Less chocolate, more income

September 30, 2011
She doesn’t look quite like this

Last month we started an impromptu feature in which we devote a post to displaying the horrible habits and lifestyle of a particular self-styled personal finance blogger. It’s part warning, part comedy. The inaugural post in the series was titled “Retard of the Week”, but lots of people left comments saying that they found that offensive. We respect that, so we’ve decided to change it.

We’re now calling it Retard of the Month. This month’s honoree is Mom’s Plans, which sounds like and is a mommy blog. But instead of offering pumpkin spice latte recipes and craft projects for her readers’ daughters and effeminate sons, the woman behind it recently chose to host a popular personal finance blog carnival. This reclassifies her as fair game.

The brains behind Mom’s Plans lists (oh God, does she love to list) her debts on her website. Rounding to the nearest thousand, they include $7000 on one credit card, $13,000 on another, $7000 on one student loan, and an incomprehensible $30,000 on her husband’s student loans (plural). However, she is making payments on these loans. At a rate that will take her decades to pay them off, but whatever. More to the point, she’s chosen a time at which she’s drowning in consumer debt to

a) dispense financial advice to whoever wants to hear it, oblivious to any irony;
b) have kids, which aren’t exactly free, and;
c) see how much she can reduce those balances while simultaneously refusing to get a freaking job.

By the way, she took a 16-month leave of absence after her most recent kid was born. You know, because when you add another economic liability to a house full of them, the last thing you want to do is go out and earn money.

This woman’s stated goal is to become a stay-at-home mom. Not an astronaut, not a research scientist, not even a hot dog cart vendor (which would require at least the discipline to get out of the house.) Her professional ambition is to watch Live with Regis & Kelly while wearing her jammies and visiting Amazon to order Halloween costumes for her kids. And it’s not as if she started off doing this. To hear her tell it, being a stay-at-home mom was something she was working towards.

Becoming a stay-at-home mom is not a “goal” for several reasons, the least of which is that a goal implies expending some effort. If you want to be a mom who stays at home, you have to a) spread your legs and b) stay at home. She already accomplished the first half of that, and to do the second half, all you have to do is not do anything.

Think about what society has chosen to value and chosen to dismiss. Incurring consumer debts of $57,000 is considered something worth sharing with one’s readership. Imagine if someone else – say a recent high school graduate with a burgeoning career and a knack for deferred gratification – proudly announced that he’d done the exact opposite of the Mom’s Plans lady and had accumulated $57,000 in assets. Here’s my car, here’s my townhome, here’s my motorcycle, here’s my furniture etc. People would deride him as materialistic. They’d leave comments reminding him of the importance of a balanced life, friends and family, no one likes a serial acquirer, etc.

Building assets is commendable. It’s something to be proud of. It proves that you contributed something of value to the marketplace, and received just rewards for doing so. Building liabilities, as Mom’s Plans is doing, is the exact opposite of this.

The husband has rung up 10 years of student loans while working on a couple of advanced degrees. A), why does it take so long to earn a master’s and a doctorate, and B) why is education the one commodity that doesn’t have to submit to cost-benefit scrutiny?

If you’re going to college for 10 years, even if you somehow get a free ride for the entire decade, your education should still have to justify itself somewhere along the line. You can talk all day long about the intangible, non-monetary benefits of an education, even an advanced one. Doubtless they exist. But they still require real outlays of that pedestrian concern called money. Penn Foster – a school that we’re guessing Mr. Mom’s Plans has never heard of, let alone considered enrolling in – will turn you into a carpenter for $700.

The median salary for an entry-level carpenter in the United States is around $40,000, which means that any Penn Foster grad who financed his tuition can pay the whole thing back within weeks. While learning a legitimate, honorable trade that will be in demand as long as the overeducated need someone to hammer their nails and drive their screws for them.

Let’s not forget the utter narcissism of it. It takes a particularly inconsequential kind of person to post her freaking grocery list online and consider it compelling content.

But it’s inspiring. And it’s sharing. Who are you to judge?

Who are we? Just people who make an effort (there’s that word again) to write worthwhile, purposeful, intelligent and helpful personal finance content, 3000 or so words of it a week.

If knowing that someone else bought a bag of quinoa and some soy milk inspires you, you need new heroes. Here are some people you can find legitimate inspiration from:

Jesus
Kurt Warner
Winston Churchill
John McCain
Stevie Wonder
Tammy Duckworth
John Milton
This guy.

One more thing. The URL is MomsPlans.com, but the introductory image on the main page reads “Mom’s Plan”. Which is it? Do you have one plan, or several? If you have several, do they include putting in a bid for the URL MomsPlan.com, which appears to be a placeholder for a porn site?

Alright, yet another thing. This passage was too good to pass up. From her September 9 entry:

When September 11, 2001 happened, my husband and I were glued to the television for days.  We were horrified by what we saw unfolding, and I remember those days as particularly dark ones.

You mean because of the terror and the destruction and the wholesale murder of innocents? Yeah, it does seem as if those days were indeed “particularly dark”, once you stop and think about it.

This should be obvious, but if you were horrified by 9/11, that’s not exactly a sentiment that warrants mentioning. We get it. Then again, there are some things we don’t get. Later in the paragraph, she polishes this gold:

In light of the 9/11 anniversary, I almost feel silly posting these links, but they are my light reading that take me away from the heaviness of the events 10 years ago.

Homemade Peanut Butter – Heavenly Homemakers.  Who knew making peanut butter was so easy?  This is on my agenda to try in the next few weeks.

That’s an unedited excerpt. She went straight from 9/11 reflection into sandwich spreads. No cowardly, wanton act of mass human butchery is so vile that a peanut butter recipe can’t make it all better.

**This article was featured in the Carnival of Personal Finance #330:Canadian Thanksgiving Edition**

Filed Under: Bad Examples, Consumer Debt, Financial Retard of the Month Tagged With: , , , , ,

Warren Buffett is a Hypocrite, Part I

September 23, 2011

Amass an 11-digit fortune, and you should probably forgo a name tag

We’ve never done a post on The Oracle of Omaha, which makes us unique among personal finance blogs. We also didn’t misspell his name as “Buffet”, which also makes us unique among personal finance blogs.

Yes, he’s the greatest investor of all time. No one disputes this. The problem is when he starts talking about topics he either knows nothing about, or is being deliberately obtuse about. Amassing wealth doesn’t make you an authority on every subject. Case in point, his recent lament about taxes.

Buffett wrote in The New York Times that the current progressive tax system in this country, in which rich people bankroll most everything, just isn’t progressive enough. He pointed out, yet again, the absurdity of his secretary paying a higher percentage of her salary in taxes than he does.

Summarizing, Buffett claims that at least one of his employees allegedly pays an effective tax rate of around 41% on income, while Buffett himself pays 17%.

First, the former claim is a lie. The highest marginal tax rate in this country isn’t even 41%, let alone the highest average tax rate. The highest marginal tax rate is 35%, and given the income level at which the IRS administers it, to pay an effective tax rate of 35% you’d have to make $6 million a year.

So Buffett’s not comparing himself to the woman who answers phones at Berkshire Hathaway. He’s comparing himself to a manager who makes a higher salary than almost everyone in America, even more than your average NBA or major league baseball player.

We’re giving Buffett the benefit of the doubt here, assuming that he meant 35% instead of 41% even though those numbers are easy to distinguish. No one knows where he got the 41% figure from.

Furthermore, that 35% maximum rate is on taxable income. Anyone who’s ever filled out a 1040, or had someone else do it, knows that taxable income is considerably less than total income. There are these things called deductions and credits, which Buffett is presumably familiar with (and which any manager who makes $6 million a year must be familiar with, too.)

It makes for a great class warfare talking point: every dollar that I fail to make is somehow some richer person’s doing. And who better to inspire envy among the poor salaried millions than a tycoon who’s finally seen the error of his ways?

Buffett – and we salute him for this – has spent a lifetime earning money via capital gains, rather than salary. Do we think this is a good idea? Hell, we wrote a book about it.

Capital gains are taxed at lower rates than salaries are. The people who write the tax code, and make it the most cumbersome and impenetrable thing on the planet, ensure this. Of course they do. Legislators write the code to accommodate and exploit this, because they derive most of their income through capital gains.

Let’s assume that Buffett indeed has employees who are paying twice the proportion of their income in taxes as he is. What’s the fairest way to make things fair? Again, multiple-choice.

  1. Further soak the rich.
  2. Get government’s foot off the throat of the poor.

Raise the rich people’s taxes to make things even, or lower the poor’s? Rich people seem to enjoy being rich. Why not reduce rates on the salaried masses to put them in line with whatever Buffett’s definition of “rich” is, instead of the other way around? Instead of creating prosthetic limbs for amputees, Buffett wants to break the right arms of the able-bodied.

The reactionary answer is “Because it’ll reduce much-needed tax revenue.” It wouldn’t. People respond to incentives, and will have incentive to work harder, longer hours if they get to keep more of what they make. When I can keep 84¢ of my next marginal dollar, there’s a better chance I’ll work for that dollar than if I only get to keep 67¢.

It’s the height of arrogance to complain about the tax system not because it hurts you, but because it benefits you. Especially when there are so many ways for Buffett to fix this perceived injustice. Sure, he could cut Washington a check for whatever amount he feels he should be paying. He could increase his employees’ pay enough to offset any tax advantage.

Or, and this is the least likely of the three, he could rework the dividends that flow through his corporations so that he could receive all his income as salary, rather than capital gains.  The chance of this happening is roughly equivalent to the likelihood of Buffett running a 4-minute mile.

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We’ve been pushing the concept of a diagonal tax since we were old enough to understand the concept. Everyone gets a basic personal deduction – say $20,000 – and pays some percentage – say 17 – on the rest.

The guy making $6 million would thus pay 16.94% of his income in taxes. The guy making $30,000 would pay 6% of his income in taxes. The guy whose net worth increases $10 billion in a year would pay 16.99997% of his income in taxes.

People who want to soak the rich should love this system. It treats the rich and the hyper-rich almost identically, biting them almost 3 times as hard as the working stiff, relative to what all three make. If that’s not enough, just manipulate the deduction and percentage numbers until it all makes sense.

 **This article is featured in the Yakezie Carnival-October 2, 2011 Welcome Fall Edition**

Filed Under: Bad Examples, Economy, Education, Estate Planning Tagged With: , , , ,

If you can’t grasp this, you’ll never get rich.

September 7, 2011

Get a credit card for the wrong reasons, and this is what will happen to your kids.

We recently showcased the perspectives that rich people share and that the non-rich never think about. Again, we’re not saying that everyone who exhibits a certain set of characteristics will build wealth. We’re saying that everyone who doesn’t, won’t.

One difference that we’d mentioned between those with the capacity to build wealth and those with none is that the former focus on the upside, rather than the downside. If that sounds uselessly vague, let’s apply it to something real: credit cards.

Most of the ads you see for credit cards plug which features the hardest?

  • Low-interest balance transfers
  • Low-interest introductory rates.

To a rich person, those mean nothing. If you’re serious about building wealth, here’s what you care about when obtaining a credit card:

  • Rewards
  • Protection.

That’s it. Nothing else. (Well, maybe credit limit too, but how much they’ll let you charge is usually a function of your payment history with your particular issuer. There’s little you can do to increase your limits until you’ve been with said issuer for a while.)

This imbalance of priorities illustrates the difference between the rich and the dreamers as much as anything else does. Think about what you’re being sold with a ***6.99% APR*** (for 6-month introductory period) card. What exactly does that feature mean?

It’s a promise from the issuer that you won’t have to spend as much for your upcoming failure to pay your balance on time than you otherwise might have.

Same deal with the low balance transfer rate. We’ll say it until we wear out the relevant keys on the computer: examine each transaction from the other party’s perspective. Are they looking for something fair, or are they looking to profit off your hide?

What does a low balance transfer rate mean? Say you’ve got a Chase VISA card, and BB&T is throwing a low-balance-transfer MasterCard at you. The implicit message from BB&T is

“We’re so sure that you’ll be making interest payments to us for the next few years, if not the rest of your life, that we’re willing to put money on it. Here’s a few hundred now, in the form of us paying off part of the interest on your old card. We’ll gladly give you that money (or more precisely, give it to Chase on your behalf) because we know you’ll make it up to us. Over and over again.”

This is no different than a casino giving you a line of credit, and no less ethical. At Control Your Cash, we don’t fault the credit card companies for offering balance transfers. We fault you for accepting them. If Amy Winehouse hadn’t bought all the heroin, her dealer would have had to find some other profession.

So how does someone with a wealthy person’s mentality handle credit cards? First, by never carrying a balance, for reasons so obvious we’re not going to get into them here.

There’s more to it than that. Plenty of people never carry balances and aren’t necessarily rich. The wealthy person takes advantage of opportunities when they present themselves. Sure, that’s easier said than done. But while most opportunities take some effort to uncover, taking advantage of your credit card issuer is about as easy as it gets.

A wealthy person thinks, “I have expenses anyway, so I’d be nuts to pay cash for them when a credit card will let me

  • wait 30 and even 60 days before paying
  • build rewards that cash won’t.”

Time value of money. Spending $5 for something today is dumb when you can receive the same thing now and not have to spend the $5 until next month. That’s called not charging interest, and if every business did it we wouldn’t have an economy. There are perfectly legitimate reasons for paying interest, if you borrowed money that the lender explicitly demanded a return on (and that you’re putting to some economic use that will benefit you more than you’re benefiting the lender.) If you pay interest (e.g., on a credit card) just because you were financing household purchases or couldn’t mail your payment in on time, then you’re just an imbecile.

Discover got famous for offering 1% cash on every purchase. If you had to choose between a Discover card and a VISA that offered no cash back but gave you a “sweet” introductory rate, why on Earth would you choose the latter? Discover is giving you money. Furthermore, why would you pay cash if you could pay with Discover? Again, Discover is giving you money. (It needed repeating. And bolding.) The Federal Reserve doesn’t send you a $1 bill at the end of the month if you use a Ben Franklin to buy something with.

Non-cash rewards cards work splendidly too, as long as you don’t change your behavior to accommodate the card. (I don’t know if they make a Victoria’s Secret MasterCard, or a UFC VISA, but I’d have little incentive to use either one.)

Again, a rich person recognizes opportunity when it’s practically waving its junk in her face. I can benefit without having to do a blessed thing? Then yes, sign me up immediately.

Meanwhile, a loser’s quest is to minimize the damage (rather than trying to maximize the benefit.) The low-interest credit card is the rectangular plastic version of the low-tar cigarette. If you’re going to get financial cancer, why prolong its arrival?

**This article is featured in the Carnival of Personal Finance #326**

Filed Under: Bad Examples, Consumer Debt, Credit Cards, Making Smart Choices Tagged With: , ,
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