How Do You Guys Do It? Part II

January 25, 2013

 

All the money she's saving on cream cheese, she's blowing on haircuts.

All the money she’s saving on cream cheese, she’s blowing on haircuts.

Welcome to the latest installment in our series on how to avoid being poor – by adopting some of the easy and painless techniques we already did. Last time, we wrote about costs that provide negligible benefits, stuff like smoking and drinking. If you missed it, we said it’s dumb to ingest things that cost you money and compromise your health. Which either makes us sanctimonious, or richer than the people who think we’re sanctimonious. One, the other or both. We’re not sure, we can’t hear you over the endless cascade of silver dollars collecting on our kitchen floor (tiled with that $11-a-square-foot brown travertine medallion mosaic stuff, which can get really loud.)

Today, something additive instead of subtractive. It’s easy to tell you what not to do.

Leverage your time. If you’re going to be fanatical about anything in your financial life, let it be this.

We make fun of him weekly in this space, but that contradictory fat man Trent Hamm at The Simple Dollar deserves every last brickbat we throw his way. But he’s not the only one guilty of the practice of encouraging people to waste their precious time calculating returns that end up saving you far less than minimum wage. After hundreds of thousands of years of evolution, humans still don’t have an instinctive grasp on the idea of raw numbers being less important than those same numbers modified with respect to time.

What we mean is this: Would you like $100,000?

You’re going to answer yes, if you’re operating under the implicit assumption that we’re going to immediately hand you $100,000 in some negotiable instruments. Cash, a giant novelty check, whatever.

Okay, would you like $100,000 if you had to work for it for a year? The job is nothing awful. You’re not going to have to give foot massages to that fat actress on that TV show, or anything like that. Air-conditioned office, 9-to-5 workday, 2 weeks’ vacation, bagels in the break room every Monday, no ugly surprises.

Most of you presumably said yes, but a significant handful said no, why would I take a pay cut just to comply with the terms of Control Your Cash’s dopey hypothetical exercise?

How about $100,000 for 20 years of volunteering at a soup kitch—alright, you see where we’re going with this. Any commodity vital to existence that you take in (and in the case of money, give out) – food, water, whatever – has to be expressed in terms of time for it to have any meaning. Why? Because we’re mortal. The clock is always ticking. If you made it this far into the post you’re already that many minutes closer to death, and for what? We don’t want to waste your time, so let’s expand a little more on the importance of looking at dollars netted versus time expended.

An hour spent clipping coupons is a feel-good exercise, not a serious attempt to increase your wealth. Divide the penultimate line on your grocery bill (“You saved “$4.33 today, Smart Shopper”) by the time you spent going over your mailbox flyer with a jeweler’s loupe and an X-Acto knife, and it can be depressing. Don’t even get us started on the wisdom of receiving alerts from Gas Buddy. The reward is only worth the effort rendered if you think your time means nothing. It doesn’t. Rich people value their time. If that manifests itself as impatience on occasion, have sympathy. Those rich people have more important things to do. Warren Buffett may live in an old and modest house, but you can bet he takes a private jet everywhere. Does he do it because he wants to flaunt his wealth? Of course not. Hardly anyone can see him, and private jets don’t attract a lot of attention anyway, unless you happen to be hanging out at executive airports and general aviation facilities. Buffett flies a private jet because he doesn’t want to waste his time getting to the airport 2 hours early, taking his laptop out of its bag, or ensuring that his leave-in conditioner is in an approved bottle of less than 3 ounces.

When we say to be aware of what you’re spending your time on in lieu of spending your money, don’t go overboard. It doesn’t mean that every activity in your day has to have some economic justification. Watching TV is what you do after you’ve had a long day and just need to crash on the couch for a while. It earns you $0/hour, and that’s fine. Same goes for learning guitar, if that’s your thing, or trying to fix a leaky toilet. It’s when you’re doing a financially specious activity that you should step back and ask what it’s really costing you. For instance, cataloguing your 1000 used DVDs. Writing descriptions and taking photos of every single one so you can sell them on eBay. That’s an intensive project with miniscule rewards. Just spend 3 minutes putting them in a box, then drive them to your local library. And enjoy the time you saved.

Next up: Putting that time to worthwhile use.

Filed Under: Capitalism, Economics, Finance Tagged With: , ,

A Thrilling Multimodal Friday Ride

January 11, 2013
Transforming the world, 33' at a time

Transforming the world, 33′ at a time

 

The Dow Jones Company creates dozens of indices. By far the most recognized and quoted of those is its Industrial average, 30 stocks that are supposed to comprise a representative cross-section of the American economy. Dow’s 2nd– and 3rd-most noted indices are its Transportation and Utilities averages, one of which we’ll discuss today and the other we’ll talk about Wednesday unless something more exciting comes along.

First off, why is the New York Stock Exchange stuck in the 19th century? Why “Industrials”, “Transportation” and “Utilities”? Shouldn’t they have given way to something like “Telecommunications”, “Software”, and “Health Care” by now?

Well, because industry (however you define it), moving stuff and people around, and keeping the lights on are still pretty important.

The Transportation index was created 129 years ago. Originally it was nothing more than the total of the stock prices of 9 railroad companies, a steamship company and Western Union. With the exception of Western Union – which is now exclusively in the business of transferring money – and Union Pacific, every one of those companies is defunct.

Of course, Dow Jones added and subtracted other companies to and from the index over the years. Much like its Industrial counterpart, the Transportation index consists of the prices of several (30 for Industrials, 20 for Transportation) stocks, summed and multiplied by a constant. The Transportation companies are as follows:

  • 5 airlines
  • 4 trucking companies
  • 4 railroads
  • 3 deliverers
  • 2 shippers (as in ships)
  • 1 rail lessor
  • 1 truck lessor.

The airlines, you’re probably familiar with. Delta, United, Southwest, JetBlue and Alaska, which are respectively America’s 1st-, 2nd-, 3rd-, 6th– and 7th-largest by passenger volume. 4th is American, which filed for Chapter 11 last year and was thus replaced on the index by Alaska. 5th is US Airways, which filed for bankruptcy in 2001 and again 3 years later.

The trucking companies have a more direct effect on your life than the airlines do, yet it’s doubtful you’ve heard of more than a couple.

C.H. Robinson, based in the Twin Cities, is what they call a “3rd party logistics” company. They don’t actually own trucks, but instead agree to ship customers’ freight using other companies’ trucks. And ships and planes. Also railcars, which C.H. Robinson does own. But the vast majority of C.H. Robinson’s revenue, $7 of every $8, derives from trucking. Landstar, headquartered in Jacksonville, is similar to C.H. Robinson in that it doesn’t own vehicles. Two of the other trucking companies, Ann Arbor, Michigan’s Con-Way and J.B. Hunt (based in Northwestern Arkansas), you’ve seen proof of up close if you’ve ever driven on an interstate.

The 3 delivery companies probably need no description, or at least 2 of them don’t – FedEx and UPS. The 3rd one is Expeditors, a Seattle-based company that specializes in international cargo shipments. (Is that redundant? “Cargo shipments”? Could we just say “cargo”? And why do shipments often involve a car while cargo involves a ship? Also, why do we park on a driveway and drive…)

The railroads on the Dow transport cargo, rather than passengers, because a) there’s a government-mandated passenger railroad monopoly in this country and b) that monopoly loses obscene amounts of money. They include the nation’s largest railroad (and, as we pointed out, the only one that’s been on the DJTA since Day 1) –Union Pacific, which is headquartered in Omaha. If you live east of the Mississippi, you’ve probably never heard of Union Pacific. Trust us, it’s huge. Vice versa for Jacksonville-based CSX, whose operations transverse the eastern United States and select parts of Ontario and Quebec. Crossing much of the same territory is Norfolk Southern, which covers the eastern states save New England and Florida, and whose western terminus is in Kansas City. Speaking of which, Kansas City Southern is the final railroad, with operations in the south central United States and much of central Mexico.

The two shipping companies are Matson and Kirby. Matson, based in Oakland, has one core and lucrative business – shipping stuff to and from Hawaii. Matson also ships to Guam, Micronesia, and a few ports in China. Kirby, with operations based in Houston, is the nation’s premier tank barge operator. They transport oil throughout the Mississippi and its tributaries, along the Gulf Coast, and to Alaska and Hawaii (the freak states.)

That leaves two, including the rail lessor, Chicago’s own General American Transportation. They lease railcars throughout the U.S. and Europe, and operate American Steamship, which crisscrosses the Great Lakes.

The truck lessor is Ryder, based in Miami. Yeah, they rent trucks, but they’re also “a FORTUNE® 500 provider of leading-edge transportation, logistics and supply chain management solutions. “

(God, does anyone working in the communications department of any major corporation know how to, y’know, communicate?) That means Ryder leases commercial fleets. The company also manages warehouses and drivers for companies that own their own trucks but want someone competent to handle the (sigh, hate this phrase) “supply chain”.

Which ones should you invest in? Primarily Kirby, but that’s not the point. We’re just trying to avail you a little of how a lot of the stuff you take for granted helps the economy roll. As the XXL t-shirt says, “If you bought it, a trucker brought it”. And picked it up off a dock where it was delivered by a container ship that was loaded from a railroad.

Filed Under: Economics, Economy, Travel Tagged With: , , , , , ,

Ordinary Income. Extraordinary taxes.

November 28, 2012

 

Manna wasn’t legal tender, but that doesn’t mean the IRS wouldn’t have tallied it.

 

A couple of days ago we pointed out how money doesn’t care where it came from. Some people think that their regular salaries should go towards daily expenses, while windfalls (inheritances, stock appreciation, house appreciation, etc.) can go towards less vital stuff like vacations and ATVs.

That’s an idiotic perception. If you have an asset to buy, defining “asset” as we do here at CYC (something that’ll build wealth), buy it. With your paycheck, or with a handout from Grandma. Or even a loan from Grandma, depending on what interest she charges. Otherwise, it shouldn’t matter. Regardless of its origins, money goes where it goes.

Well, that’s not entirely true. The only entity that cares how you came by your money is the Internal Revenue Service. Receive money one way, it’s taxed at a certain rate. Receive it another way, it’s taxed at a higher rate. Seeing as the IRS has the power of deadly force*, soon for the crime of not doing your duty for the Motherland and buying health insurance, it makes sense for us peons to accede to the agency’s capricious demands.

As far as the IRS is concerned, there are 2 ways you can receive income:

  1. ordinary income and short-term capital gains
  2. long-term capital gains.

This is simplified, obviously. A full accounting of every exception would take us years to write about.

Ordinary income? That’s:

  • Wages, salaries, tips, commissions, bonuses
  • Interest, dividends, and net income from a business that you own a piece of
  • Gambling winnings
  • Royalties
  • Rents
  • Pensions, assuming you’re one of the few people who collects one.

Meanwhile, capital gains are:

  • Money from the sale of a “capital asset”, like shares of a publicly traded company, or a house that you sold. Unless you’re a land developer and the house is your stock in trade, that kind of thing. The difference between short- and long-term capital gains is arbitrary but defined: hold on to an asset for a year before selling, that’s long-term.

We’ll spare you the numbers, but regardless of what tax bracket you’re in, long-term capital gains are always taxed at a lower rate than short-term capital gains and ordinary income are. There’s a good reason for this, too. Ordinary income (and to a lesser extent, short-term capital gains) carries little risk. If you punch a clock, you’re legally entitled to wages and can sue if you don’t receive them. If you wait tables, society expects that customers will tip you as part of (if not the bulk of) your income.

Long-term capital gains involve tons of risk. There’s no guarantee that that stock you bought years ago might ever result in a payoff. Contrast that with the biweekly checks you get after entering into a standard work agreement. By taxing long-term capital gains at a lower rate than ordinary income (and short-term capital gains), the IRS encourages people to hold onto their investments. If all income was taxed at the same rate, there’d be no incentive for anyone to defer spending (synonyms for which are “save”, “invest”, and “build wealth”.) We’d only chop trees down, never planting any.

So is this just an accounting curiosity, something for you to pass the time reading about on a boring Wednesday? Heck and no. Control Your Cash don’t play that game. If it didn’t apply to your life, we wouldn’t be spending time on it.

The more of your income you can derive via long-term capital gains, the less you’ll have to fork over to the IRS. We devote an entire chapter of the book to this. Chapter IX, the longest and most detailed one. (By far. Although it’s still easy to read, certainly no more difficult than our posts.)

Unless you want to move to Antigua – and before you do, remember that it’s easy to go stir-crazy on a 109-square mile island – you’re going to have to play the IRS’s arbitrary game. Both Wonderland croquet and Calvinball have more consistent rules. This wasn’t always the way, but America’s descent from beacon of freedom to patchwork of statism is a topic for another day.

Maximizing your long-term capital gains is the inevitable result of buying assets and selling liabilities, our 2-pronged guaranteed way to wealth. It means purchasing vehicles for passive, non-sweat income, no matter how modest or expensive: a $25 mutual fund contribution here, a real estate investment trust there. Anything that creates an income stream for you, or that should appreciate (such as a house). Hold onto it for at least a year, and you’ll pay less in taxes that you would if you’d earned similar income via more direct means. Hold onto it indefinitely, and…

You can defer capital gains, too. Sometimes indefinitely. Methods for doing this include structured sales, charitable trusts and 1031 exchanges, which we touch on in the book and will expand upon in future posts. Really we will.

The point is, don’t go to H&R Block with your W-2s and say, “Fix this for me.” And really don’t get a refund anticipation loan. You’ve got a few months to make this work for 2012, and to figure out how to not get burned in future years. Do it now. (By “do” we mean “buy”, and by “it” we mean click the link above. Which is also this link.)

 

*This is not an exaggeration. To quote P.J. O’Rourke, “If you don’t pay your taxes, you get fined. If you don’t pay the fine, you get thrown in prison. If you try to escape from prison, they shoot you.”

Filed Under: Capitalism, Economics, Making Smart Choices, Taxes Tagged With: , , ,
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