After all, if you're not looking out for your own retirement, who is?
Third, we'll deduct $180 per month for a home phone, internet access, satellite or cable subscription, and a cell phone plan. This is based on $60 for phone and internet, $60 for cable or satellite, and $60 for a cellular plan. Sure, some plans and subscriptions are cheaper, some are more expensive. In any event, there are a number of access fees and charges, as well as various taxes, on each, so we shouldn't forget those. (Remember buying that cellular plan that was supposed to be $39.99 a month, but your first bill was more like $60 with all the extra fees and charges? Funny how that works, isn't it?) While this $180 is not completely necessary -- people do actually live without these conveniences -- we'll include them.
Fourth, we have to eat. This one falls under "subjective" and a "guess-timate" because no rules-of-thumb were found. It all depends on your appetite, likes and dislikes, where you shop, etc., etc. For groceries, let's plug in $300 per month. Dining out, while not necessary, we will still include an occasional trip to a casual dining restaurant or some fast food along the way by using $100 per month. For those not spending time in a restaurant, chalk this expense up as for entertainment too, say, a movie out or the like.
Fifth, we need a roof over our heads. In fact, that probably should have come closer to first in the list, but we didn't forget nonetheless. Sure, you can rent, but in Greene County there's a very high percentage of home ownership. Looking at the 2000 U.S. census data and a recent housing assessment completed in 2005, we note that the median home value in Linton is approximately $50,000. Typically, a bank will loan 80% loan-to-value against that home, so our mortgage will be about $40,000. Current rates on a 30-year loan are 6.5% or so. So, based on this data, our mortgage payment each month will be almost $260.
Utilities to heat and cool the home, as well as provide light, water, sewage, and trash pick up will be estimated at $175 per month on average. Of course, winter and summer bills tend to be the highest, but we'll just use an average among all months.
Along with home ownership comes the pleasure of paying property taxes, casualty insurance, and maintenance. Since this is our primary residence and we have a mortgage, though, we can apply for a homestead exemption and a mortgage exemption at the Courthouse. Both will cut our property tax bill significantly, which by my calculations will be $434 per year or $36.14 per month. This is based on the old rate in the City of Linton of 3.6140%. (Look at my older posts to see what the new, higher rate will be: http://gcdailyworld.com/blogs/chriswathe... ) Insurance against fire, tornado, and other disasters is estimated at $400 per year or $33.33 per month. Again, this depends on a lot of circumstances, including the age and condition of the home, the credit score of the homeowner, the amount of the deductible, etc. Along with routine maintenance, which we will estimate costing $500 per year, we'll need to replace some more costly aspects too. For example, although it's far from a daily expense, we will eventually need to replace the roof, exterior siding or paint, floor coverings, the furnace & air conditioning, and various other miscellaneous items. We'll estimate the costs of replacing these, as well as their useful lives, as follows:
Roof
$4,000
20years
Exterior
$2,500
25 years
Floor Coverings
$2,000
12 years
HVAC unit
$3,000
20 years
Misc.
$1,000
20 years
True, all of these items can have widely varying prices and useful lives, but these are the assumptions. Combined with our estimate of $500 for maintenance per year, these will all total $1,166.67 per year or $97.22 per month.
Sixth, we need to get to work. So, we need to look at vehicle loans. Although the "sky is the limit" on prices paid for a set of wheels, we'll use a fairly conservative amount, such as $13,500 as a loan amount. This may buy a smaller car or a larger one with a decent down payment. Based on a 6% interest rate and a 60 month loan term, our payment will be about $260. (There's just something about having a car payment higher than a mortgage payment; hence, they're equal here.) Insurance is of course required by law, but again depending on the company, coverage, deductible, and credit score of the applicant, prices can vary widely. We'll use $500 per year, which is $41.67 per month. License plates figure into the mix, too, and these are estimated at $250 per year (20.83 per month). Lastly, we need to put gasoline in the tank. According to national data, the average person puts about $1,000 into their tank each year.
Most of us in Greene County observe Christmas, although national studies indicate a wide range of what we spend during the holidays. National Public Radio reported a figure of only $466, while other studies said $700 to $1,000. At the risk of being called Scrooge, we will use the NPR figure because we're running out of money quickly. Using the $466 per year, that equates to $38.83 being set aside each month. (Christmas accounts are nice ways to set aside for this, as they pay a little more interest than typical savings accounts. They also "earmark" funds for a specific purpose, so you're not as tempted to spend them throughout the year on something else.)
Seventh, we consume a lot of things that will be simply thrown away, but necessary nonetheless. Such items include toilet paper, paper towels, floss, tooth paste, soap and shampoo, etc. Having not a clue what all this stuff costs the average couple, we'll use $25 per month, so at least we acknowledged it.
Eighth, we'll put a measly 1% of our income into savings each month, which is $34.60.
There. We did it! We have $1.97 left each month to our name!
But wait! The average consumer has $10,000 of credit card debt. At a typical 2% of the balance minimum required payment ($200), we're now $198.03 in the hole every month.
How can this be? (Now you also know why I didn't even add in kids to the situation. I knew we'd already be in the hole because I had the spreadsheet in front on me. OK, I admit that wasn't fair…)
But before we discuss some likely scenarios of how this can be and what assumptions we may have gotten all wrong, let's talk about some things that were possibly left out:
One item is a second vehicle. Since both persons in this household work, they will likely both need a vehicle. This potentially adds another payment to the budget, but it certainly adds additional maintenance and repair expenses, as well as money needed for insurance and license plates.
Another criticism was nothing was allowed for clothing. Now, this is really a subjective topic, as I know some people who would not think to wear anything but higher-end, name-brand clothes, while I've also seen some pretty good garage sale & Goodwill ensembles, costing only a few bucks.
While a payroll deduction was made for employer-provided medical insurance, it was also brought up that no allowances were made for co-pays on doctor visits and prescriptions. Guilty! Of course, this is also highly variable depending on family health. Some may never go to the doctor or go for merely an annual check-up, while others may be in-and-out of the hospital regularly.
With that said, now we're back to discussing some likely scenarios of how this can be. In a word: debt. In a likely scenario, credit card balances grow slowly, while balance transferring the debt from card to card until a few years have went by. At that point, a home refinance is used to consolidate it. And the cycle begins again.
Nationwide, this brings up another current event: the downturn in the housing market. If a person's home isn't worth more and more each year, what will happen to this cycle?
It obviously crumbles.
From a Greene County perspective, however, this is likely of little significance because the cost to build verses the market values seem to be so disproportionate. That is, the likely sales price of your home is far less than the actual cost to rebuild your home new. If you've had your home recently appraised, you can verify this by looking at the different approaches to value used. It's very likely that you'll see the cost to build scenario produces a much higher dollar figure until it is reduced by depreciation. On older homes, depreciation can be a rather large amount too.
Nonetheless, the real question is: how much more can the average consumer bear? It seems under the weight of rising gasoline prices, utility rates, property tax hikes, and growing grocery store bills, the "average Joe and Jane" are getting crushed further. For some time now, consumers have made it through using credit cards and the equity in their homes, but where will it come from next?
In Part One, I said that I was originally part of a group discussion where the topic was how everyone was tired of reading about how they should put away so much in an emergency savings account every month, allocate a percentage of their wages into a retirement account, earmark funds for that special summer vacation or getaway, and the list goes on and on. In the end, though, it just couldn't be done.
Of course, if you pick up any personal finance magazine off the news rack these days, they are packed with tons of supposed sage advice, penny-wise wisdom, and general financial rules of thumb, but the question is: How practical is it to do these great, glorious things anyway? An even better question I think is: can the "average" person or household do this in Greene County, Indiana?
To help answer these questions -- at least theoretically -- I started putting together an Excel template with the notion that if all of those things you're "supposed to do" couldn't be done on paper then the real-life version would be nearly impossible. So, to put "pen to paper" per se, I looked up some average incomes for the area on the U.S. Census Bureau website and got started.
The median family income in Greene County, Indiana in 1999, which was the most current census information I found, was $41,523.
When I was working more on this template, it dawned on me that I should use these monthly amounts to "back out" into an amount of the original mortgage loan, for example. The thought process being is that a $100 per month mortgage payment sounds spectacular, but what does a $100 per month mortgage payment actually buy you? Say, the area's median home price is $50,000 -- which is the average value for Linton according to the census and another independent housing study in 2005 -- and a normal loan-to-value is 80%, a person must then figure out how much it would take per month to finance a $40,000 loan (80% of $50,000) just so they can own the supposed "average" home in the community.
I tried to estimate true taxes to be paid, not what a person's W-4 tells the employer to take out each pay. This is especially insightful for those who get a large tax refund check at the end of the year -- because basically they've overpaid their taxes for the year to the detriment to their bi-weekly paycheck amount. (Moral of the story: if you get a large tax refund check each year and have lots of high-interest rate debt on credit cards, payday loans, and various loans, get a W-4 form from your employer and change it so you can have extra money each month to pay them.)
It also became apparent rather quickly that there's a lot to think about when defining "average" because it's not as simple as it first seems. Does this include a single-income or dual-income household? How many kids live in the "average" home"? With regard to having children, is it more expensive to raise girls than boys? Does everyone in the house have a cell phone? Will having cable, internet, and other electronic gadgets around the house be considered "average" or not?
Even a family's faith and values can determine where -- and how much -- of their income goes to a church, various charities, sports and leagues, eating out, etc.
To keep moving forward, it really boiled down to the fact that assumptions must be made. Here were some of them from Part Two:
We'll assume the household includes two people, but how the income is split among the two doesn't really matter. It could be that both make $9.98 per hour and work a forty-hour workweek throughout the year, it could be that only one of them brings in $19.98 per hour, or some other combination thereof. The main point is two people live in the household, and the annual household brings in $41,523 -- well, actually, I calculated these hourly salaries of $9.98 each will bring in $41,517, but close enough.
Another assumption will be that there are no children in the household. Yes, I know, it's not likely -- or maybe even "average" -- but kids will complicate this way too much. Their ages alone can greatly sway things; for example, will we be buying diapers or prom dresses? So, let's just argue that they're clearly more expensive and leave it at that. (Some studies have stated it costs more than two hundred thousand dollars to raise the "average" child from cradle through college, so I'll just leave it to those experts to come up with the figures on raising kids.)
We'll also assume that the employer of this "average" couple offers a 401(k) retirement plan and will match 50% of their contributions up to 6% of their pay. This average couple takes advantage of this benefit by contributing 6% of their pay. The employer will also offer health, life, and disability insurance for an assumed rate of $100 per pay period.
Now, back to the calculations:
To start the calculations, the median family income in Greene County in 1999, which was the most current U.S. Census information found, was $41,523. From this, we calculate that if each earns $9.98 per hour, they will earn a combined $41,517 for the year. Like I said before, there's some rounding error here, but it is close enough. Dividing this by the twenty-six two-week pay periods in the year, this amounts to gross combined compensation of $1,596.80 per two-week pay period.
If 6% is contributed to the employees' 401(k) retirement account, a total of $95.81 per pay is removed from this amount before income taxes. Combining this amount with an $8,000 IRA contribution each year (this will be talked about in another part of the series), the retirement deduction for tax purposes should be $10,491.06. On the couple's 2007 tax return, taxable income is further reduced by the standard deduction of $10,700 and personal exemptions of $6,800; therefore, taxable income will be $13,526 for the year. Taxed at the 2007 percentage of 10% for this tax bracket (up to $15,600 per year for those married & filing jointly), total federal income tax should be $1,353 or $52.02 per pay period. The employees' share of Social Security will be 6.2% or $99 per pay. Medicare is 1.45% or $23.15 per pay. Of course, the Governor will want his share, too, which amounts to 3.4% for the State of Indiana or $17.69. The county will get 1.1%, or $5.72, as well.
This leaves $1,203.41 net per pay period, which was calculated as summarized below:
$1,596.80
Gross Pay ($41,517 / 26 pay periods per year)
<95.81>
401(k) Deduction
<52.02>
Federal Income Tax
<17.69>
State Income Tax
<99.00>
Social Security
<23.15>
Medicare
<5.72>
County Tax
<100.00>
Estimated Employer Health, Life, & Disability Insurance
$1,203
Net "Take-Home" Pay (Rounded)
Yearly, of course, this amounts to $31,288.52 "brought home" to spend as needed -- or $2,607.38 per month.
Now, we'll look at "average" monthly expenses from Part Three, which are certainly the most interesting -- and the more subjective -- part of the series. To take out as much subjectivity as possible, we'll use general rules-of-thumb or "supposed to" amounts first. If none were found or exist, we'll use national averages. If no national averages are found, we'll use "guess-timates."
First, let's deduct $260.74 per month for tithing and charity. Now, some argue that this figure should be 10% of gross income, while others say 10% of take-home pay. Still others say that 10% should go to your church, and various charities are on top of that amount. Of course, some do not attend a church nor give to charity at all, so they have no expenditures in this category. All arguments aside, we'll use 10% of take-home pay for church and charities.
Second, let's deduct $8,000 per year or $666.7 per month for IRA contributions for this "average" couple. This fits under the "supposed to" category, as many do not do this, but we're all supposed to be. After all, if you're not looking out for your own retirement, who is?
Third, we'll deduct $180 per month for a home phone, internet access, satellite or cable subscription, and a cell phone plan. This is based on $60 for phone and internet, $60 for cable or satellite, and $60 for a cellular plan. Sure, some plans and subscriptions are cheaper, some are more expensive. In any event, there are a number of access fees and charges, as well as various taxes, on each, so we shouldn't forget those. (Remember buying that cellular plan that was supposed to be $39.99 a month, but your first bill was more like $60 with all the extra fees and charges? Funny how that works, isn't it?) While this $180 is not completely necessary -- people do actually live without these conveniences -- we'll include them.
Fourth, we have to eat. This one falls under "subjective" and a "guess-timate" because no rules-of-thumb were found. It all depends on your appetite, likes and dislikes, where you shop, etc., etc. For groceries, let's plug in $300 per month. Dining out, while not necessary, we will still include an occasional trip to a casual dining restaurant or some fast food along the way by using $100 per month. For those not spending time in a restaurant, chalk this expense up as for entertainment too, say, a movie out or the like.
Fifth, we need a roof over our heads. In fact, that probably should have come closer to first in the list, but we didn't forget nonetheless. Sure, you can rent, but in Greene County there's a very high percentage of home ownership. Looking at the 2000 U.S. census data and a recent housing assessment completed in 2005, we note that the median home value in Linton is approximately $50,000. Typically, a bank will loan 80% loan-to-value against that home, so our mortgage will be about $40,000. Current rates on a 30-year loan are 6.5% or so. So, based on this data, our mortgage payment each month will be almost $260.
Utilities to heat and cool the home, as well as provide light, water, sewage, and trash pick up will be estimated at $175 per month on average. Of course, winter and summer bills tend to be the highest, but we'll just use an average among all months.
Along with home ownership comes the pleasure of paying property taxes, casualty insurance, and maintenance. Since this is our primary residence and we have a mortgage, though, we can apply for a homestead exemption and a mortgage exemption at the Courthouse. Both will cut our property tax bill significantly, which by my calculations will be $434 per year or $36.14 per month. This is based on the old rate in the City of Linton of 3.6140%. (Look at my older posts to see what the new, higher rate will be: http://gcdailyworld.com/blogs/chriswathe... ) Insurance against fire, tornado, and other disasters is estimated at $400 per year or $33.33 per month. Again, this depends on a lot of circumstances, including the age and condition of the home, the credit score of the homeowner, the amount of the deductible, etc. Along with routine maintenance, which we will estimate costing $500 per year, we'll need to replace some more costly aspects too. For example, although it's far from a daily expense, we will eventually need to replace the roof, exterior siding or paint, floor coverings, the furnace & air conditioning, and various other miscellaneous items. We'll estimate the costs of replacing these, as well as their useful lives, as follows:
Roof
$4,000
20years
Exterior
$2,500
25 years
Floor Coverings
$2,000
12 years
HVAC unit
$3,000
20 years
Misc.
$1,000
20 years
True, all of these items can have widely varying prices and useful lives, but these are the assumptions. Combined with our estimate of $500 for maintenance per year, these will all total $1,166.67 per year or $97.22 per month.
Sixth, we need to get to work. So, we need to look at vehicle loans. Although the "sky is the limit" on prices paid for a set of wheels, we'll use a fairly conservative amount, such as $13,500 as a loan amount. This may buy a smaller car or a larger one with a decent down payment. Based on a 6% interest rate and a 60 month loan term, our payment will be about $260. (There's just something about having a car payment higher than a mortgage payment; hence, they're equal here.) Insurance is of course required by law, but again depending on the company, coverage, deductible, and credit score of the applicant, prices can vary widely. We'll use $500 per year, which is $41.67 per month. License plates figure into the mix, too, and these are estimated at $250 per year (20.83 per month). Lastly, we need to put gasoline in the tank. According to national data, the average person puts about $1,000 into their tank each year.
Most of us in Greene County observe Christmas, although national studies indicate a wide range of what we spend during the holidays. National Public Radio reported a figure of only $466, while other studies said $700 to $1,000. At the risk of being called Scrooge, we will use the NPR figure because we're running out of money quickly. Using the $466 per year, that equates to $38.83 being set aside each month. (Christmas accounts are nice ways to set aside for this, as they pay a little more interest than typical savings accounts. They also "earmark" funds for a specific purpose, so you're not as tempted to spend them throughout the year on something else.)
Seventh, we consume a lot of things that will be simply thrown away, but necessary nonetheless. Such items include toilet paper, paper towels, floss, tooth paste, soap and shampoo, etc. Having not a clue what all this stuff costs the average couple, we'll use $25 per month, so at least we acknowledged it.
Eighth, we'll put a measly 1% of our income into savings each month, which is $34.60.
There. We did it! We have $1.97 left each month to our name!
But wait! The average consumer has $10,000 of credit card debt. At a typical 2% of the balance minimum required payment ($200), we're now $198.03 in the hole every month.
How can this be? (Now you also know why I didn't even add in kids to the situation. I knew we'd already be in the hole because I had the spreadsheet in front on me. OK, I admit that wasn't fair…)
But before we discuss some likely scenarios of how this can be and what assumptions we may have gotten all wrong, let's talk about some things that were possibly left out:
One item is a second vehicle. Since both persons in this household work, they will likely both need a vehicle. This potentially adds another payment to the budget, but it certainly adds additional maintenance and repair expenses, as well as money needed for insurance and license plates.
Another criticism was nothing was allowed for clothing. Now, this is really a subjective topic, as I know some people who would not think to wear anything but higher-end, name-brand clothes, while I've also seen some pretty good garage sale & Goodwill ensembles, costing only a few bucks.
While a payroll deduction was made for employer-provided medical insurance, it was also brought up that no allowances were made for co-pays on doctor visits and prescriptions. Guilty! Of course, this is also highly variable depending on family health. Some may never go to the doctor or go for merely an annual check-up, while others may be in-and-out of the hospital regularly.
With that said, now we're back to discussing some likely scenarios of how this can be. In a word: debt. In a likely scenario, credit card balances grow slowly, while balance transferring the debt from card to card until a few years have went by. At that point, a home refinance is used to consolidate it. And the cycle begins again.
Nationwide, this brings up another current event: the downturn in the housing market. If a person's home isn't worth more and more each year, what will happen to this cycle?
It obviously crumbles.
From a Greene County perspective, however, this is likely of little significance because the cost to build verses the market values seem to be so disproportionate. That is, the likely sales price of your home is far less than the actual cost to rebuild your home new. If you've had your home recently appraised, you can verify this by looking at the different approaches to value used. It's very likely that you'll see the cost to build scenario produces a much higher dollar figure until it is reduced by depreciation. On older homes, depreciation can be a rather large amount too.
Nonetheless, the real question is: how much more can the average consumer bear? It seems under the weight of rising gasoline prices, utility rates, property tax hikes, and growing grocery store bills, the "average Joe and Jane" are getting crushed further. For some time now, consumers have made it through using credit cards and the equity in their homes, but where will it come from next?
Monday, November 19, 2007
Cosigning Considerations
Many people reading this post have been -- or will be -- asked by a relative or friend to "cosign" a loan, a lease or rental agreement, or other financial obligation. Even though we all like to help others, there are several considerations before you sign on the dotted line. Although you may feel obligated to cosign for a relative or friend, you should know the associated risks.
First, don't deny the obvious: If you have been asked to cosign, it is very likely that your friend or relative has credit issues. Sure, first-time credit users or those with short credit histories can be good risks, such as your son or daughter buying his or her first car, but be sure you know what you're getting into beforehand. A friend with credit issues may share more than laughs with you; they may just be sharing their financial troubles with you too. After all, if the person met all of the normal credit criteria, there wouldn't be a need for a cosigner.
Second, realize what is being asked of you: If the other person doesn't pay, YOU do! Sure, in some situations, the creditor must try first to collect from the primary debtor before trying to collect from the cosigner, but in many situations this is not the case. The creditor can collect from either of you at any time. So, be sure you understand what happens if the payments are not made by the other person, who needs the cosigner.
Third, understand the notification process: If the loan or agreement is not paid as agreed, will the cosigner receive separate notification? In many cases, a notification to one of the parties may constitute notification to all. This is especially important to know if the person you are cosigning for maintains a separate residence or a separate mail box.
Lastly, collateral may be lost: If you pledge your own possessions as collateral, such as a vehicle or real estate, you may lose your property if payments are not paid. So, make sure you can afford to make the required payments on your own, or you may risk losing what you pledged for the other person.
As you can see, cosigning financial obligations doesn't come without risk. In some cases, it may be much more risk than you care to expose yourself to.
First, don't deny the obvious: If you have been asked to cosign, it is very likely that your friend or relative has credit issues. Sure, first-time credit users or those with short credit histories can be good risks, such as your son or daughter buying his or her first car, but be sure you know what you're getting into beforehand. A friend with credit issues may share more than laughs with you; they may just be sharing their financial troubles with you too. After all, if the person met all of the normal credit criteria, there wouldn't be a need for a cosigner.
Second, realize what is being asked of you: If the other person doesn't pay, YOU do! Sure, in some situations, the creditor must try first to collect from the primary debtor before trying to collect from the cosigner, but in many situations this is not the case. The creditor can collect from either of you at any time. So, be sure you understand what happens if the payments are not made by the other person, who needs the cosigner.
Third, understand the notification process: If the loan or agreement is not paid as agreed, will the cosigner receive separate notification? In many cases, a notification to one of the parties may constitute notification to all. This is especially important to know if the person you are cosigning for maintains a separate residence or a separate mail box.
Lastly, collateral may be lost: If you pledge your own possessions as collateral, such as a vehicle or real estate, you may lose your property if payments are not paid. So, make sure you can afford to make the required payments on your own, or you may risk losing what you pledged for the other person.
As you can see, cosigning financial obligations doesn't come without risk. In some cases, it may be much more risk than you care to expose yourself to.
Friday, November 16, 2007
New Small Businesses in Greene County
Several discussions about starting small businesses have been happening here-and-there in the area recently, and I'd like to encapsulate some of those here. I would also like to expand that discussion here with the readers' help and suggestions.
First, it's a common misconception that economic growth has to come at the price of disrupting the rural environment here. Many businesses simply better utilize the resources and assets we have here now as a community with little to no change to our way of life, save more organization, better planning, and added income.
Take a wooded area of several acres. We do not necessarily have to bulldoze the scenery to develop it economically. For example, one business that has become popular across the United States is fee-based hunting and fishing.
With a little organization, a website, brochure, lease, some liability insurance, and maybe even a small cabin or two, you can transform a woodland area producing no income into a sought-after hunting destination.
Along similar lines, a well-stocked lake with a family-friendly aspect could become a great place for children of city slickers to catch their first fish. It also becomes a fun, fee-based recreational business for a Greene County property owner.
Corn mazes, U-pick farms, roadside produce stands, farmer's markets, specialty food growers, paint ball courses, and rural retreat centers are also ideas.
But here is where the readers' suggestions will help the local area. What other ideas do YOU have, using local assets, resources, and talent? And what needs are not currently being met, which force you to shop elsewhere?
First, it's a common misconception that economic growth has to come at the price of disrupting the rural environment here. Many businesses simply better utilize the resources and assets we have here now as a community with little to no change to our way of life, save more organization, better planning, and added income.
Take a wooded area of several acres. We do not necessarily have to bulldoze the scenery to develop it economically. For example, one business that has become popular across the United States is fee-based hunting and fishing.
With a little organization, a website, brochure, lease, some liability insurance, and maybe even a small cabin or two, you can transform a woodland area producing no income into a sought-after hunting destination.
Along similar lines, a well-stocked lake with a family-friendly aspect could become a great place for children of city slickers to catch their first fish. It also becomes a fun, fee-based recreational business for a Greene County property owner.
Corn mazes, U-pick farms, roadside produce stands, farmer's markets, specialty food growers, paint ball courses, and rural retreat centers are also ideas.
But here is where the readers' suggestions will help the local area. What other ideas do YOU have, using local assets, resources, and talent? And what needs are not currently being met, which force you to shop elsewhere?
Thursday, November 15, 2007
Quick Tip: Personal Finance
There are many methods of keeping track of bills and payments, but here's one suggestion:
Get a calendar and mark monthly payments on the day they are due for the whole year. If you know the amount, or that the bill is consistently a certain amount, write that figure down for each month too. If not, just write in the name of the bill. Don't forget quarterly, semiannual, or annual payments, such as income taxes, IRA fundings, property taxes, homeowner's insurance, car insurance, license plates, life insurance, and any subscriptions you may have. Noting paydays with a "P" or a "$" or the like can also be helpful.
When payments are mailed or otherwise paid, you can cross them off the calendar.
Once you put this into practice, use the calendar from the previous year to fill out the next one and so on. You may also want to keep the old calendar(s) for a time to serve as a record of your overall finances.
If money is close, by keeping a separate bill calendar, you can look ahead to see if you will have the money needed until your next pay period.
It can also serve as a means to keep track of where your money is ultimately going. In other words, it can become a budgeting tool as well as a method of financial record-keeping.
This way can also alert you that a payment is coming due when you fail to receive a notice. Like it or not, the fact that you didn't receive your billing makes no difference to your creditors.
If you're not currently keeping track of bills in some way, try giving this a chance. It's quick and easy, and it will help you get a grip on your financial situation.
Get a calendar and mark monthly payments on the day they are due for the whole year. If you know the amount, or that the bill is consistently a certain amount, write that figure down for each month too. If not, just write in the name of the bill. Don't forget quarterly, semiannual, or annual payments, such as income taxes, IRA fundings, property taxes, homeowner's insurance, car insurance, license plates, life insurance, and any subscriptions you may have. Noting paydays with a "P" or a "$" or the like can also be helpful.
When payments are mailed or otherwise paid, you can cross them off the calendar.
Once you put this into practice, use the calendar from the previous year to fill out the next one and so on. You may also want to keep the old calendar(s) for a time to serve as a record of your overall finances.
If money is close, by keeping a separate bill calendar, you can look ahead to see if you will have the money needed until your next pay period.
It can also serve as a means to keep track of where your money is ultimately going. In other words, it can become a budgeting tool as well as a method of financial record-keeping.
This way can also alert you that a payment is coming due when you fail to receive a notice. Like it or not, the fact that you didn't receive your billing makes no difference to your creditors.
If you're not currently keeping track of bills in some way, try giving this a chance. It's quick and easy, and it will help you get a grip on your financial situation.
Wednesday, November 14, 2007
Even Higher Property Taxes Proposed
If you don't normally read the legal section of the newspaper, you tend to miss out on important notices that many times affect everyone, including YOU.
Recently, you may have missed out on the "Notice to Taxpayers of Greene County of Proposed Tax Rates" in the November 7, 2007 edition. Sure, it doesn't sound like exciting literature to read in your free-time for fun, but if you're a property owner, you may be quite upset at what was recently proposed. Even if you are not a property owner, but only rent property in the area, you will likely see this increase passed on to you in the form of higher rents. So, this affects YOU too.
All of the rates for the towns, cities, and townships are higher, as proposed, although Bloomfield and Newberry appear to be the two with the least amount of increase.
Let's take a look at the proposed City of Linton rates for 2007 payable 2008, which will climb from 3.614% to 5.30886%, an increase of 47%. The breakdown of where all of this money will go is as follows for each $100 of assessed value:
Out of almost $5.31 collected for each $100 of assessed value, about 2 ½ cents will go to the State of Indiana to fund the State Fair Board and State Forestry; this has remained the same since the previous year. Greene County will receive almost 76 cents, which is up from slightly less than 72 cents last year. Stockton Township will bring in 60% more, as proposed, than the previous year for a total of 6 cents. The City will see just over $1.34 to fund everything from police & firemen's pensions to streets, parks, cemeteries, and the new fire station; this marks a 54% increase year-over-year. As the biggest recipient of the property taxes, the Linton school system will receive more than $2.91; this is an increase of about $1 -- or a 53% increase -- from last year. The library will see 214% more this year or about 23 cents.
True, we can all just complain, but there are other more positive answers:
One way to combat rising property tax rates is for the area to develop a larger tax base. Essentially tax rates are determined by the total budget needed divided by the total assessed value within the area. So, if more businesses and industry locate in this area, these commercial properties share in the taxes needed to operate the local area, as well as spread the budget needed over more property value within the area. For example, the WestGate project will certainly help in the future, along with other new businesses that moved into the area already or are considering the move.
Certainly, we all don't have access to millions of dollars to build new buildings and businesses, but we can still be a part of the solution. Buying local when we can helps instead of spending money in other communities for the same goods and services. Some local entrepreneurs have gone into new lines of businesses and opened new shops, and it's important to support their efforts instead of waiting with arms crossed to see if they make it. Becoming part of the many task forces and groups now developing around the county is also a huge help. Groups have formed for economic development, tourism, planning, etc.
Taking once blighted properties up in value by remodeling and rehabbing helps, too, although tearing them down without replacing the structures actual hurts. True, it may make the neighborhood look better by comparison, but even the run-down shack had some value assigned to it from a tax perspective, which is now gone from the property tax rolls. This is not to say that they should remain "as is" or not be torn down either, but more of a suggestion that something should be build back on the property once the old is razed, such as a new home or business.
There may be many other ways, too, that don't involve tea or a harbor. It will largely be up to the citizenry to find and effectively execute those to help combat future increases.
One thing is for sure: we can always use more positive solutions.
Recently, you may have missed out on the "Notice to Taxpayers of Greene County of Proposed Tax Rates" in the November 7, 2007 edition. Sure, it doesn't sound like exciting literature to read in your free-time for fun, but if you're a property owner, you may be quite upset at what was recently proposed. Even if you are not a property owner, but only rent property in the area, you will likely see this increase passed on to you in the form of higher rents. So, this affects YOU too.
All of the rates for the towns, cities, and townships are higher, as proposed, although Bloomfield and Newberry appear to be the two with the least amount of increase.
Let's take a look at the proposed City of Linton rates for 2007 payable 2008, which will climb from 3.614% to 5.30886%, an increase of 47%. The breakdown of where all of this money will go is as follows for each $100 of assessed value:
Out of almost $5.31 collected for each $100 of assessed value, about 2 ½ cents will go to the State of Indiana to fund the State Fair Board and State Forestry; this has remained the same since the previous year. Greene County will receive almost 76 cents, which is up from slightly less than 72 cents last year. Stockton Township will bring in 60% more, as proposed, than the previous year for a total of 6 cents. The City will see just over $1.34 to fund everything from police & firemen's pensions to streets, parks, cemeteries, and the new fire station; this marks a 54% increase year-over-year. As the biggest recipient of the property taxes, the Linton school system will receive more than $2.91; this is an increase of about $1 -- or a 53% increase -- from last year. The library will see 214% more this year or about 23 cents.
True, we can all just complain, but there are other more positive answers:
One way to combat rising property tax rates is for the area to develop a larger tax base. Essentially tax rates are determined by the total budget needed divided by the total assessed value within the area. So, if more businesses and industry locate in this area, these commercial properties share in the taxes needed to operate the local area, as well as spread the budget needed over more property value within the area. For example, the WestGate project will certainly help in the future, along with other new businesses that moved into the area already or are considering the move.
Certainly, we all don't have access to millions of dollars to build new buildings and businesses, but we can still be a part of the solution. Buying local when we can helps instead of spending money in other communities for the same goods and services. Some local entrepreneurs have gone into new lines of businesses and opened new shops, and it's important to support their efforts instead of waiting with arms crossed to see if they make it. Becoming part of the many task forces and groups now developing around the county is also a huge help. Groups have formed for economic development, tourism, planning, etc.
Taking once blighted properties up in value by remodeling and rehabbing helps, too, although tearing them down without replacing the structures actual hurts. True, it may make the neighborhood look better by comparison, but even the run-down shack had some value assigned to it from a tax perspective, which is now gone from the property tax rolls. This is not to say that they should remain "as is" or not be torn down either, but more of a suggestion that something should be build back on the property once the old is razed, such as a new home or business.
There may be many other ways, too, that don't involve tea or a harbor. It will largely be up to the citizenry to find and effectively execute those to help combat future increases.
One thing is for sure: we can always use more positive solutions.
Tuesday, November 13, 2007
Made Toxic in China
Some may accuse me of advocating protectionist policies, yet I'm simply of the opinion that "enough is enough." I'm referring to the glut of Chinese imports, which are often found later to not only be cheaply made but toxic as well. From pet food to children's toys to toothpaste, toxic chemicals have been found in all of these Chinese-made products recently.
The latest news is that toys known as "Aqua Dots" were found to be coated with a chemical that when ingested metabolizes in the body to be the "date-rape drug" known as gamma hydroxyl butyrate. It causes horrible reactions, including everything from breathing problems to comas to even death.
Aqua Dots marks the latest in a long line of Chinese products being recalled for consumer safety. In fact, I remember reading recently that Chinese-made products currently account for more than half of all product recalls, although I don't remember the source. With all of the recent publicity surrounding these cases, I really don't feel much need to substantiate the over 50% claim. After all, when its reported over several months in numerous articles among several news organization that everything from toothpaste has been made with the same chemicals used to make anti-freeze to children's toys have been coated with lead-based paint to tainted pet food produced with toxic chemicals causing severe disorders and death to our four-legged friends, I don't see much need to prove my case.
It seems only logical then to not only urge the ban of these imports with our legislators until such time the Chinese can get their act together, but to simply stop buying anything with "Made in China" or "Product of China" stamped on it.
Most certainly, buying food products from China -- and there are more of them than you may think -- should be marked off the shopping list. I've seen store-branded canned mushrooms and apple juice stamped with "Product of China" as I perused local shelves, so they're definitely out there.
Maybe an old cliché best sums this situation: "Fool me once, shame on you. Fool me twice, shame on me". But just how many consumer-safety recalls will it take for Americans to realize this and take action?
The latest news is that toys known as "Aqua Dots" were found to be coated with a chemical that when ingested metabolizes in the body to be the "date-rape drug" known as gamma hydroxyl butyrate. It causes horrible reactions, including everything from breathing problems to comas to even death.
Aqua Dots marks the latest in a long line of Chinese products being recalled for consumer safety. In fact, I remember reading recently that Chinese-made products currently account for more than half of all product recalls, although I don't remember the source. With all of the recent publicity surrounding these cases, I really don't feel much need to substantiate the over 50% claim. After all, when its reported over several months in numerous articles among several news organization that everything from toothpaste has been made with the same chemicals used to make anti-freeze to children's toys have been coated with lead-based paint to tainted pet food produced with toxic chemicals causing severe disorders and death to our four-legged friends, I don't see much need to prove my case.
It seems only logical then to not only urge the ban of these imports with our legislators until such time the Chinese can get their act together, but to simply stop buying anything with "Made in China" or "Product of China" stamped on it.
Most certainly, buying food products from China -- and there are more of them than you may think -- should be marked off the shopping list. I've seen store-branded canned mushrooms and apple juice stamped with "Product of China" as I perused local shelves, so they're definitely out there.
Maybe an old cliché best sums this situation: "Fool me once, shame on you. Fool me twice, shame on me". But just how many consumer-safety recalls will it take for Americans to realize this and take action?
Friday, November 9, 2007
The State of Our Economy
"Consumer confidence plunged in early November to the lowest level since Hurricane Katrina battered the Gulf Coast and sent oil prices soaring in 2005," wrote Martin Crutsinger, an AP Economics Writer, earlier today.
Arguably, we are in much worse financial shape now as a nation than when Katrina hit. After all, subprime lending was still the rage, stock prices on Wall Street continued to climb to new record numbers for the Dow, and we hadn't yet felt the effects of $3-plus gasoline. We were all blissfully ignorant of the perfect storm coming -- and still making its way to shore -- financially-speaking.
Often times, we hear national financial trends and macro-economic news that better serves as fodder for water cooler talk rather than as actual news that impacts us here in Greene County, Indiana. People in this area have mostly stuck with traditional practices, such as not getting involved in exotic residential financing arrangements like those have in, say, California. Out West, in fact, it seems to be very common to have an interest-only home loan. Even worse than interest-only loans, banks have doled out negatively-amortizing loans like candy. (This is when you will never pay off your loan, nor even pay all the interest you have accrued, but your loan actually gets bigger with each month gone by.) That's scary, to say the least. Imagery of a ticking time bomb also comes to mind.
What have hit rural communities of Southern Indiana are loan brokers writing subprime loans. These are loans that are written, which really never had a chance in the first place. In talking with one such broker in the Indianapolis market several months ago, he stated their loan policy was to allow up to 50% debt-to-income. That, my friends, is ridiculous -- at least in the mind of a traditional banker. Put another way: financial suicide. No wonder Indiana is in some of the top foreclosure states in the nation.
This subprime phenomenon has hit Wall Street in a big way too. Even the most proud and prestigious brand-names in finance, such as Merrill Lynch, JP Morgan Chase, and Citigroup, have recently announced things are going awry. Citigroup said recently that they have charged off over SIX BILLION dollars with analysts estimating they will ultimately write off many, many more. These financial cornerstones now have signs of strain, and hopefully they have learned their lesson, as the real moral of the story is: it doesn't matter what interest rate you are getting if you don't get your principal back. They should have read the book, The Richest Man in Babylon, which by the way, I highly recommend reading. (It's around $6 for the paperback, and the best $6 you'll ever spend.)
But how does this affect me, right?
No doubt these financial titans are a part of your investments, such as your 401(k) account. Take a look at your most-recent statement to see how it has affected you.
Even if you are not foreclosed on and you don't think this affects you, the amount of these homes on the market affects the value of your home and property. It's simple supply-and-demand economics.
Surprisingly, charities are also affected. Today, The Indianapolis Business Journal reported that, "Indianapolis-based Indiana Children's Wish Fund has been caught in the national subprime mortgage lending crisis. The small not-for-profit, which grants wishes to terminally ill children, has filed an arbitration claim after an investment it had in an intermediate-bond fund lost $50,000 between late June and late September on an initial investment of $222,812. The bond fund had more than half its assets in mortgage-related investments as of mid-year, according to the filing."
It will be interesting to see how everything finally shakes out nationally and locally.
In the midst of this, our dollar has become weaker and weaker against other world currencies. But how does this affect us in Greene County? Well, for one, some now say that oil has become the new world currency. With it hovering near $100 a barrel, the laws of supply-and-demand dictate that they are probably right. After all, someone has to be buying a lot of oil somewhere. Certainly, most all of the world's currencies have gotten stronger, such as the Euro, the Yen, and even the Canadian Dollar.
(Interesting side note: Take some coins into a bank to be counted. Odds are if you have a lot of change, you'll have some Canadian money in there. See if they give it back to you. Ironically, these coins are worth more than our own currency even though they'll be given back to you as "worthless" here in the US.)
Thankfully, this argument of oil becoming a new currency could be expanded to "energy" in general, and Southern Indiana is sitting on vast reserves of coal. Sadly, mostly that's all they are: reserves still in the ground. Some new mines are developing or are rumored to be starting, although rumors are always plentiful.
One other benefit to rising oil to Greene County is that ethanol and bio-diesel become more attractive. Higher demand for grain, such as corn and soy beans, mean higher prices per bushel. It also means higher prices for farm ground since the products produced from them have become more valuable.
On the downside, sitting down at the dinner table just got more expensive. Of course, filling up the tractor just took more money out of a farmer's pocket too.
Greene County has a lot of agricultural activity. With alternative fuel demand rising, it may have more. Agri-tourism will no doubt become more popular in the County, as corn mazes, pumpkin patches, rural retreat centers, birding, farmers markets, and other activities are embraced. It only makes sense to add these and make more money with the same resources. In some areas, these "side projects" have become more profitable than the original use or business.
It will be interesting to see how all of these ingredients come together and what they ultimately make. In the meantime, it's probably most prudent to not be going out on a limb with debt right now, while saving some extra cash for a rainy day.
Arguably, we are in much worse financial shape now as a nation than when Katrina hit. After all, subprime lending was still the rage, stock prices on Wall Street continued to climb to new record numbers for the Dow, and we hadn't yet felt the effects of $3-plus gasoline. We were all blissfully ignorant of the perfect storm coming -- and still making its way to shore -- financially-speaking.
Often times, we hear national financial trends and macro-economic news that better serves as fodder for water cooler talk rather than as actual news that impacts us here in Greene County, Indiana. People in this area have mostly stuck with traditional practices, such as not getting involved in exotic residential financing arrangements like those have in, say, California. Out West, in fact, it seems to be very common to have an interest-only home loan. Even worse than interest-only loans, banks have doled out negatively-amortizing loans like candy. (This is when you will never pay off your loan, nor even pay all the interest you have accrued, but your loan actually gets bigger with each month gone by.) That's scary, to say the least. Imagery of a ticking time bomb also comes to mind.
What have hit rural communities of Southern Indiana are loan brokers writing subprime loans. These are loans that are written, which really never had a chance in the first place. In talking with one such broker in the Indianapolis market several months ago, he stated their loan policy was to allow up to 50% debt-to-income. That, my friends, is ridiculous -- at least in the mind of a traditional banker. Put another way: financial suicide. No wonder Indiana is in some of the top foreclosure states in the nation.
This subprime phenomenon has hit Wall Street in a big way too. Even the most proud and prestigious brand-names in finance, such as Merrill Lynch, JP Morgan Chase, and Citigroup, have recently announced things are going awry. Citigroup said recently that they have charged off over SIX BILLION dollars with analysts estimating they will ultimately write off many, many more. These financial cornerstones now have signs of strain, and hopefully they have learned their lesson, as the real moral of the story is: it doesn't matter what interest rate you are getting if you don't get your principal back. They should have read the book, The Richest Man in Babylon, which by the way, I highly recommend reading. (It's around $6 for the paperback, and the best $6 you'll ever spend.)
But how does this affect me, right?
No doubt these financial titans are a part of your investments, such as your 401(k) account. Take a look at your most-recent statement to see how it has affected you.
Even if you are not foreclosed on and you don't think this affects you, the amount of these homes on the market affects the value of your home and property. It's simple supply-and-demand economics.
Surprisingly, charities are also affected. Today, The Indianapolis Business Journal reported that, "Indianapolis-based Indiana Children's Wish Fund has been caught in the national subprime mortgage lending crisis. The small not-for-profit, which grants wishes to terminally ill children, has filed an arbitration claim after an investment it had in an intermediate-bond fund lost $50,000 between late June and late September on an initial investment of $222,812. The bond fund had more than half its assets in mortgage-related investments as of mid-year, according to the filing."
It will be interesting to see how everything finally shakes out nationally and locally.
In the midst of this, our dollar has become weaker and weaker against other world currencies. But how does this affect us in Greene County? Well, for one, some now say that oil has become the new world currency. With it hovering near $100 a barrel, the laws of supply-and-demand dictate that they are probably right. After all, someone has to be buying a lot of oil somewhere. Certainly, most all of the world's currencies have gotten stronger, such as the Euro, the Yen, and even the Canadian Dollar.
(Interesting side note: Take some coins into a bank to be counted. Odds are if you have a lot of change, you'll have some Canadian money in there. See if they give it back to you. Ironically, these coins are worth more than our own currency even though they'll be given back to you as "worthless" here in the US.)
Thankfully, this argument of oil becoming a new currency could be expanded to "energy" in general, and Southern Indiana is sitting on vast reserves of coal. Sadly, mostly that's all they are: reserves still in the ground. Some new mines are developing or are rumored to be starting, although rumors are always plentiful.
One other benefit to rising oil to Greene County is that ethanol and bio-diesel become more attractive. Higher demand for grain, such as corn and soy beans, mean higher prices per bushel. It also means higher prices for farm ground since the products produced from them have become more valuable.
On the downside, sitting down at the dinner table just got more expensive. Of course, filling up the tractor just took more money out of a farmer's pocket too.
Greene County has a lot of agricultural activity. With alternative fuel demand rising, it may have more. Agri-tourism will no doubt become more popular in the County, as corn mazes, pumpkin patches, rural retreat centers, birding, farmers markets, and other activities are embraced. It only makes sense to add these and make more money with the same resources. In some areas, these "side projects" have become more profitable than the original use or business.
It will be interesting to see how all of these ingredients come together and what they ultimately make. In the meantime, it's probably most prudent to not be going out on a limb with debt right now, while saving some extra cash for a rainy day.
Tuesday, October 30, 2007
Reverse Mortgages: What They Are & How They Work
You may have noticed a substantial increase in the number of advertisements in print and on television soliciting retirement-aged homeowners to inquire about reverse mortgages. But exactly what are they?
Until the concept of the reverse mortgage was born, there were two main ways to get spendable cash from your home: either (1.) you could sell your home, or (2.) you could borrow against your home. The obvious problem with selling your home is that you would have to move, which can be an expensive, frustrating, and unwanted consequence, especially if you enjoy your current home and neighborhood. Of course, the problem with a traditional loan is that you would have to make regular, monthly payments to repay the loan. In addition, to be approved for the loan, you would need to pass a credit check and have adequate income to pay back the loan. The lack of income is the very reason to apply for a reverse mortgage, so this is clearly an obstacle to using the traditional mortgage route. Reverse mortgages solve these issues, so the homeowner can remain in the home while not having the financial burden of another monthly payment.
Simply put, a reverse mortgage is a loan product that allows home owners, who are 62 years old and older, an opportunity to convert the built-up equity in their primary residence into income that they can use for everyday expenses in their retirement years. Proceeds can be used for anything that the homeowner needs or desires, including for example: medical expenses, home repairs, property taxes, daily expenses, or entertainment and travel. They can receive money through a reverse mortgage program, so they do not have to sell their home, give up title to their property, or even make monthly payments. As opposed to a normal mortgage, there are no income or credit qualifications; rather, a reverse mortgage is based on three main factors, including: the age of the homeowner(s), value of the home, and the current interest rates.
There are a variety of ways a homeowner can receive these monies, such as:
*Equal monthly payments for as long as at least one borrower lives in the home;
*Equal but typically larger monthly payments for a fixed number of months selected;
*As a line of credit, which is available for use whenever needed;
*A lump sum cash payment; or,
*A combination of a monthly income and line of credit option, as shown above.
There are many reasons for a reverse mortgage, but chief among them is that elderly homeowners do not want to burden their children with the costs of their ongoing medical care, home repairs, or other living expenses, so a reverse mortgage works well in this situation, as the illiquid equity in their home can be converted into cash.
Although the concept has been around since at least 1961 when the first reverse mortgage was funded, not many homeowners have taken advantage of the opportunity until recently. In fact, only about 55,000 of these unique loans were made by 1999 (since the early-60's), yet this figure had rapidly increased to surpass 150,000 by 2005.
This increase can be attributed to increased consumer protections and education, yet still many older Americans do not fully understand exactly what a reverse mortgage is -- and is not - so, they may be reluctant to inquire. Complicating the matter, they may have only heard "half truths" about these loans or things that are completely untrue.
One common misconception is that the borrower will have to sign the title to their home over to the bank, so the financial institution will own their home. This is not true because a reverse mortgage is considered a loan, despite the fact that repayment does not have to occur until you or your estate sells the home, all of the homeowners die, or all homeowners reside outside the home for more than one year (such as in a nursing home facility). Lenders can also require repayment at any time if you fail to pay your property taxes, maintain and repair your home, fail to keep your home insured, or declare bankruptcy, but these are all fairly standard conditions of default on any mortgage, whether it is a reverse or traditional mortgage loan.
Another misunderstood aspect is that when the equity in the borrower's home "runs out" that the bank will force the owners out of their home or force them to sell the home. Again, this is not true, as the mortgage does not become due until the last surviving borrower dies, permanently leaves the home, or sells the property.
Similar to the fear of running out of equity is that some homeowners fear that they will be put in a situation where they owe more than their home is worth; however, this is unfounded because under reverse mortgage programs, they will never owe more than the value of the home. Since there is never more owed than the home is worth, no debt will be passed on to the homeowner's heirs. When the home is sold or no longer used as the homeowner's primary residence, the homeowner or his/her estate will repay the cash received from the reverse mortgage, along with interest and any other fees to the lender. Any remaining equity in the home belongs to the homeowner or their heirs (if the homeowner has died). If the borrower or their heirs prefer to keep the home, they can simply pay off the reverse mortgage by obtaining a normal mortgage on the property or by using other assets they may have available.
But what are the costs? Most reverse mortgages have an application fee, origination fee, closing costs, insurance, and a monthly servicing fee. These fees can typically be paid by the proceeds from the reverse mortgage, so there are no out-of-pocket expenses to the homeowner.
For additional information, please see the following website:
U.S. Department of Housing and Urban Development:
http://www.hud.gov/offices/hsg/sfh/hecm/...
Until the concept of the reverse mortgage was born, there were two main ways to get spendable cash from your home: either (1.) you could sell your home, or (2.) you could borrow against your home. The obvious problem with selling your home is that you would have to move, which can be an expensive, frustrating, and unwanted consequence, especially if you enjoy your current home and neighborhood. Of course, the problem with a traditional loan is that you would have to make regular, monthly payments to repay the loan. In addition, to be approved for the loan, you would need to pass a credit check and have adequate income to pay back the loan. The lack of income is the very reason to apply for a reverse mortgage, so this is clearly an obstacle to using the traditional mortgage route. Reverse mortgages solve these issues, so the homeowner can remain in the home while not having the financial burden of another monthly payment.
Simply put, a reverse mortgage is a loan product that allows home owners, who are 62 years old and older, an opportunity to convert the built-up equity in their primary residence into income that they can use for everyday expenses in their retirement years. Proceeds can be used for anything that the homeowner needs or desires, including for example: medical expenses, home repairs, property taxes, daily expenses, or entertainment and travel. They can receive money through a reverse mortgage program, so they do not have to sell their home, give up title to their property, or even make monthly payments. As opposed to a normal mortgage, there are no income or credit qualifications; rather, a reverse mortgage is based on three main factors, including: the age of the homeowner(s), value of the home, and the current interest rates.
There are a variety of ways a homeowner can receive these monies, such as:
*Equal monthly payments for as long as at least one borrower lives in the home;
*Equal but typically larger monthly payments for a fixed number of months selected;
*As a line of credit, which is available for use whenever needed;
*A lump sum cash payment; or,
*A combination of a monthly income and line of credit option, as shown above.
There are many reasons for a reverse mortgage, but chief among them is that elderly homeowners do not want to burden their children with the costs of their ongoing medical care, home repairs, or other living expenses, so a reverse mortgage works well in this situation, as the illiquid equity in their home can be converted into cash.
Although the concept has been around since at least 1961 when the first reverse mortgage was funded, not many homeowners have taken advantage of the opportunity until recently. In fact, only about 55,000 of these unique loans were made by 1999 (since the early-60's), yet this figure had rapidly increased to surpass 150,000 by 2005.
This increase can be attributed to increased consumer protections and education, yet still many older Americans do not fully understand exactly what a reverse mortgage is -- and is not - so, they may be reluctant to inquire. Complicating the matter, they may have only heard "half truths" about these loans or things that are completely untrue.
One common misconception is that the borrower will have to sign the title to their home over to the bank, so the financial institution will own their home. This is not true because a reverse mortgage is considered a loan, despite the fact that repayment does not have to occur until you or your estate sells the home, all of the homeowners die, or all homeowners reside outside the home for more than one year (such as in a nursing home facility). Lenders can also require repayment at any time if you fail to pay your property taxes, maintain and repair your home, fail to keep your home insured, or declare bankruptcy, but these are all fairly standard conditions of default on any mortgage, whether it is a reverse or traditional mortgage loan.
Another misunderstood aspect is that when the equity in the borrower's home "runs out" that the bank will force the owners out of their home or force them to sell the home. Again, this is not true, as the mortgage does not become due until the last surviving borrower dies, permanently leaves the home, or sells the property.
Similar to the fear of running out of equity is that some homeowners fear that they will be put in a situation where they owe more than their home is worth; however, this is unfounded because under reverse mortgage programs, they will never owe more than the value of the home. Since there is never more owed than the home is worth, no debt will be passed on to the homeowner's heirs. When the home is sold or no longer used as the homeowner's primary residence, the homeowner or his/her estate will repay the cash received from the reverse mortgage, along with interest and any other fees to the lender. Any remaining equity in the home belongs to the homeowner or their heirs (if the homeowner has died). If the borrower or their heirs prefer to keep the home, they can simply pay off the reverse mortgage by obtaining a normal mortgage on the property or by using other assets they may have available.
But what are the costs? Most reverse mortgages have an application fee, origination fee, closing costs, insurance, and a monthly servicing fee. These fees can typically be paid by the proceeds from the reverse mortgage, so there are no out-of-pocket expenses to the homeowner.
For additional information, please see the following website:
U.S. Department of Housing and Urban Development:
http://www.hud.gov/offices/hsg/sfh/hecm/...
Friday, October 26, 2007
A 1910 Letter From Linton to Congress
In 1910, The Mayor and City Councilmen of Linton wrote a letter to Congress. It is an interesting read from yesteryear, and it is reprinted in its entirety as follows:
Linton, Indiana, March, 8th, 1910.
To The Sixty-Fifth Congress Of The United States Of America, Washington, D. C.
Gentlemen:-
We, the Mayor and the City Council, of the City of Linton, Indiana, submit to your Honorable Body, the following report, relative to our commercial interests, in support of a bill now before you, for an appropriation of One-Hundred- Thousand-Dollars for the erection of a Federal building in the City of Linton, Indiana.
The reports submitted herewith are conservative, having been gathered from those in a position to know the valuations of the several enterprises here-in-after enumerated, and are statistical facts which will convey more accurate impressions of importance of the City as a commercial center, than could be otherwise given.
Coal Mining Industry;
The chief and basic industry of this City is Coal Mining, though since the development of the mining fields, other enterprises which naturally follow the fuel centers, have come until there is a diversity of interests which make Linton, not a mining camp, nor an overgrown town of unsubstantial buildings and temporary residences, but a modern thriving commercial City, where hundred of thousands of dollars have been and are being invested.
There are, within a radius of three miles of the City of Linton, sixteen coal mining properties in operation, representing an investment of One and One-Half Million dollars, employing twenty-five-hundred men, with a tonnage capacity of twenty-thousand tons per day and an average semi-monthly payroll of Seventy-Thousand dollars.
Coal mined in the Linton field is bituminous and it is said by coal dealers and consumers, that a better quality is not to be found.
Coke Industry;
Thirty-Five-Thousand dollars have just been expanded in the erection of Coke ovens for the purpose of testing the coke producing qualities of the coal in this field and the reports thus far are gratifying.
Arrangements have just been completed, and miners trains are now in service for the purpose of conveying miners from this City to practically all the mines within a radius of ten miles, the miners living at or near these mines having signified their desire to live in our City, if transportation to and from the mines could be had.
Rail Road Facilities;
Five rail roads enter our City, namely; Indianapolis Southern, from Indianapolis, Indiana, to Effingham, Ill., a part of the Illinois Central System, giving direct connection with through service to New Orleans, La. That part of the road between Linton and Indianapolis, Indiana, was completed three years ago, giving an outlet at Indianapolis, for the East and North by way of the several great railway systems entering that City.
The Monon, Bedford and Bloomfield Division, coming into the City over the Indianapolis, Southern tracks, having an outlet to the main line of the Chicago and Louisville Division at Bedford, Indiana.
Southern Indiana, from Seymour to Terre Haute, Indiana, giving direct connection with through service over the Chicago Southern, to Chicago, Ill. and giving an outlet at Terre Haute, North, West and South by way of the Frisco System and East and West by way of the Pennsylvania and Big Four Systems, with outlet at Seymour, for the North, East and South by way of the Baltimore and Ohio Southwestern and the Pennsylvania System.
Vandalia, branch from the Indianapolis and Vincennes Division, extending into the Linton Coal Fields, doing a coal shipping and a local freight business.
Monon, leaving the Chicago and Louisville Division at Quincy, Indiana, and extending into the Linton coal field. This road completed two years ago.
Receipts at the local offices of the five rail roads entering our City, for the year just closed, were, Nine-Hundred-Eighty-Four-Thousand Dollars.
Local Industries;-
Rolling Mill with One-hundred-fifty ton capacity, employing One-hundred-sixty men. Investment, One-hundred-thousand Dollars.
Water Works System, with twelve miles of maines, Seventy Fire hydrants, with an unlimited supply of water for both City and Commercial purposes. Investment One-hundred-seventy-five-thousand dollars.
Gas Plant, capacity 250,000 cubic feet per day with holder capacity of Fifty-millions cubic feet per year, using 13-½ miles of maines and fifty miles of service pipe. Gas is made from the Coal from our local mines, the by-product selling at the highest market prices. Investment One-hundred-twenty-five-thousand dollars.
Ice and Cold Storage Plant, tonnage capacity of thirty five tons per day. Investment, Ten-Thousand dollars.
Flouring Mill doing a One-hundred-thousand dollar business per year. $50,000 investment.
Three Printing establishments with three weekly papers and two Daily Papers, employing twenty-five men. Investments, Twenty-five-thousand dollars.
Other enterprises of smaller note representing several hundred thousand dollars in investments, as; Machine Shops, Lumber Yards, Planing Mills, Cigar Factories etc.
Banks, Two, State and National.
Trust Companies, One.
Churches;
Seven, three of which have real estate investments of One-hundred-fifty-thousand-dollars. Four having real estate investments to the amount of Ten-thousand dollars.
Fifteen-thousand dollar Carnegie Library.
City Schools;
Enumeration, Nineteen-hundred-twenty-six.
Enrollment, Fourteen-hundred-ninety-eight.
Pay-roll last year, $14,377.64.
Pay-roll this year will be, $18.574.56.
Five School Buildings; One High School and four Ward Buildings, employing 32 teachers.
Value of the School buildings and Apparatuses, $78.000.
In addition to the regular grade work, of which there are eight, and the regular high school work, music and art are taught.
Commissioned High School with a nine months term.
The City owns the Electric Lighting System, which is conservatively estimated at $50.000.
City Improvements;
Brick Streets, Two miles
Macadam Streets, Three miles.
Cement Sidewalks, Sixty miles.
Sanitary Sewage system, completed, June, 1908, with 14 miles maines, at a cost of $75.000.
Farming Industry;
To say Linton is fortunate is a modest statement of the facts. Not only is the City and vicinity fortunate in possessing the great fields of coal, but in other things as well. No section of the country within the Great fertile valley of the Mississippi, can justly lay claims to better land adapted to agriculture.
Time and progress have also wrought changes in this respect. The drainage of swamps and the reclamation of marshes have added thousands of fertile fruitful acres to the territory. That were of but comparatively recent years bogs and thickets, covered with shrubbery and marsh grasses, are new vast fields of cereal.
Plethoric barns and granaries have taken the place of modest log stables and pens, and the spirit of progress and prosperity have superceded squalor and discontent.
In pace with these changes, the building of gravel and macadam roads has also been carried on without a burdensome taxation and a system of gravel and macadam roads not equaled by any locality south of Indianapolis, has been constructed.
We, the Mayor, and the City Council, of the City of Linton, Indiana, verify the foregoing statement.
/s/ Granville Riley, Mayor
/s/ Curt Dittimore, Councilman
/s/ Benj. Holcher, Councilman
/s/ Seph Inman, Councilman
/s/ Enoch Murphy, Councilman
/s/ Joseph Hurt, Councilman
Linton, Indiana, March, 8th, 1910.
To The Sixty-Fifth Congress Of The United States Of America, Washington, D. C.
Gentlemen:-
We, the Mayor and the City Council, of the City of Linton, Indiana, submit to your Honorable Body, the following report, relative to our commercial interests, in support of a bill now before you, for an appropriation of One-Hundred- Thousand-Dollars for the erection of a Federal building in the City of Linton, Indiana.
The reports submitted herewith are conservative, having been gathered from those in a position to know the valuations of the several enterprises here-in-after enumerated, and are statistical facts which will convey more accurate impressions of importance of the City as a commercial center, than could be otherwise given.
Coal Mining Industry;
The chief and basic industry of this City is Coal Mining, though since the development of the mining fields, other enterprises which naturally follow the fuel centers, have come until there is a diversity of interests which make Linton, not a mining camp, nor an overgrown town of unsubstantial buildings and temporary residences, but a modern thriving commercial City, where hundred of thousands of dollars have been and are being invested.
There are, within a radius of three miles of the City of Linton, sixteen coal mining properties in operation, representing an investment of One and One-Half Million dollars, employing twenty-five-hundred men, with a tonnage capacity of twenty-thousand tons per day and an average semi-monthly payroll of Seventy-Thousand dollars.
Coal mined in the Linton field is bituminous and it is said by coal dealers and consumers, that a better quality is not to be found.
Coke Industry;
Thirty-Five-Thousand dollars have just been expanded in the erection of Coke ovens for the purpose of testing the coke producing qualities of the coal in this field and the reports thus far are gratifying.
Arrangements have just been completed, and miners trains are now in service for the purpose of conveying miners from this City to practically all the mines within a radius of ten miles, the miners living at or near these mines having signified their desire to live in our City, if transportation to and from the mines could be had.
Rail Road Facilities;
Five rail roads enter our City, namely; Indianapolis Southern, from Indianapolis, Indiana, to Effingham, Ill., a part of the Illinois Central System, giving direct connection with through service to New Orleans, La. That part of the road between Linton and Indianapolis, Indiana, was completed three years ago, giving an outlet at Indianapolis, for the East and North by way of the several great railway systems entering that City.
The Monon, Bedford and Bloomfield Division, coming into the City over the Indianapolis, Southern tracks, having an outlet to the main line of the Chicago and Louisville Division at Bedford, Indiana.
Southern Indiana, from Seymour to Terre Haute, Indiana, giving direct connection with through service over the Chicago Southern, to Chicago, Ill. and giving an outlet at Terre Haute, North, West and South by way of the Frisco System and East and West by way of the Pennsylvania and Big Four Systems, with outlet at Seymour, for the North, East and South by way of the Baltimore and Ohio Southwestern and the Pennsylvania System.
Vandalia, branch from the Indianapolis and Vincennes Division, extending into the Linton Coal Fields, doing a coal shipping and a local freight business.
Monon, leaving the Chicago and Louisville Division at Quincy, Indiana, and extending into the Linton coal field. This road completed two years ago.
Receipts at the local offices of the five rail roads entering our City, for the year just closed, were, Nine-Hundred-Eighty-Four-Thousand Dollars.
Local Industries;-
Rolling Mill with One-hundred-fifty ton capacity, employing One-hundred-sixty men. Investment, One-hundred-thousand Dollars.
Water Works System, with twelve miles of maines, Seventy Fire hydrants, with an unlimited supply of water for both City and Commercial purposes. Investment One-hundred-seventy-five-thousand dollars.
Gas Plant, capacity 250,000 cubic feet per day with holder capacity of Fifty-millions cubic feet per year, using 13-½ miles of maines and fifty miles of service pipe. Gas is made from the Coal from our local mines, the by-product selling at the highest market prices. Investment One-hundred-twenty-five-thousand dollars.
Ice and Cold Storage Plant, tonnage capacity of thirty five tons per day. Investment, Ten-Thousand dollars.
Flouring Mill doing a One-hundred-thousand dollar business per year. $50,000 investment.
Three Printing establishments with three weekly papers and two Daily Papers, employing twenty-five men. Investments, Twenty-five-thousand dollars.
Other enterprises of smaller note representing several hundred thousand dollars in investments, as; Machine Shops, Lumber Yards, Planing Mills, Cigar Factories etc.
Banks, Two, State and National.
Trust Companies, One.
Churches;
Seven, three of which have real estate investments of One-hundred-fifty-thousand-dollars. Four having real estate investments to the amount of Ten-thousand dollars.
Fifteen-thousand dollar Carnegie Library.
City Schools;
Enumeration, Nineteen-hundred-twenty-six.
Enrollment, Fourteen-hundred-ninety-eight.
Pay-roll last year, $14,377.64.
Pay-roll this year will be, $18.574.56.
Five School Buildings; One High School and four Ward Buildings, employing 32 teachers.
Value of the School buildings and Apparatuses, $78.000.
In addition to the regular grade work, of which there are eight, and the regular high school work, music and art are taught.
Commissioned High School with a nine months term.
The City owns the Electric Lighting System, which is conservatively estimated at $50.000.
City Improvements;
Brick Streets, Two miles
Macadam Streets, Three miles.
Cement Sidewalks, Sixty miles.
Sanitary Sewage system, completed, June, 1908, with 14 miles maines, at a cost of $75.000.
Farming Industry;
To say Linton is fortunate is a modest statement of the facts. Not only is the City and vicinity fortunate in possessing the great fields of coal, but in other things as well. No section of the country within the Great fertile valley of the Mississippi, can justly lay claims to better land adapted to agriculture.
Time and progress have also wrought changes in this respect. The drainage of swamps and the reclamation of marshes have added thousands of fertile fruitful acres to the territory. That were of but comparatively recent years bogs and thickets, covered with shrubbery and marsh grasses, are new vast fields of cereal.
Plethoric barns and granaries have taken the place of modest log stables and pens, and the spirit of progress and prosperity have superceded squalor and discontent.
In pace with these changes, the building of gravel and macadam roads has also been carried on without a burdensome taxation and a system of gravel and macadam roads not equaled by any locality south of Indianapolis, has been constructed.
We, the Mayor, and the City Council, of the City of Linton, Indiana, verify the foregoing statement.
/s/ Granville Riley, Mayor
/s/ Curt Dittimore, Councilman
/s/ Benj. Holcher, Councilman
/s/ Seph Inman, Councilman
/s/ Enoch Murphy, Councilman
/s/ Joseph Hurt, Councilman
Friday, October 19, 2007
What It Costs to Live in Greene County: Part III
From Parts I & II, we calculated annual 'take home' pay for an average household in Greene County was $31,288.52 or $2,607.38 per month.
In Part III, we'll look at 'average' monthly expenses, which are certainly the most interesting -- and subjective -- part of the series. To take out as much subjectivity as possible, we'll use general rules-of-thumb or 'supposed to' amounts first. If none were found or exist, we'll use national averages. If no national averages are found, we'll use 'guess-timates'.
First, let's deduct $260.74 per month for tithing and charity. Now, some argue that this figure should be 10% of gross income, while others say 10% of take-home pay. Still others say that 10% should go to your church, and various charities are on top of that amount. Of course, some do not attend a church nor give to charity at all, so they have no expenditures in this category. All arguments aside, we'll use 10% of take-home pay for church and charities.
Second, let's deduct $8,000 per year or $666.7 per month for IRA contributions for this 'average' couple. This fits under the 'supposed to' category, as many do not do this, but we're all supposed to be. After all, if you're not looking out for your own retirement, who is?
Third, we'll deduct $180 per month for a home phone, internet access, satellite or cable subscription, and a cell phone plan. This is based on $60 for phone and internet, $60 for cable or satellite, and $60 for a cellular plan. Sure, some plans and subscriptions are cheaper, some are more expensive. In any event, there are a number of access fees and charges, as well as various taxes, on each, so we shouldn't forget those. (Remember buying that cellular plan that was supposed to be $39.99 a month, but your first bill was more like $60 with all the extra fees and charges? Funny how that works, isn't it?) While this $180 is not completely necessary -- people do actually live without these conveniences -- we'll include them.
Fourth, we have to eat. This one falls under 'subjective' and a 'guess-timate' because no rules-of-thumb were found. It all depends on your appetite, likes and dislikes, where you shop, etc., etc. For groceries, let's plug in $300 per month. Dining out, while not necessary, we will still include an occasional trip to a casual dining restaurant or some fast food along the way by using $100 per month. For those not spending time in a restaurant, chalk this expense up as for entertainment too, say, a movie out or the like.
Fifth, we need a roof over our heads. In fact, that probably should have come closer to first in the list, but we did't forget nonetheless. Sure, you can rent, but in Greene County there's a very high percentage of home ownership. Looking at the 2000 U.S. census data and a recent housing assessment completed in 2005, we note that the median home value in Linton is approximately $50,000. Typically, a bank will loan 80% loan-to-value against that home, so our mortgage will be about $40,000. Current rates on a 30-year loan are 6.5% or so. So, based on this data, our mortgage payment each month will be almost $260.
Utilities to heat and cool the home, as well as provide light, water, sewage, and trash pick up will be estimated at $175 per month on average. Of course, winter and summer bills tend to be the highest, but we'll just use an average among all months.
Along with home ownership comes the pleasure of paying property taxes, casualty insurance, and maintenance. Since this is our primary residence and we have a mortgage, though, we can apply for a homestead exemption and a mortgage exemption at the Courthouse. Both will cut our property tax bill significantly, which by my calculations will be $434 per year or $36.14 per month. This is based on the new rate in the City of Linton of 3.6140%. Insurance against fire, tornado, and other disasters is estimated at $400 per year or $33.33 per month. Again, this depends on a lot of circumstances, including the age and condition of the home, the credit score of the homeowner, the amount of the deductible, etc. Along with routine maintenance, which we will estimate costing $500 per year, we’ll need to replace some more costly aspects too. For example, although it's far from a daily expense, we will eventually need to replace the roof, exterior siding or paint, floor coverings, the furnace & air conditioning, and various other miscellaneous items. We'll estimate the costs of replacing these, as well as their useful lives, as follows:
Roof - $4,000 - 20years
Exterior - $2,500 - 25 years
Floor Coverings - $2,000 - 12 years
HVAC unit - $3,000 - 20 years
Misc. - $1,000 - 20 years
True, all of these items can have widely varying prices and useful lives, but these are the assumptions. Combined with our estimate of $500 for maintenance per year, these will all total $1,166.67 per year or $97.22 per month.
Sixth, we need to get to work. So, we need to look at vehicle loans. Although the 'sky is the limit' on prices paid for a set of wheels, we'll use a fairly conservative amount, such as $13,500 as a loan amount. This may buy a smaller car or a larger one with a decent down payment. Based on a 6% interest rate and a 60 month loan term, our payment will be about $260. (There's just something about having a car payment higher than a mortgage payment; hence, they're equal here.) Insurance is of course required by law, but again depending on the company, coverage, deductible, and credit score of the applicant, prices can vary widely. We'll use $500 per year, which is $41.67 per month. License plates figure into the mix, too, and these are estimated at $250 per year (20.83 per month). Lastly, we need to put gasoline in the tank. According to national data, the average person puts about $1,000 into their tank each year.
Most of us in Greene County observe Christmas, although national studies indicate a wide range of what we spend during the holidays. National Public Radio reported a figure of only $466, while other studies said $700 to $1,000. At the risk of being called Scrooge, we will use the NPR figure because we're running out of money quickly. Using the $466 per year, that equates to $38.83 being set aside each month.
Seventh, we consume a lot of things that will be simply thrown away, but necessary nonetheless. Such items include toilet paper, paper towels, floss, tooth paste, soap and shampoo, etc. Having not a clue what all this stuff costs the average couple, we'll use $25 per month, so at least we acknowledged it.
Eighth, we'll put a measly 1% of our income into savings each month, which is $34.60.
There. We did it! We have $1.97 left each month to our name! Not a whole lot of room for having kids, is it?
But wait! The average consumer has $10,000 of credit card debt. At a typical 2% of the balance minimum required payment ($200), we're now $198.03 in the hole every month.
How can this be?
Stay tuned. In Part IV, we'll discuss some likely scenarios of how this can be and what assumptions we may have gotten all wrong.
In Part III, we'll look at 'average' monthly expenses, which are certainly the most interesting -- and subjective -- part of the series. To take out as much subjectivity as possible, we'll use general rules-of-thumb or 'supposed to' amounts first. If none were found or exist, we'll use national averages. If no national averages are found, we'll use 'guess-timates'.
First, let's deduct $260.74 per month for tithing and charity. Now, some argue that this figure should be 10% of gross income, while others say 10% of take-home pay. Still others say that 10% should go to your church, and various charities are on top of that amount. Of course, some do not attend a church nor give to charity at all, so they have no expenditures in this category. All arguments aside, we'll use 10% of take-home pay for church and charities.
Second, let's deduct $8,000 per year or $666.7 per month for IRA contributions for this 'average' couple. This fits under the 'supposed to' category, as many do not do this, but we're all supposed to be. After all, if you're not looking out for your own retirement, who is?
Third, we'll deduct $180 per month for a home phone, internet access, satellite or cable subscription, and a cell phone plan. This is based on $60 for phone and internet, $60 for cable or satellite, and $60 for a cellular plan. Sure, some plans and subscriptions are cheaper, some are more expensive. In any event, there are a number of access fees and charges, as well as various taxes, on each, so we shouldn't forget those. (Remember buying that cellular plan that was supposed to be $39.99 a month, but your first bill was more like $60 with all the extra fees and charges? Funny how that works, isn't it?) While this $180 is not completely necessary -- people do actually live without these conveniences -- we'll include them.
Fourth, we have to eat. This one falls under 'subjective' and a 'guess-timate' because no rules-of-thumb were found. It all depends on your appetite, likes and dislikes, where you shop, etc., etc. For groceries, let's plug in $300 per month. Dining out, while not necessary, we will still include an occasional trip to a casual dining restaurant or some fast food along the way by using $100 per month. For those not spending time in a restaurant, chalk this expense up as for entertainment too, say, a movie out or the like.
Fifth, we need a roof over our heads. In fact, that probably should have come closer to first in the list, but we did't forget nonetheless. Sure, you can rent, but in Greene County there's a very high percentage of home ownership. Looking at the 2000 U.S. census data and a recent housing assessment completed in 2005, we note that the median home value in Linton is approximately $50,000. Typically, a bank will loan 80% loan-to-value against that home, so our mortgage will be about $40,000. Current rates on a 30-year loan are 6.5% or so. So, based on this data, our mortgage payment each month will be almost $260.
Utilities to heat and cool the home, as well as provide light, water, sewage, and trash pick up will be estimated at $175 per month on average. Of course, winter and summer bills tend to be the highest, but we'll just use an average among all months.
Along with home ownership comes the pleasure of paying property taxes, casualty insurance, and maintenance. Since this is our primary residence and we have a mortgage, though, we can apply for a homestead exemption and a mortgage exemption at the Courthouse. Both will cut our property tax bill significantly, which by my calculations will be $434 per year or $36.14 per month. This is based on the new rate in the City of Linton of 3.6140%. Insurance against fire, tornado, and other disasters is estimated at $400 per year or $33.33 per month. Again, this depends on a lot of circumstances, including the age and condition of the home, the credit score of the homeowner, the amount of the deductible, etc. Along with routine maintenance, which we will estimate costing $500 per year, we’ll need to replace some more costly aspects too. For example, although it's far from a daily expense, we will eventually need to replace the roof, exterior siding or paint, floor coverings, the furnace & air conditioning, and various other miscellaneous items. We'll estimate the costs of replacing these, as well as their useful lives, as follows:
Roof - $4,000 - 20years
Exterior - $2,500 - 25 years
Floor Coverings - $2,000 - 12 years
HVAC unit - $3,000 - 20 years
Misc. - $1,000 - 20 years
True, all of these items can have widely varying prices and useful lives, but these are the assumptions. Combined with our estimate of $500 for maintenance per year, these will all total $1,166.67 per year or $97.22 per month.
Sixth, we need to get to work. So, we need to look at vehicle loans. Although the 'sky is the limit' on prices paid for a set of wheels, we'll use a fairly conservative amount, such as $13,500 as a loan amount. This may buy a smaller car or a larger one with a decent down payment. Based on a 6% interest rate and a 60 month loan term, our payment will be about $260. (There's just something about having a car payment higher than a mortgage payment; hence, they're equal here.) Insurance is of course required by law, but again depending on the company, coverage, deductible, and credit score of the applicant, prices can vary widely. We'll use $500 per year, which is $41.67 per month. License plates figure into the mix, too, and these are estimated at $250 per year (20.83 per month). Lastly, we need to put gasoline in the tank. According to national data, the average person puts about $1,000 into their tank each year.
Most of us in Greene County observe Christmas, although national studies indicate a wide range of what we spend during the holidays. National Public Radio reported a figure of only $466, while other studies said $700 to $1,000. At the risk of being called Scrooge, we will use the NPR figure because we're running out of money quickly. Using the $466 per year, that equates to $38.83 being set aside each month.
Seventh, we consume a lot of things that will be simply thrown away, but necessary nonetheless. Such items include toilet paper, paper towels, floss, tooth paste, soap and shampoo, etc. Having not a clue what all this stuff costs the average couple, we'll use $25 per month, so at least we acknowledged it.
Eighth, we'll put a measly 1% of our income into savings each month, which is $34.60.
There. We did it! We have $1.97 left each month to our name! Not a whole lot of room for having kids, is it?
But wait! The average consumer has $10,000 of credit card debt. At a typical 2% of the balance minimum required payment ($200), we're now $198.03 in the hole every month.
How can this be?
Stay tuned. In Part IV, we'll discuss some likely scenarios of how this can be and what assumptions we may have gotten all wrong.
Thursday, October 18, 2007
Tax Abatement: An Economic Development Tool
From what was being said during certain political ads in the primaries of at least one out-of-county race, there appears to be general misunderstanding about the economic development tool called 'property tax abatement' and misinformation about what it means to area economic development, local government, and fellow property tax payers in the community.
Property tax abatement in Indiana is authorized under state law in the form of deductions from assessed valuation; however, a better way of phrasing this would be that it is a tool that allows the increase in property taxes to be 'phased-in' over a period of time, say, ten years. (There is abatement available for such personal property as new machinery, too, but we will tackle only the real estate aspect.)
A property owner who makes improvements to real estate may apply to the local governmental body for property tax abatement. The local governing body could be the City Council, County Council, or the development or redevelopment commission having jurisdiction over the area.
It is important to understand that only the increase in the assessed valuation, which occurs as a result of the additional investment, is eligible for tax abatement. So, no tax money is lost from the existing improvements or structures on the property. The property taxes cannot be lower than the prior year's taxes.
Essentially, local government uses tax abatement to encourage investment in the area, while also ultimately increasing the tax base of the community and the taxes collected from the particular property that has been improved. While this provides an incentive to companies to invest and expand their businesses in the area, the local government has not sacrificed any taxes it currently is collecting, as commonly misunderstood.
The government has only given up a percentage of the 'theoretical' taxes that could have been assessed on the improvements or additions to a property, if the abatement was not given. This is referred to as 'theoretical' because the improvement may have never been brought into reality in the first place without the abatement incentive. In fact, businesses may look elsewhere to other communities willing to offer such abatements. In that scenario, if a community does not offer abatement, they have not only lost the increased tax base, but they may have lost any additional jobs that would have come along with that expansion or relocation to the area too.
As you can see, tax abatement does not put a community in any tax jeopardy. Rather, it is an effective negotiating tool when it comes to promoting economic development. Not using economic development tools because of misunderstanding and misinformation, however, can lead to businesses looking to expand or relocate elsewhere where they are understood.
Property tax abatement in Indiana is authorized under state law in the form of deductions from assessed valuation; however, a better way of phrasing this would be that it is a tool that allows the increase in property taxes to be 'phased-in' over a period of time, say, ten years. (There is abatement available for such personal property as new machinery, too, but we will tackle only the real estate aspect.)
A property owner who makes improvements to real estate may apply to the local governmental body for property tax abatement. The local governing body could be the City Council, County Council, or the development or redevelopment commission having jurisdiction over the area.
It is important to understand that only the increase in the assessed valuation, which occurs as a result of the additional investment, is eligible for tax abatement. So, no tax money is lost from the existing improvements or structures on the property. The property taxes cannot be lower than the prior year's taxes.
Essentially, local government uses tax abatement to encourage investment in the area, while also ultimately increasing the tax base of the community and the taxes collected from the particular property that has been improved. While this provides an incentive to companies to invest and expand their businesses in the area, the local government has not sacrificed any taxes it currently is collecting, as commonly misunderstood.
The government has only given up a percentage of the 'theoretical' taxes that could have been assessed on the improvements or additions to a property, if the abatement was not given. This is referred to as 'theoretical' because the improvement may have never been brought into reality in the first place without the abatement incentive. In fact, businesses may look elsewhere to other communities willing to offer such abatements. In that scenario, if a community does not offer abatement, they have not only lost the increased tax base, but they may have lost any additional jobs that would have come along with that expansion or relocation to the area too.
As you can see, tax abatement does not put a community in any tax jeopardy. Rather, it is an effective negotiating tool when it comes to promoting economic development. Not using economic development tools because of misunderstanding and misinformation, however, can lead to businesses looking to expand or relocate elsewhere where they are understood.
Thursday, October 11, 2007
Paying Off Debt -- Fast!
Do you want to save big bucks? How would you like to pay off all your debts in record time?
A little organization and a "game plan" can help you do both! Here's how:
First, list and prioritize your mortgage debt, credit cards, auto loans, etc. with the highest interest rate first and the lowest rate last. Second, pay the minimum payments due on all but the highest interest rate debt. (Yes, you heard me right: pay the minimums on all but the highest rate!) Third, apply an additional amount, say, an extra $100 per month on the highest interest rate debt. Once this debt is paid off, you apply that payment plus your extra $100 to the second highest interest rate debt until it's paid off. Repeat the process for the third, fourth, fifth, etc. until you're debt-free.
Let's look at an example:
Joe has $100,000 of debt. It is broken down as follows:
Debt: Balance: Payment: Rate:
Car Loan - $20,000 - $387 - 6.0%
Home Mortgage - $55,000 - $348 - 6.5%
Credit Card A - $7,500 - $150 - 18.0%
Credit Card B - $2,500 - $75 - 12.0%
Student Loan - $15,000 - $145 - 3.0%
If we simply prioritized the debts to pay off by the highest interest rate charged, we would list them like this:
Priority: Debt: Balance: Payment: Rate:
#1 - Credit Card A - $7,500 - $150 - 18.0%
#2 - Credit Card B - $2,500 - $75 - 12.0%
#3 - Home Mortgage - $55,000 - $348 - 6.5%
#4 - Car Loan - $20,000 - $387 - 6.0%
#5 - Student Loan - $15,000 - $145 - 3.0%
If Joe pays only the minimum payment required on these debts each month, he will spend a total of $82,476 in interest over the next 30 years that it will take to pay off these debts.
Alternatively, if Joe were to prioritize these debts with the highest interest rate as first to pay off and the lowest rate as the last to pay off, and he applies $100 extra dollars to the highest rate debt until it is paid off, he would save lots of money and time. In fact, the time to pay off everything would be reduced to only 9 years and 2 months (compared with 30 years!), and the interest savings he would enjoy would be over $50,500!
So, instead of paying just the minimums or paying a little extra on each debt each month, you should consider putting together your own game plan. Simply list and prioritize your debts and routinely apply a little extra to the highest interest rate debt you have while just paying the minimums on the rest. Once the first debt is paid off, you apply that payment plus your extra $100 to the second-highest rate debt until it's paid off.
You'll be debt-free in less time than you think!
A little organization and a "game plan" can help you do both! Here's how:
First, list and prioritize your mortgage debt, credit cards, auto loans, etc. with the highest interest rate first and the lowest rate last. Second, pay the minimum payments due on all but the highest interest rate debt. (Yes, you heard me right: pay the minimums on all but the highest rate!) Third, apply an additional amount, say, an extra $100 per month on the highest interest rate debt. Once this debt is paid off, you apply that payment plus your extra $100 to the second highest interest rate debt until it's paid off. Repeat the process for the third, fourth, fifth, etc. until you're debt-free.
Let's look at an example:
Joe has $100,000 of debt. It is broken down as follows:
Debt: Balance: Payment: Rate:
Car Loan - $20,000 - $387 - 6.0%
Home Mortgage - $55,000 - $348 - 6.5%
Credit Card A - $7,500 - $150 - 18.0%
Credit Card B - $2,500 - $75 - 12.0%
Student Loan - $15,000 - $145 - 3.0%
If we simply prioritized the debts to pay off by the highest interest rate charged, we would list them like this:
Priority: Debt: Balance: Payment: Rate:
#1 - Credit Card A - $7,500 - $150 - 18.0%
#2 - Credit Card B - $2,500 - $75 - 12.0%
#3 - Home Mortgage - $55,000 - $348 - 6.5%
#4 - Car Loan - $20,000 - $387 - 6.0%
#5 - Student Loan - $15,000 - $145 - 3.0%
If Joe pays only the minimum payment required on these debts each month, he will spend a total of $82,476 in interest over the next 30 years that it will take to pay off these debts.
Alternatively, if Joe were to prioritize these debts with the highest interest rate as first to pay off and the lowest rate as the last to pay off, and he applies $100 extra dollars to the highest rate debt until it is paid off, he would save lots of money and time. In fact, the time to pay off everything would be reduced to only 9 years and 2 months (compared with 30 years!), and the interest savings he would enjoy would be over $50,500!
So, instead of paying just the minimums or paying a little extra on each debt each month, you should consider putting together your own game plan. Simply list and prioritize your debts and routinely apply a little extra to the highest interest rate debt you have while just paying the minimums on the rest. Once the first debt is paid off, you apply that payment plus your extra $100 to the second-highest rate debt until it's paid off.
You'll be debt-free in less time than you think!
Wednesday, October 10, 2007
Non-Profits for Pets
Businesses need not always be measured by the profits that they make, as many corporations are actually non-profit groups. Many of these groups are engaged in the help and rescue of neglected animals and forgotten pets. It is their passion to help these animals, whether the organization is large and well-funded or very small with only a few animals in their daily care.
These groups may measure their success in terms of the impact they have on society and their local area, but dollars are still needed to operate. For those interested in starting a new organization to help animals, or reinvigorating an existing one, but are unsure about the business side of things, you may want to refer to this online resource:
* Starting a Non-Profit Organization to help Animals: A Manual
http://www.bestfriends.org/nomorehomeles...
Of course, starting or running an animal shelter or rescue is not a new concept, and a person can learn a lot from other organizations that are already operating. In fact, a common technique among all successful businesses, whether for-profit or non-profit, is to look at other similar operations located outside their market area. In this way, people are free to exchange ideas without the threat of direct competition.
With that said, so you're not "reinventing the wheel" yourself, here is a list of several groups from all over the map, which you may find useful to see how they are doing things:
* Humane Societies, Animal Shelters (dog, cat, & general pet shelter), and Pet Adoption organizations - 378 listings alphabetically by US state (city), Canadian Province, & other countries: http://www.greenpeople.org/humanesociety...
These groups may measure their success in terms of the impact they have on society and their local area, but dollars are still needed to operate. For those interested in starting a new organization to help animals, or reinvigorating an existing one, but are unsure about the business side of things, you may want to refer to this online resource:
* Starting a Non-Profit Organization to help Animals: A Manual
http://www.bestfriends.org/nomorehomeles...
Of course, starting or running an animal shelter or rescue is not a new concept, and a person can learn a lot from other organizations that are already operating. In fact, a common technique among all successful businesses, whether for-profit or non-profit, is to look at other similar operations located outside their market area. In this way, people are free to exchange ideas without the threat of direct competition.
With that said, so you're not "reinventing the wheel" yourself, here is a list of several groups from all over the map, which you may find useful to see how they are doing things:
* Humane Societies, Animal Shelters (dog, cat, & general pet shelter), and Pet Adoption organizations - 378 listings alphabetically by US state (city), Canadian Province, & other countries: http://www.greenpeople.org/humanesociety...
Tuesday, October 9, 2007
Make Ten Times What You Are Now
Want to make ten times the amount you are now on your savings?
Take money lying in your savings account, which is probably earning only one-half of one percent interest right now and consider putting this into a Certificate of Deposit (CD). Many are currently earning about five-percent interest, and these investments are federally-insured through the FDIC up to $100,000 just like your savings account. So, no additional risk of losing your principal, but you receive up to ten times the rate of return!
Depending on the amount of money you have in savings, you may consider "laddering" your CD investments. What the term "laddering" means is simply dividing the total amount up into smaller portions with varying maturity dates.
For example: instead of having one $25,000 CD mature in twelve months, you could break it up into five $5,000 CDs maturing in three months, six months, one year, two years, three years, and five years.
Why ladder?
There are a few benefits to laddering:
First, if you need to cash in a CD, you take a smaller penalty -- just on the amount within the one smaller CD -- or a portion of the overall amount. Second, if rates decline, you have only a portion of your money maturing at any one time to invest at the then lower rate. Third, psychologically, people seem to keep the CDs in place -- or spend only the portion that matures -- as opposed to indulging big by spending everything when it matures in one large lump sum.
But what about early withdraw penalties?
Penalties vary, but many early withdraw penalties are only one to three months worth of interest. So, the world does not necessarily end if you do need the money for an emergency before the maturity date.
Although transferring money into CDs may not be sexy, it is a simple way to make much more on your savings.
Take money lying in your savings account, which is probably earning only one-half of one percent interest right now and consider putting this into a Certificate of Deposit (CD). Many are currently earning about five-percent interest, and these investments are federally-insured through the FDIC up to $100,000 just like your savings account. So, no additional risk of losing your principal, but you receive up to ten times the rate of return!
Depending on the amount of money you have in savings, you may consider "laddering" your CD investments. What the term "laddering" means is simply dividing the total amount up into smaller portions with varying maturity dates.
For example: instead of having one $25,000 CD mature in twelve months, you could break it up into five $5,000 CDs maturing in three months, six months, one year, two years, three years, and five years.
Why ladder?
There are a few benefits to laddering:
First, if you need to cash in a CD, you take a smaller penalty -- just on the amount within the one smaller CD -- or a portion of the overall amount. Second, if rates decline, you have only a portion of your money maturing at any one time to invest at the then lower rate. Third, psychologically, people seem to keep the CDs in place -- or spend only the portion that matures -- as opposed to indulging big by spending everything when it matures in one large lump sum.
But what about early withdraw penalties?
Penalties vary, but many early withdraw penalties are only one to three months worth of interest. So, the world does not necessarily end if you do need the money for an emergency before the maturity date.
Although transferring money into CDs may not be sexy, it is a simple way to make much more on your savings.
Friday, October 5, 2007
County Tax Sale Rapidly Approaching
If you think you really own your home just try ignoring your real estate taxes and see how long you "own" it! No, this isn't a dare, but just a friendly reminder that the county's annual tax sale will be held shortly on October 10th to sell those tax liens to the highest bidder.
So, what happens if a person fails to pay their property taxes? And how do some people invest in the resulting tax liens?
Let's discuss the process:
Properties that are at least three installments behind are eligible to be added to the tax sale list. The minimum bid for the auction is set at the amount of property taxes owed, plus any penalties, auction fees, and public notice or advertisement costs.
At the public auction, the bidding starts with this minimum bid and proceeds until there are no more bids. The highest bidder receives a tax lien certificate (not a deed!) on the property in return, which is essentially a first-priority lien and one that is superior to most everything, even previously-recorded mortgages, except certain federal and state tax liens. (As you know, Uncle Sam always gets his money first, but the Governor does too! This is an interesting phenomenon because in Indiana liens typically attach to a property in the order -- or priority -- that they were filed, so tax liens are unique in this respect. This also explains one of the reasons why lenders want to escrow for property taxes when you have a loan secured with real estate. This way they know that the taxes are paid, and they won't have a higher-priority tax lien to resolve down the road.)
The purchaser of the tax lien must send a "notice of sale" letter to the owner and any other person(s) with a "substantial interest" in the property (e.g. the bank with a mortgage on the property) with all the information required under the Indiana Code at least three months before the redemption period expiration, which is 12 months from the date of sale. Of course, this requires a title search to be conducted to find out exactly who these "substantial" interest holders are. After these notices are sent, the tax lien holder asks the same court that issued the original judgment for delinquent taxes on the property to order the County Auditor to issue a tax deed if the property is not redeemed by the redemption period expiration date.
For the 12 months between the tax sale auction date and the expiration of the redemption period, the tax lien holder may pay the subsequent property taxes and special assessments. Immediately upon paying for any of these additional costs, including the title search mentioned above, it must be reported to the Auditor's office on a special form with the receipts. If this is not done, those additional expenses will not be reimbursed if the tax lien is redeemed by the property owner, who will probably not send you a "thank you" card in the mail either.
So, what if the property owner pays within the twelve month redemption period?
He or she pays interest -- and a lot of it!
For up to six months, the lien holder will receive a refund equal to 110% of the minimum sale price and 10% per year of the amount that the purchase price exceeds the minimum sale price. So, on an annualized basis, the return is much, much higher than 10% if redeemed within a short period after the sale.
If redeemed after six months from the sale, the property owner must pay 115% of the minimum sale price, plus 10% per annum of the amount that the purchase price exceeded the minimum sale price.
As a person can see, the returns to the investor are very high in comparison to other traditional investments, but there are several risks, including:
*The bidder must determine what it is that he or she is actually bidding on, as it could be a property with environmental contamination, a useless strip of ground only a few feet wide and hundreds of feet long, or a parcel with other major issues. There are no guarantees or warranties, so that can be a huge risk, too, if the bidder does not do his or her homework.
*The tax lien holder does not actually own the property during the twelve month redemption period, so the tax lien holder has no right to trespass on the property. Needless to say, the owners -- or vandals in general -- can damage the property during that time.
*If the winning bidder on the tax lien fails to have the cash or financing available to him or her to pay the County Treasurer the full amount of their winning bid by the deadline on the sale date, which is usually in the afternoon of the auction, the bid is not only canceled but the bidder is subject to a penalty equal to 25% of the total amount bid.
*If the tax lien holder fails to notify the owner and those with a substantial property interest, as discussed above, the court may say, "Sorry, you just lost everything that you bid on it because you didn't follow the rules!" So, a total loss of investment is possible.
As a person can see, where there is money to be made, there is also risk. Greater returns typically involve greater risk.
If there are any morals to this story, they are: (1.) pay your property taxes on time, and (2.) if you want to invest, be sure to find a competent legal advisor with experience in this area of investing. Although this may have whetted your appetite for large investment returns, you simply cannot read just one article and prudently expect to invest without major problems.
So, what happens if a person fails to pay their property taxes? And how do some people invest in the resulting tax liens?
Let's discuss the process:
Properties that are at least three installments behind are eligible to be added to the tax sale list. The minimum bid for the auction is set at the amount of property taxes owed, plus any penalties, auction fees, and public notice or advertisement costs.
At the public auction, the bidding starts with this minimum bid and proceeds until there are no more bids. The highest bidder receives a tax lien certificate (not a deed!) on the property in return, which is essentially a first-priority lien and one that is superior to most everything, even previously-recorded mortgages, except certain federal and state tax liens. (As you know, Uncle Sam always gets his money first, but the Governor does too! This is an interesting phenomenon because in Indiana liens typically attach to a property in the order -- or priority -- that they were filed, so tax liens are unique in this respect. This also explains one of the reasons why lenders want to escrow for property taxes when you have a loan secured with real estate. This way they know that the taxes are paid, and they won't have a higher-priority tax lien to resolve down the road.)
The purchaser of the tax lien must send a "notice of sale" letter to the owner and any other person(s) with a "substantial interest" in the property (e.g. the bank with a mortgage on the property) with all the information required under the Indiana Code at least three months before the redemption period expiration, which is 12 months from the date of sale. Of course, this requires a title search to be conducted to find out exactly who these "substantial" interest holders are. After these notices are sent, the tax lien holder asks the same court that issued the original judgment for delinquent taxes on the property to order the County Auditor to issue a tax deed if the property is not redeemed by the redemption period expiration date.
For the 12 months between the tax sale auction date and the expiration of the redemption period, the tax lien holder may pay the subsequent property taxes and special assessments. Immediately upon paying for any of these additional costs, including the title search mentioned above, it must be reported to the Auditor's office on a special form with the receipts. If this is not done, those additional expenses will not be reimbursed if the tax lien is redeemed by the property owner, who will probably not send you a "thank you" card in the mail either.
So, what if the property owner pays within the twelve month redemption period?
He or she pays interest -- and a lot of it!
For up to six months, the lien holder will receive a refund equal to 110% of the minimum sale price and 10% per year of the amount that the purchase price exceeds the minimum sale price. So, on an annualized basis, the return is much, much higher than 10% if redeemed within a short period after the sale.
If redeemed after six months from the sale, the property owner must pay 115% of the minimum sale price, plus 10% per annum of the amount that the purchase price exceeded the minimum sale price.
As a person can see, the returns to the investor are very high in comparison to other traditional investments, but there are several risks, including:
*The bidder must determine what it is that he or she is actually bidding on, as it could be a property with environmental contamination, a useless strip of ground only a few feet wide and hundreds of feet long, or a parcel with other major issues. There are no guarantees or warranties, so that can be a huge risk, too, if the bidder does not do his or her homework.
*The tax lien holder does not actually own the property during the twelve month redemption period, so the tax lien holder has no right to trespass on the property. Needless to say, the owners -- or vandals in general -- can damage the property during that time.
*If the winning bidder on the tax lien fails to have the cash or financing available to him or her to pay the County Treasurer the full amount of their winning bid by the deadline on the sale date, which is usually in the afternoon of the auction, the bid is not only canceled but the bidder is subject to a penalty equal to 25% of the total amount bid.
*If the tax lien holder fails to notify the owner and those with a substantial property interest, as discussed above, the court may say, "Sorry, you just lost everything that you bid on it because you didn't follow the rules!" So, a total loss of investment is possible.
As a person can see, where there is money to be made, there is also risk. Greater returns typically involve greater risk.
If there are any morals to this story, they are: (1.) pay your property taxes on time, and (2.) if you want to invest, be sure to find a competent legal advisor with experience in this area of investing. Although this may have whetted your appetite for large investment returns, you simply cannot read just one article and prudently expect to invest without major problems.
Thursday, October 4, 2007
A Retirement Dilemma
With many wondering how long Social Security will remain in place as we know it, more than ever the question, "How much money do I need to accumulate to retire?" is a common one with several "rules of thumb" as a potential answer.
One simple answer is to accumulate $100,000 in a retirement account for each $500 that you will need to live on each month. For example, you determine that you live on $2,500 a month and want to continue your current lifestyle in retirement. In that case, using this rule of thumb, you should accumulate $500,000.
($2,500 / $500 = 5 and $100,000 X 5 = $500,000)
The theory behind this is that a 6% return on the principal amount you have invested is a sustainable rate for a well-diversified portfolio. Under this method, you will never theoretically need to spend the principal invested, but only the money it produces. This is important because whether you live until you are age 67 or 107, you will not "run out of money" if only the earnings are spent. After all, you probably don't want to be trying to find a job at age 90 because your bank account is empty.
This meets another good question, namely, "How can I accumulate such an amount of money?"
Certainly, taking advantage of employer-provided retirement plans can help, such as a 401(k) account, as many will even match funds up to a certain percentage. Traditional and Roth IRAs are also available on a personal level. (All of these provide certain tax benefits as well.)
Large amounts can be accumulated, but keeping time on your side will make all of the difference. Although unconfirmed, Albert Einstein is credited by many sources with declaring that the power of compounding interest is the most powerful force in the universe.
To illustrate, consider these three scenarios:
(1.) It would take 30 years to accumulate $500,000 if a person invested about $498 per month and received a 6% return per year on the money they invested.
(2.) If the same scenario was put into place just five years later, and the person only had 25 years to invest, it would take setting aside over $721 per month.
(3.) If the person puts off investing for an additional five years, and there is only 20 years left to invest, it would take slightly over $1,082 per month to accumulate $500,000.
Please know there are certain negative arguments made about this rule-of-thumb of $100,000 invested for every $500 per month needed, especially those questioning sustainable rates of return and future inflation considerations; however, it seems to be a very simple one to set initial goals to. Once you're on-track to achieve this, those and other issues can be considered too.
One simple answer is to accumulate $100,000 in a retirement account for each $500 that you will need to live on each month. For example, you determine that you live on $2,500 a month and want to continue your current lifestyle in retirement. In that case, using this rule of thumb, you should accumulate $500,000.
($2,500 / $500 = 5 and $100,000 X 5 = $500,000)
The theory behind this is that a 6% return on the principal amount you have invested is a sustainable rate for a well-diversified portfolio. Under this method, you will never theoretically need to spend the principal invested, but only the money it produces. This is important because whether you live until you are age 67 or 107, you will not "run out of money" if only the earnings are spent. After all, you probably don't want to be trying to find a job at age 90 because your bank account is empty.
This meets another good question, namely, "How can I accumulate such an amount of money?"
Certainly, taking advantage of employer-provided retirement plans can help, such as a 401(k) account, as many will even match funds up to a certain percentage. Traditional and Roth IRAs are also available on a personal level. (All of these provide certain tax benefits as well.)
Large amounts can be accumulated, but keeping time on your side will make all of the difference. Although unconfirmed, Albert Einstein is credited by many sources with declaring that the power of compounding interest is the most powerful force in the universe.
To illustrate, consider these three scenarios:
(1.) It would take 30 years to accumulate $500,000 if a person invested about $498 per month and received a 6% return per year on the money they invested.
(2.) If the same scenario was put into place just five years later, and the person only had 25 years to invest, it would take setting aside over $721 per month.
(3.) If the person puts off investing for an additional five years, and there is only 20 years left to invest, it would take slightly over $1,082 per month to accumulate $500,000.
Please know there are certain negative arguments made about this rule-of-thumb of $100,000 invested for every $500 per month needed, especially those questioning sustainable rates of return and future inflation considerations; however, it seems to be a very simple one to set initial goals to. Once you're on-track to achieve this, those and other issues can be considered too.
Wednesday, October 3, 2007
Has Idaho Lost Its Potatoes?
An interesting find in my change yesterday was a new 2007 Idaho quarter.
If I were to ask you what you thought would be on the Idaho quarter, what would you say? I've asked several people already, and they've all said a potato. I would have said the same.
That's incorrect though. It's a Peregrine Falcon, and I'm still trying to figure out why.
Can anyone enlighten me why this carnivorous -- sometimes even cannibalistic -- bird represents Idaho? Curious minds want to know.
UPDATE:
This bird may represent Idaho on the quarter, but it seems even those from Idaho don't necessarily approve. An online poll conducted by KTVB, an Idaho news group, indicated more than 75 percent of people who voted on the coin did not like the design.
According to this same news group, the Peregrine Falcon was picked because of Idaho's role in removing the raptor from the Endangered Species List.
Still, the potato seems like a better choice given Idaho grows more potatoes than any other U.S. region, producing about one-third of the U.S. production annually, according to the Idaho Potato Commission. The Commission also says that potatoes contribute $2.5 billion or 15% of Idaho's gross state product.
If I were to ask you what you thought would be on the Idaho quarter, what would you say? I've asked several people already, and they've all said a potato. I would have said the same.
That's incorrect though. It's a Peregrine Falcon, and I'm still trying to figure out why.
Can anyone enlighten me why this carnivorous -- sometimes even cannibalistic -- bird represents Idaho? Curious minds want to know.
UPDATE:
This bird may represent Idaho on the quarter, but it seems even those from Idaho don't necessarily approve. An online poll conducted by KTVB, an Idaho news group, indicated more than 75 percent of people who voted on the coin did not like the design.
According to this same news group, the Peregrine Falcon was picked because of Idaho's role in removing the raptor from the Endangered Species List.
Still, the potato seems like a better choice given Idaho grows more potatoes than any other U.S. region, producing about one-third of the U.S. production annually, according to the Idaho Potato Commission. The Commission also says that potatoes contribute $2.5 billion or 15% of Idaho's gross state product.
Monday, October 1, 2007
A New Twist on "Forever"
Everything we buy seems to be getting more expensive almost by the day, whether it is gasoline, a gallon of milk, a McDonald's value meal, or even first-class postage stamps. These are just some of the many items that you may have noticed have risen in price lately. With this last item, the postage stamp, something very interesting has happened recently, and it could be called the most pure marketing genius to ever come from the halls of government: the "Forever Stamp".
In May 2007, the United States Postal Service (USPS) introduced this latest innovation, which depicts an image of the Liberty Bell and the word "forever" on it. The truly unique aspect, however, is that the stamp will be good for mailing first-class letters up to one-ounce in weight anytime in the future, regardless of price changes. So, it's good for -- well -- forever!
While this may be a great marketing tool to help justify the two cent increase that went along with the rollout of this new stamp, it also could be viewed as a zero percent interest rate loan made to the post office through millions of these mini "gift certificates" that they have had printed. Sure, each is only valued at forty-one cents, but since they have printed millions upon millions of them the dollar amount becomes much more significant. Consider each person in the United States has a few lying around, while many of the stamps will either be lost or somehow destroyed, and you can see the benefits to the USPS.
But while this event marks yet another two-cent postage increase, provides a zero-percent interest loan to the postal system, and saves the USPS the hassle of printing, distributing, and selling millions of "make up" stamps (the stamps that "make up" the difference between the old postage rate and the new one) in future years when rates undoubtedly will increase again, could this new stamp and concept be good for consumers too?
Since the postage rates seem to always be rising, could this be a quirky, yet viable investment opportunity? After all, if a person can literally use them forever -- or sell them to someone else to be used in the future -- could someone reap the benefits of "postage rate inflation" by hoarding these unique stamps?
A little bit of research was necessary to answer that question, namely discovering what postage rates have been in the past and exactly when they have changed. Although "past performance is not indicative of future results" as they say in many investment disclosures, the past postage rates should tell us if we are on to something, as off-the-beaten path as this investment idea may seem.
An internet website for the Postal Regulatory Commission (http://www.prc.gov/) yielded the results we needed, which is summarized below, showing the first day the rate became available and the postage rate for the first ounce of a first-class letter:
Date:
Rate ($):
July 1, 1999
0.02
July 6, 1932
0.03
August 1, 1958
0.04
January 7, 1963
0.05
January 7, 1968
0.06
May 16, 1971
0.08
March 2, 1974
0.10
December 31, 1975
0.13
May 29, 1978
0.15
March 22, 1981
0.18
November 1, 1981
0.20
February 17, 1985
0.22
April 3, 1988
0.25
February 3, 1991
0.29
January 1, 1995
0.32
January 10, 1999
0.33
January 7, 2001
0.34
June 30, 2002
0.37
January 8, 2006
0.39
May 14, 2007
0.41
At first glance, the rate hikes appear to have grown by leaps-and-bounds, but it is important to keep in mind that although the postage rates have risen from only two cents in 1919 to forty-one cents today, the increases have occurred over roughly eighty-eight years.
Applying this to investments, if you made an investment of two cents in 1919, which ultimately returned a total of forty-one cents in 2007, the result is an annual return of less than 3.5%.
With many interest rates currently available on money market accounts and certificates of deposit currently between 4 to 5 percent -- or even slightly more -- it appears that those are much better returns than hoarding postage stamps for use or to sell in the future, yet it may make for a much less interesting dinner conversation…
In May 2007, the United States Postal Service (USPS) introduced this latest innovation, which depicts an image of the Liberty Bell and the word "forever" on it. The truly unique aspect, however, is that the stamp will be good for mailing first-class letters up to one-ounce in weight anytime in the future, regardless of price changes. So, it's good for -- well -- forever!
While this may be a great marketing tool to help justify the two cent increase that went along with the rollout of this new stamp, it also could be viewed as a zero percent interest rate loan made to the post office through millions of these mini "gift certificates" that they have had printed. Sure, each is only valued at forty-one cents, but since they have printed millions upon millions of them the dollar amount becomes much more significant. Consider each person in the United States has a few lying around, while many of the stamps will either be lost or somehow destroyed, and you can see the benefits to the USPS.
But while this event marks yet another two-cent postage increase, provides a zero-percent interest loan to the postal system, and saves the USPS the hassle of printing, distributing, and selling millions of "make up" stamps (the stamps that "make up" the difference between the old postage rate and the new one) in future years when rates undoubtedly will increase again, could this new stamp and concept be good for consumers too?
Since the postage rates seem to always be rising, could this be a quirky, yet viable investment opportunity? After all, if a person can literally use them forever -- or sell them to someone else to be used in the future -- could someone reap the benefits of "postage rate inflation" by hoarding these unique stamps?
A little bit of research was necessary to answer that question, namely discovering what postage rates have been in the past and exactly when they have changed. Although "past performance is not indicative of future results" as they say in many investment disclosures, the past postage rates should tell us if we are on to something, as off-the-beaten path as this investment idea may seem.
An internet website for the Postal Regulatory Commission (http://www.prc.gov/) yielded the results we needed, which is summarized below, showing the first day the rate became available and the postage rate for the first ounce of a first-class letter:
Date:
Rate ($):
July 1, 1999
0.02
July 6, 1932
0.03
August 1, 1958
0.04
January 7, 1963
0.05
January 7, 1968
0.06
May 16, 1971
0.08
March 2, 1974
0.10
December 31, 1975
0.13
May 29, 1978
0.15
March 22, 1981
0.18
November 1, 1981
0.20
February 17, 1985
0.22
April 3, 1988
0.25
February 3, 1991
0.29
January 1, 1995
0.32
January 10, 1999
0.33
January 7, 2001
0.34
June 30, 2002
0.37
January 8, 2006
0.39
May 14, 2007
0.41
At first glance, the rate hikes appear to have grown by leaps-and-bounds, but it is important to keep in mind that although the postage rates have risen from only two cents in 1919 to forty-one cents today, the increases have occurred over roughly eighty-eight years.
Applying this to investments, if you made an investment of two cents in 1919, which ultimately returned a total of forty-one cents in 2007, the result is an annual return of less than 3.5%.
With many interest rates currently available on money market accounts and certificates of deposit currently between 4 to 5 percent -- or even slightly more -- it appears that those are much better returns than hoarding postage stamps for use or to sell in the future, yet it may make for a much less interesting dinner conversation…
Thursday, September 27, 2007
What It Costs To Live In Greene County: Part Two
A short while ago, I embarked on a pretty complex and ambitious project to attempt to answer the question, "What does it really cost the "average" person in Greene County to live?" Never having done payroll, I've had to do a little research, but I think I've gotten it pretty close.
As I said in Part One (http://http://magiccoalcity.blogspot.com/2007/09/recently-i-was-part-of-discussion-where.html), it became apparent rather quickly that there's a lot to think about when defining "average" because it's not as simple as it first seems. It really boils down to the fact that assumptions must be made. So, here goes:
We'll assume the household includes two people, but how the income is split among the two doesn't really matter. It could be that both make $9.98 per hour and work a forty-hour workweek throughout the year, it could be that only one of them brings in $19.98 per hour, or some other combination thereof. The main point is two people live in the household, and the annual household brings in $41,523 -- well, actually, I calculated these hourly salaries of $9.98 each will bring in $41,517, but close enough.
Another assumption will be that there are no children in the household. Yes, I know, it's not likely -- or maybe even "average" -- but kids will complicate this way too much. Their ages alone can greatly sway things; for example, will we be buying diapers or prom dresses? So, let's just argue that they're clearly more expensive and leave it at that. (Some studies have stated it costs more than two hundred thousand dollars to raise the "average" child from cradle through college, so I'll just leave it to those experts to come up with the figures on raising kids.)
We'll also assume that the employer of this "average" couple offers a 401(k) retirement plan and will match 50% of their contributions up to 6% of their pay. This average couple takes advantage of this benefit by contributing 6% of their pay. The employer will also offer health, life, and disability insurance for an assumed rate of $100 per pay period.
Now, back to the calculations:
To start the calculations, the median family income in Greene County in 1999, which was the most current U.S. Census information found, was $41,523. From this, we calculate that if each earns $9.98 per hour, they will earn a combined $41,517 for the year. Like I said before, there's some rounding error here, but it is close enough. Dividing this by the twenty-six two-week pay periods in the year, this amounts to gross combined compensation of $1,596.80 per two-week pay period.
If 6% is contributed to the employees' 401(k) retirement account, a total of $95.81 per pay is removed from this amount before income taxes. Combining this amount with an $8,000 IRA contribution each year (this will be talked about in another part of the series), the retirement deduction for tax purposes should be $10,491.06. On the couple's 2007 tax return, taxable income is further reduced by the standard deduction of $10,700 and personal exemptions of $6,800; therefore, taxable income will be $13,526 for the year. Taxed at the 2007 percentage of 10% for this tax bracket (up to $15,600 per year for those married & filing jointly), total federal income tax should be $1,353 or $52.02 per pay period. The employees' share of Social Security will be 6.2% or $99 per pay. Medicare is 1.45% or $23.15 per pay. Of course, the Governor will want his share, too, which amounts to 3.4% for the State of Indiana or $17.69. The county will get 1.1%, or $5.72, as well.
This leaves $1,203.41 net per pay period, which was calculated as summarized below:
$1,596.80
Gross Pay ($41,517 / 26 pay periods per year)
<95.81>
401(k) Deduction
<52.02>
Federal Income Tax
<17.69>
State Income Tax
<99.00>
Social Security
<23.15>
Medicare
<5.72>
County Tax
<100.00>
Estimated Employer Health, Life, & Disability Insurance
$1,203
Net "Take-Home" Pay (Rounded)
Yearly, of course, this amounts to $31,288.52 "brought home" to spend as needed -- or $2,607.38 per month.
So, now that we've estimated what will be brought home, we'll look at "average" monthly expenses next in Part Three…
As I said in Part One (http://http://magiccoalcity.blogspot.com/2007/09/recently-i-was-part-of-discussion-where.html), it became apparent rather quickly that there's a lot to think about when defining "average" because it's not as simple as it first seems. It really boils down to the fact that assumptions must be made. So, here goes:
We'll assume the household includes two people, but how the income is split among the two doesn't really matter. It could be that both make $9.98 per hour and work a forty-hour workweek throughout the year, it could be that only one of them brings in $19.98 per hour, or some other combination thereof. The main point is two people live in the household, and the annual household brings in $41,523 -- well, actually, I calculated these hourly salaries of $9.98 each will bring in $41,517, but close enough.
Another assumption will be that there are no children in the household. Yes, I know, it's not likely -- or maybe even "average" -- but kids will complicate this way too much. Their ages alone can greatly sway things; for example, will we be buying diapers or prom dresses? So, let's just argue that they're clearly more expensive and leave it at that. (Some studies have stated it costs more than two hundred thousand dollars to raise the "average" child from cradle through college, so I'll just leave it to those experts to come up with the figures on raising kids.)
We'll also assume that the employer of this "average" couple offers a 401(k) retirement plan and will match 50% of their contributions up to 6% of their pay. This average couple takes advantage of this benefit by contributing 6% of their pay. The employer will also offer health, life, and disability insurance for an assumed rate of $100 per pay period.
Now, back to the calculations:
To start the calculations, the median family income in Greene County in 1999, which was the most current U.S. Census information found, was $41,523. From this, we calculate that if each earns $9.98 per hour, they will earn a combined $41,517 for the year. Like I said before, there's some rounding error here, but it is close enough. Dividing this by the twenty-six two-week pay periods in the year, this amounts to gross combined compensation of $1,596.80 per two-week pay period.
If 6% is contributed to the employees' 401(k) retirement account, a total of $95.81 per pay is removed from this amount before income taxes. Combining this amount with an $8,000 IRA contribution each year (this will be talked about in another part of the series), the retirement deduction for tax purposes should be $10,491.06. On the couple's 2007 tax return, taxable income is further reduced by the standard deduction of $10,700 and personal exemptions of $6,800; therefore, taxable income will be $13,526 for the year. Taxed at the 2007 percentage of 10% for this tax bracket (up to $15,600 per year for those married & filing jointly), total federal income tax should be $1,353 or $52.02 per pay period. The employees' share of Social Security will be 6.2% or $99 per pay. Medicare is 1.45% or $23.15 per pay. Of course, the Governor will want his share, too, which amounts to 3.4% for the State of Indiana or $17.69. The county will get 1.1%, or $5.72, as well.
This leaves $1,203.41 net per pay period, which was calculated as summarized below:
$1,596.80
Gross Pay ($41,517 / 26 pay periods per year)
<95.81>
401(k) Deduction
<52.02>
Federal Income Tax
<17.69>
State Income Tax
<99.00>
Social Security
<23.15>
Medicare
<5.72>
County Tax
<100.00>
Estimated Employer Health, Life, & Disability Insurance
$1,203
Net "Take-Home" Pay (Rounded)
Yearly, of course, this amounts to $31,288.52 "brought home" to spend as needed -- or $2,607.38 per month.
So, now that we've estimated what will be brought home, we'll look at "average" monthly expenses next in Part Three…
Wednesday, September 26, 2007
Social Entrepreneurship
A business professor from my alma mater was recently telling me about a new program at the School of Business, called "social entrepreneurship." What is a "social entrepreneur"? Well, the online encyclopedia, Wikipedia, defines a "social entrepreneur" as:
"… someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to make social change. Whereas business entrepreneurs typically measure performance in profit and return, social entrepreneurs assess their success in terms of the impact they have on society. While social entrepreneurs often work through nonprofits and citizen groups, many work in the private and governmental sectors."
Essentially, social entrepreneurs kill "two birds (or more) with one stone" by providing a needed service and/or product to the community, while addressing other civic issues all at the same time. As the definition states, success is not measured in dollars but in the company or group's impact.
In my opinion, one prime example of social entrepreneurship is located in Greene County's neighbor to the east: Monroe County. The not-for-profit organization I'm thinking of is called Bloomington Restorations, Inc.
What do they do?
Bloomington Restorations, Inc. does a number of things for the community, but it seems to me that they really help address these areas through their work:
*Blighted properties
*Historic preservation
*Affordable housing
*Improving neighborhoods
In many instances, this group will purchase a historic, yet neglected property in the community. Through donations and grants, they revitalize the property while also keeping true to the historic architecture of the exterior of the home. Upon completion, they market the home for typically much less than the total dollars invested in the remodeling (that's where the donations and grants come into play). The buyer agrees to keep the historic architecture of the home's exterior intact, and they also agree not to sell the property for a profit for a set number of years.
When you look at the big picture, this not-for-profit group takes a once-blighted property, revitalizes it, improves the overall neighborhood by doing so, addresses affordable housing issues, and maintains historic homes for future generations -- all at the same time. Throw in the fact that materials, supplies, and labor can be purchased locally to have an even more positive economic impact, and you really have a wonderful program!
To learn more about this organization, visit their website at: http://www.bloomingtonrestorations.org/
It seems to me that we could use a group like that here. What do you think Greene County?
"… someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to make social change. Whereas business entrepreneurs typically measure performance in profit and return, social entrepreneurs assess their success in terms of the impact they have on society. While social entrepreneurs often work through nonprofits and citizen groups, many work in the private and governmental sectors."
Essentially, social entrepreneurs kill "two birds (or more) with one stone" by providing a needed service and/or product to the community, while addressing other civic issues all at the same time. As the definition states, success is not measured in dollars but in the company or group's impact.
In my opinion, one prime example of social entrepreneurship is located in Greene County's neighbor to the east: Monroe County. The not-for-profit organization I'm thinking of is called Bloomington Restorations, Inc.
What do they do?
Bloomington Restorations, Inc. does a number of things for the community, but it seems to me that they really help address these areas through their work:
*Blighted properties
*Historic preservation
*Affordable housing
*Improving neighborhoods
In many instances, this group will purchase a historic, yet neglected property in the community. Through donations and grants, they revitalize the property while also keeping true to the historic architecture of the exterior of the home. Upon completion, they market the home for typically much less than the total dollars invested in the remodeling (that's where the donations and grants come into play). The buyer agrees to keep the historic architecture of the home's exterior intact, and they also agree not to sell the property for a profit for a set number of years.
When you look at the big picture, this not-for-profit group takes a once-blighted property, revitalizes it, improves the overall neighborhood by doing so, addresses affordable housing issues, and maintains historic homes for future generations -- all at the same time. Throw in the fact that materials, supplies, and labor can be purchased locally to have an even more positive economic impact, and you really have a wonderful program!
To learn more about this organization, visit their website at: http://www.bloomingtonrestorations.org/
It seems to me that we could use a group like that here. What do you think Greene County?
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