America has fallen in love with the TV show named "Extreme Makeover," which is an ABC production where a family struggling to make ends meet receives a new home, complete with fabulous furnishings. The building materials, labor, appliances, and even a vacation for the family to be out of town during the construction is all donated by show sponsors, contractors, and the local community. The episodes tend to be a tear-jerking journey of the family's past woes and a celebration of their new start, surrounded by the outpouring of giving in their community to them.
Call me negative, but I've always asked myself what happens to the family when they get their new property tax bill. After all, they've taken a typically very distressed property, torn it down, and built a mini-mansion in it's place. It may be looking a gift horse in the mouth, but it's a very real issue nonetheless.
Well, a recent news article forwarded to me took my thought process a bit further: what happens when this family goes out and mortgages their new mini-mansion and can't pay the monthly bill?
Think it doesn't happen? It happens:
http://www.wsbtv.com/news/16980412/detai...
As feel-good as the TV show may be, there's still a story to tell after the production lights have dimmed… and it's not always pretty.
Perhaps, the show is the equivalent of giving a person an aspirin for a headache when the real problem is a brain tumor. In other words, the new home may be a solution to the symptoms, not the true underlying issues.
Instead, maybe the family really needs health insurance, assistance with food or daycare, or additional training or education to land that better-paying job. Each situation would be different, that's for sure, but these may be some of the true underlying issues -- not the need for a mini-mansion -- however great a gift that may be.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Wednesday, July 30, 2008
Tuesday, July 29, 2008
What We Think, What They Think
Americans have the tendency to only care about what we have to say about ourselves, our nation, and our economy.
It's useful from time-to-time to gain another perspective, though, by reading some newspapers abroad. For example, here's a link to what they're saying about the U.S. economy in the United Kingdom: http://www.guardian.co.uk/business/useconomy Other counties' perspectives of the U.S. will surely gain more importance to us as the U.S. economy becomes more tied to the global marketplace.
It also brings to mind that developing nations in the world could very well take huge leaps forward by jumping over steps in our own evolution of things.
(Think: telegraph => telephone => wireless & cellular)
As a nation, we have had to evolve through the various technological advances in telecommunications, expending vast amounts of capital and effort towards infrastructure to support these now archaic methods. Developing nations can jump right to cell towers and never have to install the vast amount of copper and fiber lines that we have had to develop.
Americans may have blazed the path, but still have the R&D bill to show for it.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
It's useful from time-to-time to gain another perspective, though, by reading some newspapers abroad. For example, here's a link to what they're saying about the U.S. economy in the United Kingdom: http://www.guardian.co.uk/business/useconomy Other counties' perspectives of the U.S. will surely gain more importance to us as the U.S. economy becomes more tied to the global marketplace.
It also brings to mind that developing nations in the world could very well take huge leaps forward by jumping over steps in our own evolution of things.
(Think: telegraph => telephone => wireless & cellular)
As a nation, we have had to evolve through the various technological advances in telecommunications, expending vast amounts of capital and effort towards infrastructure to support these now archaic methods. Developing nations can jump right to cell towers and never have to install the vast amount of copper and fiber lines that we have had to develop.
Americans may have blazed the path, but still have the R&D bill to show for it.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Friday, July 25, 2008
WHERE ARE WE NOW?!
A while back, I wrote about the virtues of applying for community block grants, and how Greene County as a whole could really improve with a few. OK, so I was exceptionally sarcastic on my post: http://www.magiccoalcity.blogspot.com/ Nonetheless, where are we now four months later?!
Call your County Commissioners, County Council, City Council, Mayors, and Town Boards. If we can have up to three of these Community Block Grants open at one time, and each can be for up to $500,000, then does Greene County have its applications in?
I'm not even suggesting at this point that we even have WON three grant applications, but HAVE WE EVEN APPLIED for these monies?!
Sadly, I think not.
Why???
Please hold your elected officials accountable by asking the simple question: "Why not?" You're paying in taxes, so why aren't we applying to get to get some of these monies back??
When someone has a good reason why we're not even applying for them, I'd be glad to listen. How great would $1.5 million dollars coming into our community to make a true difference every year be?!
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Call your County Commissioners, County Council, City Council, Mayors, and Town Boards. If we can have up to three of these Community Block Grants open at one time, and each can be for up to $500,000, then does Greene County have its applications in?
I'm not even suggesting at this point that we even have WON three grant applications, but HAVE WE EVEN APPLIED for these monies?!
Sadly, I think not.
Why???
Please hold your elected officials accountable by asking the simple question: "Why not?" You're paying in taxes, so why aren't we applying to get to get some of these monies back??
When someone has a good reason why we're not even applying for them, I'd be glad to listen. How great would $1.5 million dollars coming into our community to make a true difference every year be?!
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Thursday, July 24, 2008
A Piggy Bank, Not a Cash Cow
Investments in real estate have been quite lucrative for many people, but before you buy several properties to begin your own real estate empire, there is a lot to consider.
Expectations should be set because not all properties work the same way. For example, residential rental property has its own set of "pros and cons" just like commercial property has its own. Unfortunately, there are many misconceptions. For one, many people mistakenly buy single-family residential dwellings with the expectation they will be "cash cows" stuffing big denominations in their pockets each month, but they typically work more like "piggy banks" instead, creating a savings account of sorts in the form of equity.
How do I know this? As a banker, I've seen borrowers do this time-and-time again. Some are successful with the right mind-set from the start, while others learn and adjust along the way, eventually becoming successful too. Another group winds up selling everything at a loss to get rid of the problems they didn't anticipate.
In fact, that seems to be the key: setting good expectations.
To illustrate, let's work backward to find out what amount of rent charged per month will make you break-even at "one-to-one" debt service coverage after expenses. That is banker-speak for what amount of rental income will be enough to cover the monthly mortgage payment and other normal expenses with the only "profit" being some principal amount paid down on the property each month. (As you may already know, a portion of each mortgage payment is directed toward the interest due and the remaining amount toward paying down the principal of the loan.)
The median single-family residence in Linton is valued at approximately $50,000, according to the 2000 Census and another recent housing study conducted for the city in 2005. For this price, the property will most likely be a two-bedroom home with one bathroom and situated on one city lot. (If you'd like to view current homes on the market, you can go to http://www.realtor.com/ and enter the city and state or zip code to search.)
For simplicity, we will finance this hypothetical home with a bank that will loan 100% of the purchase price, assuming we made an excellent purchase and it appraises for more. (This is not likely now due to current nationwide credit crunch, but even if this isn't the case, shouldn't the investor make at least as much as a bank would for lending the money to the project? So, using this argument, we will use a 100% loan on the property.)
Using a 7.5% interest rate (non-owner occupied homes are typically higher interest than owner-occupied property) and an amortization period of 360 months, the monthly payment will be about $350. Again, for simplicity, we will assume the home will not need any remodeling or repairs and is immediately available to rent. (This is very unlikely, too, but we will keep everything simple.)
The property tax on the home should be "market-based" and we just paid $50,000 for it. Applying the 3.66% tax rate (2006 payable 2007 rate) for the City of Linton to the $50,000 assessed value, the annual property tax bill will be $1,830. (Remember: there is no homestead or mortgage exemption available for rental property, but the new property tax relief MAY help this figure to go down in the future. I say "may" because the caps placed on rental property in 2009 will be 2% of assessed value. Remember, though, that property taxes are not only based on the rate, but the assessed values, so assessed values could go up overall.)
Maintenance will run, say, $500 per year. This arbitrary figure will cover a variety of miscellaneous items, such as fixing holes in the walls, replacing light bulbs missing or burned out when the tenant leaves, fixing a leaky toilet from time-to-time, and covering any winter heating costs or summertime lawn mowing fees when the property is vacant.
For argument's sake, the property and casualty insurance will run about $400 per year, but of course this can be impacted by many things, such as credit scores, past losses, deductibles, etc.
We will use only one month of "vacancy" expense for the year. If you are unfamiliar with this term, "vacancy" is defined as the money lost due either to renters not paying us, paying us with bad checks that are never collectable, or the property is simply empty and not rented to anyone for a time. Sometimes this is referred to as "vacancy & collection" expense, which is probably more accurate.
At this point, you should be starting to realize that the check each month from the tenants -- if you even get it -- is far from pure profit. Even if the expenses thus far are covered, you may be actually paying for the renter to stay there in the long run if you are not careful because of yet another important consideration: reserves.
When we talk about "reserves" it means those "big-ticket" items that will need to be replaced in future years, such as the roof, floor coverings, HVAC system, and exterior that will eventually need new paint or siding. Inexperienced landlords often overlook this important consideration, which can be a very costly mistake for them when these items eventually fail. After all, even though they are not monthly outgoing expenses, there will come the day that they will need to be replaced. If money is not collected and set aside, where will the money come from to replace the roof or any other expensive repairs or replacements?
(The alternative is bad, too, if these items are not maintained because the overall appearance of the property goes downhill -- and so does the quality of renter -- leading to more vacancy and collections expenses. Think: slumlord.)
An estimate of some of these major items is shown below, showing the item, estimated useful life in years, estimated cost to replace based on size of example property, and annual allocation (which will be further divided down into a monthly allocation later):
Roof - 20 - $ 4,000 - $ 200
Exterior - 20 - $ 2,500 - $ 125
Floor Coverings - 10 - $ 3,000 - $ 300
HVAC System - 20 - $ 4,000 - $ 200
Other - 20 - $ 1,000 - $ 50
Total Annual Allocation => $ 875
Keep in mind, too, that these are only estimates, as there are a wide variety of materials, brands, service providers, etc.
Total everything mentioned above on a monthly basis, such as $350.00 mortgage payment + $152.50 property taxes + $41.67 maintenance expense + $33.33 insurance + $72.92 reserves + $59.17 vacancy expense, and you will need to charge $710 per month (rounded) to just cover the loan payments and other expenses!
The only "profit" in this example besides the $10 (shown below) would be the principal that is paid down on the loan ("the piggy bank"), which in the first year will be less than $461 for the year, if all of the assumptions above go as planned. (Keep in mind if your vacancy rate goes up to two months, for example, even this profit is completely erased -- and then some.)
To illustrate how a simplified, annual income statement would look when everything goes "as planned" on the above-described property, please see below. Amounts in parenthesis ( ) signify a negative amount or a loss:
INCOME STATEMENT
Gross Income ($710 / month) - $ 8,520.00
Vacancy (1 month) - $ (710.00)
Gross Profit - $ 7,810.00
Insurance - $ (400)
Property Taxes - $ (1,830)
Maintenance - $ (500)
Net Operating Income - $ 5,080.00
Interest Expense (1st Year) - $ (3,734)
Estimated Reserves - $ (875)
Income After Expenses - $ 471.00
Principal Paid (1st Year) - $ (461)
Cash in Pocket - $ 10.00
Although the discussion and figures above may be discouraging, especially the amount of cash in your pocket after everything is accounted for, it is really meant to be thought-provoking.
Sure, from time-to-time, you may be money ahead from these calculations, but just then your a/c unit may go out...
A person must plan very well and do several calculations before jumping into real estate investing. However, the funny thing is, you don't have to be a landlord or renter to use these calculations. This is essentially what it costs to own a home (like the one in the example) long-term. After all, shouldn't you as a homeowner be building equity in your own home, just like the investor would? Or, are you treating your home like an ATM?
One last thought:
If this example was a business building that you owned and operated your business out of, are you really making money off of your business? To find out, you must separate out your real estate "business" from your actual business because, as an owner-occupant, you are really in two lines of business, whether you realized that or not. A business person should be maintaining his/her building, while setting aside reasonable reserves for the big ticket items that will eventually fail, plus make an income from their time and toil in his/her business too.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Expectations should be set because not all properties work the same way. For example, residential rental property has its own set of "pros and cons" just like commercial property has its own. Unfortunately, there are many misconceptions. For one, many people mistakenly buy single-family residential dwellings with the expectation they will be "cash cows" stuffing big denominations in their pockets each month, but they typically work more like "piggy banks" instead, creating a savings account of sorts in the form of equity.
How do I know this? As a banker, I've seen borrowers do this time-and-time again. Some are successful with the right mind-set from the start, while others learn and adjust along the way, eventually becoming successful too. Another group winds up selling everything at a loss to get rid of the problems they didn't anticipate.
In fact, that seems to be the key: setting good expectations.
To illustrate, let's work backward to find out what amount of rent charged per month will make you break-even at "one-to-one" debt service coverage after expenses. That is banker-speak for what amount of rental income will be enough to cover the monthly mortgage payment and other normal expenses with the only "profit" being some principal amount paid down on the property each month. (As you may already know, a portion of each mortgage payment is directed toward the interest due and the remaining amount toward paying down the principal of the loan.)
The median single-family residence in Linton is valued at approximately $50,000, according to the 2000 Census and another recent housing study conducted for the city in 2005. For this price, the property will most likely be a two-bedroom home with one bathroom and situated on one city lot. (If you'd like to view current homes on the market, you can go to http://www.realtor.com/ and enter the city and state or zip code to search.)
For simplicity, we will finance this hypothetical home with a bank that will loan 100% of the purchase price, assuming we made an excellent purchase and it appraises for more. (This is not likely now due to current nationwide credit crunch, but even if this isn't the case, shouldn't the investor make at least as much as a bank would for lending the money to the project? So, using this argument, we will use a 100% loan on the property.)
Using a 7.5% interest rate (non-owner occupied homes are typically higher interest than owner-occupied property) and an amortization period of 360 months, the monthly payment will be about $350. Again, for simplicity, we will assume the home will not need any remodeling or repairs and is immediately available to rent. (This is very unlikely, too, but we will keep everything simple.)
The property tax on the home should be "market-based" and we just paid $50,000 for it. Applying the 3.66% tax rate (2006 payable 2007 rate) for the City of Linton to the $50,000 assessed value, the annual property tax bill will be $1,830. (Remember: there is no homestead or mortgage exemption available for rental property, but the new property tax relief MAY help this figure to go down in the future. I say "may" because the caps placed on rental property in 2009 will be 2% of assessed value. Remember, though, that property taxes are not only based on the rate, but the assessed values, so assessed values could go up overall.)
Maintenance will run, say, $500 per year. This arbitrary figure will cover a variety of miscellaneous items, such as fixing holes in the walls, replacing light bulbs missing or burned out when the tenant leaves, fixing a leaky toilet from time-to-time, and covering any winter heating costs or summertime lawn mowing fees when the property is vacant.
For argument's sake, the property and casualty insurance will run about $400 per year, but of course this can be impacted by many things, such as credit scores, past losses, deductibles, etc.
We will use only one month of "vacancy" expense for the year. If you are unfamiliar with this term, "vacancy" is defined as the money lost due either to renters not paying us, paying us with bad checks that are never collectable, or the property is simply empty and not rented to anyone for a time. Sometimes this is referred to as "vacancy & collection" expense, which is probably more accurate.
At this point, you should be starting to realize that the check each month from the tenants -- if you even get it -- is far from pure profit. Even if the expenses thus far are covered, you may be actually paying for the renter to stay there in the long run if you are not careful because of yet another important consideration: reserves.
When we talk about "reserves" it means those "big-ticket" items that will need to be replaced in future years, such as the roof, floor coverings, HVAC system, and exterior that will eventually need new paint or siding. Inexperienced landlords often overlook this important consideration, which can be a very costly mistake for them when these items eventually fail. After all, even though they are not monthly outgoing expenses, there will come the day that they will need to be replaced. If money is not collected and set aside, where will the money come from to replace the roof or any other expensive repairs or replacements?
(The alternative is bad, too, if these items are not maintained because the overall appearance of the property goes downhill -- and so does the quality of renter -- leading to more vacancy and collections expenses. Think: slumlord.)
An estimate of some of these major items is shown below, showing the item, estimated useful life in years, estimated cost to replace based on size of example property, and annual allocation (which will be further divided down into a monthly allocation later):
Roof - 20 - $ 4,000 - $ 200
Exterior - 20 - $ 2,500 - $ 125
Floor Coverings - 10 - $ 3,000 - $ 300
HVAC System - 20 - $ 4,000 - $ 200
Other - 20 - $ 1,000 - $ 50
Total Annual Allocation => $ 875
Keep in mind, too, that these are only estimates, as there are a wide variety of materials, brands, service providers, etc.
Total everything mentioned above on a monthly basis, such as $350.00 mortgage payment + $152.50 property taxes + $41.67 maintenance expense + $33.33 insurance + $72.92 reserves + $59.17 vacancy expense, and you will need to charge $710 per month (rounded) to just cover the loan payments and other expenses!
The only "profit" in this example besides the $10 (shown below) would be the principal that is paid down on the loan ("the piggy bank"), which in the first year will be less than $461 for the year, if all of the assumptions above go as planned. (Keep in mind if your vacancy rate goes up to two months, for example, even this profit is completely erased -- and then some.)
To illustrate how a simplified, annual income statement would look when everything goes "as planned" on the above-described property, please see below. Amounts in parenthesis ( ) signify a negative amount or a loss:
INCOME STATEMENT
Gross Income ($710 / month) - $ 8,520.00
Vacancy (1 month) - $ (710.00)
Gross Profit - $ 7,810.00
Insurance - $ (400)
Property Taxes - $ (1,830)
Maintenance - $ (500)
Net Operating Income - $ 5,080.00
Interest Expense (1st Year) - $ (3,734)
Estimated Reserves - $ (875)
Income After Expenses - $ 471.00
Principal Paid (1st Year) - $ (461)
Cash in Pocket - $ 10.00
Although the discussion and figures above may be discouraging, especially the amount of cash in your pocket after everything is accounted for, it is really meant to be thought-provoking.
Sure, from time-to-time, you may be money ahead from these calculations, but just then your a/c unit may go out...
A person must plan very well and do several calculations before jumping into real estate investing. However, the funny thing is, you don't have to be a landlord or renter to use these calculations. This is essentially what it costs to own a home (like the one in the example) long-term. After all, shouldn't you as a homeowner be building equity in your own home, just like the investor would? Or, are you treating your home like an ATM?
One last thought:
If this example was a business building that you owned and operated your business out of, are you really making money off of your business? To find out, you must separate out your real estate "business" from your actual business because, as an owner-occupant, you are really in two lines of business, whether you realized that or not. A business person should be maintaining his/her building, while setting aside reasonable reserves for the big ticket items that will eventually fail, plus make an income from their time and toil in his/her business too.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Wednesday, July 23, 2008
Entrepreneurship Report Now Available
Back a few months ago, students in the Foundations of Entrepreneurship course at Marian College made a short presentation at the Linton City Council meeting. Along with this presentation, they prepared a written report for the City of Linton.
A hard copy of this report is now available at the Linton Public Library in the "Indiana" section. I dropped it off the other day. So, if you get the chance, be sure to take a look.
Special thanks to Professor Robert Schuttler for making this all possible.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
A hard copy of this report is now available at the Linton Public Library in the "Indiana" section. I dropped it off the other day. So, if you get the chance, be sure to take a look.
Special thanks to Professor Robert Schuttler for making this all possible.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Monday, July 21, 2008
There's a New Logo in Town
They're rolling out something new -- and it's not new, lower prices this time. It's a new look and logo.
Walmart is changing its logo, and it's getting a lot of press these days for it... at least in the business news headlines. In fact, the company seems to be making a huge deal out of its logo change. They've even set aside a page on their website to chronicle the evolution of their name and logo at http://walmartstores.com/AboutUs/8412.as...
But does it really matter?
Founder Sam Walton spent a lot of money on improving the company's trucking and logistics, and now they are one of the biggest -- and in some people's opinion, the best. He spent lots of money on check-out scanning and computer technology when this was still in its infancy to many competitors' jeers. This enabled the retailer to outperform these peers in later years because, for example, when you check out with six GI Joes with the Kung-Fu grip, it not only rings up your total, but reduces the store's inventory count by six, and orders six more from the distribution center -- all automatically.
I'm just not sure this very frugal founder, who reportedly still drove an old pick-up truck after becoming a multi-millionaire, would have approved such an expenditure. What dropping the hyphen and adding a sunburst will really do for the company's bottom line is a mystery to me. And frankly, I don't think it'll benefit the stockholders -- or the shoppers.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Walmart is changing its logo, and it's getting a lot of press these days for it... at least in the business news headlines. In fact, the company seems to be making a huge deal out of its logo change. They've even set aside a page on their website to chronicle the evolution of their name and logo at http://walmartstores.com/AboutUs/8412.as...
But does it really matter?
Founder Sam Walton spent a lot of money on improving the company's trucking and logistics, and now they are one of the biggest -- and in some people's opinion, the best. He spent lots of money on check-out scanning and computer technology when this was still in its infancy to many competitors' jeers. This enabled the retailer to outperform these peers in later years because, for example, when you check out with six GI Joes with the Kung-Fu grip, it not only rings up your total, but reduces the store's inventory count by six, and orders six more from the distribution center -- all automatically.
I'm just not sure this very frugal founder, who reportedly still drove an old pick-up truck after becoming a multi-millionaire, would have approved such an expenditure. What dropping the hyphen and adding a sunburst will really do for the company's bottom line is a mystery to me. And frankly, I don't think it'll benefit the stockholders -- or the shoppers.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Sunday, July 20, 2008
Charging Your Way to Tax-Free Living?
I came across an interesting theory on money and credit lately. Of course, it was posted on the internet, a good sign that it should receive some scrutiny...
A guy was thoroughly disgusted with the overall reliance and heavy-use of credit cards among Americans, but he said he knew why that was. After all, he said, the use of credit cards is equivalent to making tax-free money since money from loans is not taxed as earned income is.
[Be forewarned, there's lots of math ahead.]
His example was a person, who makes $30,000 per year could have the same lifestyle as another person making much more (in the $50's) just because the one making $30,000 and charging another, say, $15,000 wasn't having to pay the many taxes (say, 30%, he stated) that come out of one's paycheck on those credit card charges.
It's an interesting theory, one that I'd like to put pen to paper on, so here goes:
For now, let's put aside the fact that you'll have to pay it back someday. If your argument is that the amount charged is "tax-free" income, then only the $15,000 could be used with the 30% tax "inflation" factor shown as (X-0.3X) = $15,000 => 0.7X = $15,000 => X=$21,429 rounded. This amount, in addition to the $30,000 actual salary, would be the equivalent to a person making $51,429, who had to pay taxes on all of it at the said 30% rate.
To get to a point where this fictional person is "making" (or at least enjoying the lifestyle) of twice the amount of his/her actual earnings -- or $60,000 -- you would have to charge $42,857 on the card or cards, which is figured as follows: ($30,000 + (0.7X)) = $60,000 => subtract $30,000 from each side of the equation and => 0.7X = 30,000 => divide both sides by 0.7 => $42,857.
But, alas, you have to pay it back in reality:
So, since most credit cards charge a minimum monthly payment of 1 to 2% of the balance, this would equate to a $429 to $858 per month bill, depending on the card company. This would put this person, who makes $30,000 per year gross in actual compensation, in an immediate 17% to 34% debt-to-income ratio without any other outstanding debt considered.
Most banks, do not want to see any more than a 36% debt-to-income ratio when all debts are considered, although some will go to 40% in special circumstances. Therefore, you could charge that much is one year ($42,857), provided a card company would give a person 1.43 X's his/her annual salary in available credit; however, you'd only last one year charging things at this rate because of creating such a high debt-to-income ratio.
Of course, at that point, you'd be paying back debt on the card(s) for the rest of your life -- or at least 100 months paying even the $858 per month at a 19% interest rate. So, I'm not sure the "tax-free living" theory is exactly worth it, but this little run-through certainly helps to reinforce his disgust about the heavy-use of credit in America today.
It also makes me thankful that HP makes such a great financial calculator to test these theories without much work.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
A guy was thoroughly disgusted with the overall reliance and heavy-use of credit cards among Americans, but he said he knew why that was. After all, he said, the use of credit cards is equivalent to making tax-free money since money from loans is not taxed as earned income is.
[Be forewarned, there's lots of math ahead.]
His example was a person, who makes $30,000 per year could have the same lifestyle as another person making much more (in the $50's) just because the one making $30,000 and charging another, say, $15,000 wasn't having to pay the many taxes (say, 30%, he stated) that come out of one's paycheck on those credit card charges.
It's an interesting theory, one that I'd like to put pen to paper on, so here goes:
For now, let's put aside the fact that you'll have to pay it back someday. If your argument is that the amount charged is "tax-free" income, then only the $15,000 could be used with the 30% tax "inflation" factor shown as (X-0.3X) = $15,000 => 0.7X = $15,000 => X=$21,429 rounded. This amount, in addition to the $30,000 actual salary, would be the equivalent to a person making $51,429, who had to pay taxes on all of it at the said 30% rate.
To get to a point where this fictional person is "making" (or at least enjoying the lifestyle) of twice the amount of his/her actual earnings -- or $60,000 -- you would have to charge $42,857 on the card or cards, which is figured as follows: ($30,000 + (0.7X)) = $60,000 => subtract $30,000 from each side of the equation and => 0.7X = 30,000 => divide both sides by 0.7 => $42,857.
But, alas, you have to pay it back in reality:
So, since most credit cards charge a minimum monthly payment of 1 to 2% of the balance, this would equate to a $429 to $858 per month bill, depending on the card company. This would put this person, who makes $30,000 per year gross in actual compensation, in an immediate 17% to 34% debt-to-income ratio without any other outstanding debt considered.
Most banks, do not want to see any more than a 36% debt-to-income ratio when all debts are considered, although some will go to 40% in special circumstances. Therefore, you could charge that much is one year ($42,857), provided a card company would give a person 1.43 X's his/her annual salary in available credit; however, you'd only last one year charging things at this rate because of creating such a high debt-to-income ratio.
Of course, at that point, you'd be paying back debt on the card(s) for the rest of your life -- or at least 100 months paying even the $858 per month at a 19% interest rate. So, I'm not sure the "tax-free living" theory is exactly worth it, but this little run-through certainly helps to reinforce his disgust about the heavy-use of credit in America today.
It also makes me thankful that HP makes such a great financial calculator to test these theories without much work.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, "Riddle Me This".
Thursday, July 17, 2008
I Became a Multi-Millionaire Today!
Friends,
I don't like to brag, but I became a multi-millionaire today.
There's no need to contact me for a loan or a charitable gift because as soon as the money hits my account, I plan to escape to a private island to soak up the sun, sand, and surf.
From now on, my only job will be holding onto and sipping on the many Mai Tai's I'll be ordering from my attentive, private wait staff.
How did I accomplish this vast wealth?
Well, it was easy. I checked my e-mail this morning, and there it was. I've copied and pasted it in its entirety below:
Dear Sir,
As the Executor of the estate of Late Engr.Richard Megson; I seek your humble consent to present you as a next of kin to the sum of $17.1Million belonging to my Late Client who died intestate(without a will).
Upon your acceptance of this offer,i will prepare all necessary documents to support this claims and i assure you that it is completely legal and risk free. Respond for more details.
Yours in service
BARRISTER HENRY BILL.
Lawyer&Solicitor
Seriously, though... people fall for these e-mail scams daily.
There may be several variations, but they all work in the same way: to enrich the fraudster. If I were to contact this person, I'm sure I'd have to wire some money for taxes or a special fee or some sort of bribe for a foreign governmental official. This would be a few thousand dollars, but only a minute fraction of the millions I would be promised to receive, right?
I probably shouldn't have, but back several months ago, I gave in to temptation and actually replied to one and gave them the police department's phone number to contact me. Obviously, the international fraudster was too dumb -- or his English not good enough -- to figure out that he had been sent into the arms of the law because he actually e-mailed back saying that it was a wrong number, as I wasn't at that number.
I guess I can't fault the police -- maybe s/he didn't recognize the Nigerian accent -- but the dispatcher had obviously been mouthpiece-to-mouthpiece over the phone with an international criminal, committing all sorts of punishable crimes. It's too bad you can't cuff people over the telephone lines!
In any event, many people feel it goes without saying that, "if it's too good to be true, it probably is" but I'm going to say it anyway. If you receive one of these e-mails or letters, saying you have some huge inheritance from someone you never heard of, a sizeable foreign lottery winning without actually ever buying a lottery ticket, or some other big prize, just delete it or throw it away.
I probably shouldn't have even replied to the one I just spoke about because s/he probably sold my e-mail address to every spammer out there. Good thing I have good spam filters!
And sadly, I guess there will be no sun, sand, and surf for me, nor a private island or attentive wait staff or endless Mai Tai's either...
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
I don't like to brag, but I became a multi-millionaire today.
There's no need to contact me for a loan or a charitable gift because as soon as the money hits my account, I plan to escape to a private island to soak up the sun, sand, and surf.
From now on, my only job will be holding onto and sipping on the many Mai Tai's I'll be ordering from my attentive, private wait staff.
How did I accomplish this vast wealth?
Well, it was easy. I checked my e-mail this morning, and there it was. I've copied and pasted it in its entirety below:
Dear Sir,
As the Executor of the estate of Late Engr.Richard Megson; I seek your humble consent to present you as a next of kin to the sum of $17.1Million belonging to my Late Client who died intestate(without a will).
Upon your acceptance of this offer,i will prepare all necessary documents to support this claims and i assure you that it is completely legal and risk free. Respond for more details.
Yours in service
BARRISTER HENRY BILL.
Lawyer&Solicitor
Seriously, though... people fall for these e-mail scams daily.
There may be several variations, but they all work in the same way: to enrich the fraudster. If I were to contact this person, I'm sure I'd have to wire some money for taxes or a special fee or some sort of bribe for a foreign governmental official. This would be a few thousand dollars, but only a minute fraction of the millions I would be promised to receive, right?
I probably shouldn't have, but back several months ago, I gave in to temptation and actually replied to one and gave them the police department's phone number to contact me. Obviously, the international fraudster was too dumb -- or his English not good enough -- to figure out that he had been sent into the arms of the law because he actually e-mailed back saying that it was a wrong number, as I wasn't at that number.
I guess I can't fault the police -- maybe s/he didn't recognize the Nigerian accent -- but the dispatcher had obviously been mouthpiece-to-mouthpiece over the phone with an international criminal, committing all sorts of punishable crimes. It's too bad you can't cuff people over the telephone lines!
In any event, many people feel it goes without saying that, "if it's too good to be true, it probably is" but I'm going to say it anyway. If you receive one of these e-mails or letters, saying you have some huge inheritance from someone you never heard of, a sizeable foreign lottery winning without actually ever buying a lottery ticket, or some other big prize, just delete it or throw it away.
I probably shouldn't have even replied to the one I just spoke about because s/he probably sold my e-mail address to every spammer out there. Good thing I have good spam filters!
And sadly, I guess there will be no sun, sand, and surf for me, nor a private island or attentive wait staff or endless Mai Tai's either...
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Wednesday, July 16, 2008
Pearls Before Breakfast, But For Only Very Few
A short while back, I was reading an article in the Washington Post about Joshua Bell, entitled Pearls Before Breakfast. http://www.washingtonpost.com/wp-dyn/content/article/2007/04/04/AR2007040401721.html If his name sounds familiar, Mr. Bell has ties to nearby Bloomington, Indiana. He is also known as one of the best violinists in the world today. If you choose not to click on the link above to read this lengthy, but very good article, I'll give you the condensed version here:
As a little experiment, Mr. Bell was asked to play in a subway one morning to every day commuters, playing a very rare and valuable Stradivarius violin. He would be dressed in normal street clothes, and there would be no indications, such as signage around him, to let people know who he really was. It would be just an ordinary morning with extraordinary music being played.
Experts were asked beforehand, including Bell himself, how many people would stop to listen. It was also hypothesized that he would receive quite a few donations in his opened violin case during his stint as a street musician. After all, tickets to a Joshua Bell concert are pricey, equating to a tidy sum for him as even measured by the minute played, not hour. In all, there were many guesses, but none as low as was the reality.
In fact, of the thousands of commuters that morning, it was the very rare person who even stopped for a moment. After those conducting this social experiment reviewed the tape from the hidden cameras placed in the subway, the only common theme was that small children always seemed to stop to listen -- at least for a moment until their parents whisked them away.Many people interviewed later had not even noticed there was a "street musician" in the subway that day.
A world-renowned violinist playing extremely difficult compositions on a multi-million dollar musical instrument for free to thousands of people passing by -- and only 7 people even stopped to listen. Total tips in his violin case after playing that morning was a measly $32.17, given by about 27 people, who were almost all on the run. And as the Washington Post writer points out, yes, some gave pennies. Very interesting to say the least.
There may have been pearls before breakfast, but very few even accepted them.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
As a little experiment, Mr. Bell was asked to play in a subway one morning to every day commuters, playing a very rare and valuable Stradivarius violin. He would be dressed in normal street clothes, and there would be no indications, such as signage around him, to let people know who he really was. It would be just an ordinary morning with extraordinary music being played.
Experts were asked beforehand, including Bell himself, how many people would stop to listen. It was also hypothesized that he would receive quite a few donations in his opened violin case during his stint as a street musician. After all, tickets to a Joshua Bell concert are pricey, equating to a tidy sum for him as even measured by the minute played, not hour. In all, there were many guesses, but none as low as was the reality.
In fact, of the thousands of commuters that morning, it was the very rare person who even stopped for a moment. After those conducting this social experiment reviewed the tape from the hidden cameras placed in the subway, the only common theme was that small children always seemed to stop to listen -- at least for a moment until their parents whisked them away.Many people interviewed later had not even noticed there was a "street musician" in the subway that day.
A world-renowned violinist playing extremely difficult compositions on a multi-million dollar musical instrument for free to thousands of people passing by -- and only 7 people even stopped to listen. Total tips in his violin case after playing that morning was a measly $32.17, given by about 27 people, who were almost all on the run. And as the Washington Post writer points out, yes, some gave pennies. Very interesting to say the least.
There may have been pearls before breakfast, but very few even accepted them.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Sunday, July 13, 2008
Another American Icon Bites the Dust
The Wall Street Journal reported today that Anheuser-Busch has finally agreed to be purchased for $70 per share by Belgo-Brazilian brewer InBev. The merger will form the largest brewer in the world and the fourth largest consumer product company in the world.
Tracing its roots back to Eberhard Anheuser and Adolphus Busch (Anheuser's son-in-law), the brewing company has been in existence since the 1860's. It's seen many tests, including Prohibition when it sold root beer and ice cream, among other products. When Prohibition ended, it's said that the company sent a Clydesdale-powered wagon straight up to 1600 Pennsylvania Avenue with a load of beer for the President.
It currently produces about half the beer produced in the U.S., and approximately 6,000 people are employed in St Louis by Anheuser-Busch. Of course, as with any merger, nothing is to change at the company due to the merger; however, many employees should be rightfully concerned about their futures with the company in my humble opinion.
Although the company has agreed to the merger, shareholders and regulators must still approve. Reportedly, InBev brews beer in Cuba, and it is thought that fact may be a hang-up for American regulators in approving the deal.
While in college, I actually spoke with one of the master brewers at Anheuser about pursuing fermentation sciences in graduate school. (No, seriously. What else are you supposed to do with a dual major in biology and finance?) I learned that a doctorate in fermentation sciences was only available -- at least at the time -- at UC Davis and The University of Munich in Germany. Who would have thought at that point, I'd wind up in banking!
In any event, another American icon appears to be fading... that is if the shareholders and regulators approve...
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Tracing its roots back to Eberhard Anheuser and Adolphus Busch (Anheuser's son-in-law), the brewing company has been in existence since the 1860's. It's seen many tests, including Prohibition when it sold root beer and ice cream, among other products. When Prohibition ended, it's said that the company sent a Clydesdale-powered wagon straight up to 1600 Pennsylvania Avenue with a load of beer for the President.
It currently produces about half the beer produced in the U.S., and approximately 6,000 people are employed in St Louis by Anheuser-Busch. Of course, as with any merger, nothing is to change at the company due to the merger; however, many employees should be rightfully concerned about their futures with the company in my humble opinion.
Although the company has agreed to the merger, shareholders and regulators must still approve. Reportedly, InBev brews beer in Cuba, and it is thought that fact may be a hang-up for American regulators in approving the deal.
While in college, I actually spoke with one of the master brewers at Anheuser about pursuing fermentation sciences in graduate school. (No, seriously. What else are you supposed to do with a dual major in biology and finance?) I learned that a doctorate in fermentation sciences was only available -- at least at the time -- at UC Davis and The University of Munich in Germany. Who would have thought at that point, I'd wind up in banking!
In any event, another American icon appears to be fading... that is if the shareholders and regulators approve...
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Friday, July 11, 2008
HTC: Phase I Ended
Back in March, I posted about Greene County becoming one of nine pilot communities within the State of Indiana for the Home Town Competitiveness program. http://gcdailyworld.com/blogs/chriswathe...
Yesterday, the Steering Committee travelled to Bedford to celebrate the end to Phase I of the program, the "assessment phase," with the other pilot communities involved. This included exchanging ideas, stories, and solutions to common issues. It also involved an afternoon address by Lt. Governor Becky Skillman, who has continued to be very excited about this initiative to revitalize Indiana's rural communities.
During this all-day event, the Greene County group was reminded again and again by the other communities present that our problems share many similarities with their community's problems. Retaining youth, supporting entrepreneurship, developing "community chests" for re-investment into the community, and developing new leaders is challenging not only for those of us in Greene County, but also other counties and communities within our state. And those issues are very similar to communities even in Nebraska, where the HTC program originated, as we had a representative from Nebraska's program explain to the group earlier in the day.
An interesting analogy was given about hometowns, their youth, and baseball, too, which I'd like to share:
The speaker explained that in baseball you send a batter to the box after much training and conditioning. The batter's box is a confined area, and balls get hurled at the batter at great speeds. The batter's first goal, of course, is to hit the ball and advance to first base. When the batter arrives at first base, there is a coach there to advise the batter. When the second batter comes to bat, it's this batter's main goal to advance the first batter to second base. When arriving at second base, the first batter is furthest from where he started at -- from home -- and has no coach beside him. He then tries to advance to third base, where another coach is there to ultimately guide him back to home.
A small town's youth is a lot like those batters, he went on to explain. The confined area of the batter's box may have the same feel of a hometown to an 18 year old. They get trained and conditioned at home to go out in the world and have a lot of things hurled at them. They may go on to college, a technical school, or into the trades, where they may be furthest from home (2nd base). From that vantage point, they gain new perspective and have a different view from where they once were at home. Along the way, they will hopefully be guided by coaches, family, and mentors. And ultimately, they'll return home to help the team (our community) to become winners.
I thought that was a good analogy and worth sharing.
There was even a new acronym that entered my vocabulary yesterday: "C.A.V.E." people. No, these people do not live in dark, damp holes in the ground, but it's an acronym for "Citizens Against Virtually Everything". Boy, how true! There seems to be a few of these in each community, and although I've had the general concept of these small groups or people identified for many years, I'm glad to finally have an official label for them.
Another one-liner I thought summed things up well for smaller communities was this: rural economic development is like hand-to-hand combat, not about dropping big bombs. I think this goes back to an earlier blog post I had in mid-January http://gcdailyworld.com/blogs/chriswathe...
It seems best for economic development to maintain what they have, as a first priority. Not losing the businesses they have already helps to build a firm foundation to launch and develop additional businesses, which is a close second in priority.
As we move into Phase II of the HTC process, I think you'll see how this initiative will begin uniting people, increasing enthusiasm, engaging youth, introducing new ideas, starting discussions, and involving new people. It already has.
It might be useful when you attend or participate in HTC events, such as the recent Opportunity Retreat http://gcdailyworld.com/blogs/chriswathen/entry/18972/ , to look around the crowd and identify who is NOT there but SHOULD BE. A simple invitation may be all that's needed to get that person there.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
Yesterday, the Steering Committee travelled to Bedford to celebrate the end to Phase I of the program, the "assessment phase," with the other pilot communities involved. This included exchanging ideas, stories, and solutions to common issues. It also involved an afternoon address by Lt. Governor Becky Skillman, who has continued to be very excited about this initiative to revitalize Indiana's rural communities.
During this all-day event, the Greene County group was reminded again and again by the other communities present that our problems share many similarities with their community's problems. Retaining youth, supporting entrepreneurship, developing "community chests" for re-investment into the community, and developing new leaders is challenging not only for those of us in Greene County, but also other counties and communities within our state. And those issues are very similar to communities even in Nebraska, where the HTC program originated, as we had a representative from Nebraska's program explain to the group earlier in the day.
An interesting analogy was given about hometowns, their youth, and baseball, too, which I'd like to share:
The speaker explained that in baseball you send a batter to the box after much training and conditioning. The batter's box is a confined area, and balls get hurled at the batter at great speeds. The batter's first goal, of course, is to hit the ball and advance to first base. When the batter arrives at first base, there is a coach there to advise the batter. When the second batter comes to bat, it's this batter's main goal to advance the first batter to second base. When arriving at second base, the first batter is furthest from where he started at -- from home -- and has no coach beside him. He then tries to advance to third base, where another coach is there to ultimately guide him back to home.
A small town's youth is a lot like those batters, he went on to explain. The confined area of the batter's box may have the same feel of a hometown to an 18 year old. They get trained and conditioned at home to go out in the world and have a lot of things hurled at them. They may go on to college, a technical school, or into the trades, where they may be furthest from home (2nd base). From that vantage point, they gain new perspective and have a different view from where they once were at home. Along the way, they will hopefully be guided by coaches, family, and mentors. And ultimately, they'll return home to help the team (our community) to become winners.
I thought that was a good analogy and worth sharing.
There was even a new acronym that entered my vocabulary yesterday: "C.A.V.E." people. No, these people do not live in dark, damp holes in the ground, but it's an acronym for "Citizens Against Virtually Everything". Boy, how true! There seems to be a few of these in each community, and although I've had the general concept of these small groups or people identified for many years, I'm glad to finally have an official label for them.
Another one-liner I thought summed things up well for smaller communities was this: rural economic development is like hand-to-hand combat, not about dropping big bombs. I think this goes back to an earlier blog post I had in mid-January http://gcdailyworld.com/blogs/chriswathe...
It seems best for economic development to maintain what they have, as a first priority. Not losing the businesses they have already helps to build a firm foundation to launch and develop additional businesses, which is a close second in priority.
As we move into Phase II of the HTC process, I think you'll see how this initiative will begin uniting people, increasing enthusiasm, engaging youth, introducing new ideas, starting discussions, and involving new people. It already has.
It might be useful when you attend or participate in HTC events, such as the recent Opportunity Retreat http://gcdailyworld.com/blogs/chriswathen/entry/18972/ , to look around the crowd and identify who is NOT there but SHOULD BE. A simple invitation may be all that's needed to get that person there.
***
This blog post by Chris Wathen was also published in his Linton, Indiana based Greene County Daily World blog entitled, “Riddle Me This”.
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