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You get what you pay for – Overall factors and housing costs

Education, Finance

You get what you pay for – Overall factors and housing costs

  • Key purchasing factors for all items: Many people just do not make “smart” purchases. The old adage that “you get what you pay for” (pardon the dangling participle) is just not always true in today’s economy. At times I wonder if some of us just like to be able to say we paid more! My view, when comparing identical items is, I prefer to pay less. There are two key factors to maximize your purchasing power. First, never allow yourself to be “sold” and next make “time” your asset. 

–         Research (doing our homework vs. “being sold”) When you identify a need it is important to research the market. I’m not suggesting that you not listen to sales pitches. However, I am suggesting that you never make a purchasing decision based on an initial pitch. Always (repeat, always) do your homework before making a purchase decision. By that I mean “research” the market. My policy is always to buy local, but only if they offer what is needed at a reasonable price. By reasonable I mean at or near the “market” price. A few good sources for price information are: EBay, Amazon & Walmart online. If you check these information sources it will give you a good idea of what you should be paying.

–         Timing; making time your asset: Having to make a purchase on the spur of the moment almost always is an expensive decision. Be sure to plan all significant purchases in advance. Give yourself the time to do your homework and thus make an informed decision.

  • Housing costs (the biggie)

–         How much of our income should be dedicated to housing costs? The typical recommendation is no more than 35% of “gross” income, but in today’s economy that is not always possible. The average family income in our area is approximately $38,000 per year. Looking at the average this translates into about $1,300 per month for rent (or mortgage), taxes, insurance, utilities, etc.

–         Is it better to rent or to own a house?  Initially, at lower income levels renting actually can be a good decision. A few of the reasons are: Renting provides flexibility, the overall occupancy cost can actually be less than ownership is some markets and it provides time for first time buyers to evaluate what they want in terms of location and type of housing. Another factor is that loan approval for a purchase can be difficult and expensive at lower income levels. My recommendation is to put off purchasing until a family is fairly certain that they will be located in an area for an extended time period. In times past the recommendation would have been to invest in a home as soon as possible and start building equity in the vastly appreciating real estate market. The promise of market appreciation is much less certain today. It is taking much longer to recover the transaction and ownership costs through appreciation. It is also best to wait until a person achieves a good to excellent credit score prior to applying for a home loan (it will save big bucks over the life of the loan).                                                                                                                                                    –         Utilities – methods to control, this is not a “fixed” expense:  Utility costs have the potential to exceed the cost of rent if not properly managed. The very best way to manage your major utility expense (electric or the combination of electric & gas) is to moderate your temperature expectations.  Setting your thermostat in the 74 – 76 F range in the summer and in the 64 – 66 F range in winter may take some getting used to but it the financial benefits can be substantial. When compared to a constant 70 F setting it can easily amount to over a $1,000 in annual saving. I recommend using a programmable thermostat. A low end model works great and they can be purchased for under $25. The unit comes with easy to install instructions. Even a novice can install one in under 30 minutes. The basic models allow you to manage temperatures in four different time zones each day and have different settings for each day of the week. The potential savings can easily exceed the cost of the unit in just a few months. If you do not reside in a house with a centrally controlled system then the best way to go is with “zoned” units, preferably heat pumps (have the ability to both heat and cool in one unit). This is probably only a viable option for home owners or very long term renters that are able to work out a deal with their landlords. These units only cost a bit more than A/C units and offer the advantages of only using electricity when a zone is occupied and are very energy efficient. An additional energy saving item is to convert to LED light bulbs. They last up to 20 x longer than incandescent and more than 5 x longer than florescent. They also use less than 1/20th of the energy of incandescent and less than 1/5th of the energy of fluorescent. One option is to replace your bulbs as the old ones expire. They can be purchased for about $2 each on eBay and locally at near that price when on sale. I recommend not waiting as the financial payback in energy savings is usually less than six months. Another benefit is that florescent bulbs are not recyclable, while LED bulbs are. While other options like solar are available, the preceding offer the quickest financial advantage.                                                                              –         Insurance (casualty & contents) Most renters do not carry insurance on their contents. It is important to understand that the insurance a landlord carries on rental property does not cover the contents of the tenant. I’m not making a suggestion one way or another, just a point of information. As a homeowner I do highly recommend carrying insurance and if you have a mortgage the lender will require that you have coverage. Insurance rates vary significantly among providers. The difference in premiums can vary by as much as 200%!  Shopping rates every few years is a must! When you do shop I recommend getting quotes from no less than 3 firms.                                                                                 –         Property taxes: This cost applies to the owner of the property. There is little you can do to control this fixed cost. The rate is set by the assessed value of the property and usually represents about 1% (or a bit more) of the fair market value. If the market has declined (which it did from 2007 – 2015) then you have the option of asking for a reassessment through the county assessor’s office.                                                                                  –         On-going maintenance (lawn care, upkeep, breakdowns, etc.) Another factor that apples to the property owner. In a fairly flat market property will decline in value if not properly maintained. If you are a renter your rental agreement may specify that as tenant you must maintain the lawn. It is recommended that, as a property owner, you set aside an extra 10% of the value of your loan payment for ongoing maintenance and repairs. This will insure that when the need arises the ability to fund will be available.

this is the first of several posting on this topic, stay tuned for more next week.

Our National Debt – Update

Broken in the USA, Finance, tax related issues

Our National Debt – Update

I like to keep track of our debt since it the Elephant in three rooms (Oval office, the House & the Senate). It is our most significant financial issue and one which none of our elected representatives are willing to address. The solutions are easy, but it will be painful which is why no “career” politician will pursue them.

Now that the Republicans control the Executive & Congress you would expect that we would start to slow down the rate at which the debt is increasing. If you believe that, then you would be wrong. The National debt is currently increasing at the rate of $1 million every 50 seconds. It now stands at $21 trillion. The annual deficit is actually accelerating vs 2017.  President Trump is on schedule to set new budget deficit records:

The Total Actual plus Budgeted (projected) for the next 4 years = $5.683 trillion, almost as much in one term as Obama accumulated in two.

I am not taking sides politically as my view is that both the Dems & Reps are in this together. Ignore what they say, look at what they do. A significant contributor to the runaway debt is the recent tax cut. What we are doing is borrowing the money to fund this tax cut.

President Obama actually did the same thing in 2010:

In 2010, the Obama tax cut (an extension of the Bush tax cut) added $858 billion to the debt in its first two years. Obama increased defense spending, adding as much as $800 billion a year. Federal income decreased due to lower tax receipts from the 2008 financial crisis which was a result of the financial industry’s mismanagement during the President Bush terms.

Tax changes are always just a method of income redistribution. The only real difference is in who gets what. The problem is that we primarily fund these cuts out of borrowings which increases the size of the elephant.

The redistribution formula of the current tax cut is extremely complicated, but in general terms only about 20 – 25% of the funds end up in the pockets of the middle class and overall is the equivalent of a 2% pay increase. The vast majority of the benefit is going to the wealthiest segment and to corporations.

If tax payers had to payoff their portion of this debt it would require over $173 thousand each and it grows larger every day.

A significant measure of the financial health of country is the ratio of debt to GDP. Many were dissing the Greeks when they were facing bankruptcy at a ratio of 1.8 to 1. They were very lucky to have the EU to bail them out. Our current ratio is 1.06 to 1. The most optimistic projections for growth in GPD over the next 20 years is 3%. There are others that predict the new average real growth norm will be in the 1 – 1.5% range. Using a mid-point of 2% (inflation adjusted) and the current growth rate of our debt at 5% we will be approaching the level of the Greek financial status by 2050, if not sooner. Who will bail us out? Our grandchildren? China?

Path to a Balanced Budget

Broken in the USA, Finance, Government Issues, tax related issues

We spend far too much time arguing about increasing or decreasing taxes as a mean to stimulate the economy and solve the deficit issue. Our focus needs to be on spending. Following is a family simple and straight forward approach to balancing the Federal budget which I believe that the electorate, regardless of political “leaning” will support. For reasons that should by now be apparent, this will not be supported by our current elected representation:

1.     Despite our poor performance in providing quality health care our single largest area of spending is in this area. The solution is not to spend more. We have been doing this and it is not working. Available statistics show that our capita spending is more than double other countries that are providing a superior level of care. Our current level of spending for Medicare & Medicaid is $1.15 Billion. A new system of health care would conservatively save $500 billion.

2.     Our 2nd largest budget is Social Security. I am not in favor of cuts in this area. In fact, with the aging of our population this area will need to increase.

3.     Next largest area is Defense/War. I do not have a problem with Defense. I favor additional funding here as long as it spent efficiently. I have a problem with the “war”. Our current level of spending is over $630 billion. We the currently spent more than $2 trillion in “direct” costs to the offensive campaigns in Iraq & Afghanistan. This does not take into account the cost in human lives which now stands over 300,000 (125,000 of these have been civilians). Nor does it take into account the related costs to our dedicated warriors in terms of rehabilitation. It is estimated that if we withdraw now the total eventual cost of these incursions will exceed $4 trillion.  Other estimates put the total nearer $6 trillion. Currently about $200 billion per year (about $100 billion in each war zone) is being spent on these, so far unsuccessful, efforts. I am in favor of bringing our boys and girls home now.

Focus on just two areas of spending has the potential to balance the budget. The current budget deficit is running at $684 Billion. Financial opportunities would remain in the areas of: productivity/efficiency, civil service salary inequity, disability abuse & other income security reform.