Wednesday, January 28, 2009

Three Tax Tips

The time has come again where I am preparing to do taxes for 2008. This year, like most years in the past, I am actually looking forward to doing my taxes. Fortunately, my W2 form came a little earlier than the January 31 deadline, so I was able to start early.

Many people recommend going to a professional to do taxes to avoid any mistakes. If you have a complicated return or are uneasy for some other reason, then I would definitely go that route. Personally, the first year I started my business, I made an appointment at H+R Block to get my taxes taken care of. As for the subsequent years though, I simply did the taxes online.

Over the past several years of doing taxes though, I've definitely learned some key tips that have really helped.

1. Make sure you adjust your tax withholding. If you have a business, you may find that you tend to owe taxes. In this age of shrinking economy, you don't want to be in that position next year, so make sure to pay quarterly taxes and/or increase your withholding at your primary job. This will help you by giving you some assurance that you will get a refund.

2. Know your deductions. Most people have specific situations due to business, retirement account, property, children, and dependents that impact taxes and deductions. Some of these things cannot be deducted after the fact though if there is not planning and proof. If you have had dramatic life changes, it can help to see a professional, if not to save money this year, at the very least to save money next year. An example for me is that the mortgage deduction shrinks each year so it is important to adjust accordingly.

3. Finally, make sure that you know your marginal tax rate. In the event that you are trying to make contributions to retirement accounts or do other tax planning, it is important to be aware of this. As salaries increase and income rises, these can change and start to make a dramatic difference. This is especially important for small business owners as the brackets can change by between 5 and 10%. A change this dramatic can effectively erase your profit margin for the final dollars you make each year if you're not careful.

Saturday, January 17, 2009

Don't Discount Good Health

Everyone who has been paying attention is aware that the economy is in dire straits. From the serious tumble that the stock market took, to the completely tanking housing market, it is easy to see examples nearly everywhere that things are going badly.

Fortunately though, the chances are, that if you're reading this, that you're in relatively good health. This is something that has the kind of value that doesn't have a price tag. There, I said it. Now think about it for a minute; you're good health is priceless.

Recently I had someone close to me undergo a serious surgery. This has given me a new perspective on my health and also made me realize how important it is that everyone, no matter what their situation, do what they can to stay healthy.

When you go to the doctor, you may be told to change your lifestyle, quit smoking, stop eating bad foods, etc. When you go to the dentist you may be told to brush better, or floss more. Regardless of what these professionals are telling you, you should probably take this common sense, preventative advice and follow it.

This blog is about easy change you can make to have a better life. I am realizing, even personally, that I was able to make some improvements to my health by exercising more consistently and taking even better care of my teeth. These things were not expensive in terms of money, but rather, more expensive in terms of motivation.

However, when compared with the cost and pain and emotional drain of having root canals, or some sort of heart surgery down the line because you chose to 'live fast', it certainly seems like prevention is the way to go. Not only is the the less painful and cheaper method (which avoids all sorts of Moral hazard), it is in your self interest. Take this opportunity that this new government, economic turmoil, and new year is giving us, and see if there is some positive change you can make on your life to improve your health!

Suze Orman's Action Plan 2009

Recently I was in the position of being able to download the latest of Suze's books-Action Plan 2009.Although I was hopeful that it would be an amazing new take on money for the current economic enviornment, it was not the case. Personal finance stays the same over time and Suze's advice is fairly standard for those who are interested and are following personal finance. I suppose that the upside is that I am not in a position to worry. One nice feature of the book is that much of it is in question and answer format.

Monday, January 12, 2009

What Happened to Moral Hazard?

This week on Meet the Press, an contributor to Vanity Fair was one guest and she asked this very question. The concept is rather simple, it asks the question why America has become so content to spread the risk around?

That is, if we fundamentally think that people who make bad decisions should bear the consequences of those decisions, then we must consider bailouts which significantly reduce and/or eliminate those risks to be a problem. Moral hazard is the term applied to such an event.

Indeed, this is a fair question. Listening to broadcasts from the fall of 2008 would bring you to the same question when there was a workout for Bear Sterns. Some felt that any type of intervention, even in the form of a deal, was a bad idea. But others felt like this type of government assistance was a bad idea and was a moral hazard. This was a backlash which might have contributed to the U.S. government allowing Lehman to fail.

Regardless of the whys and the hows, the question is now: why has the average American changed his mind about moral hazard? The argument is that this people have realized that it was wrong to feel that way and that we need stimulus and bailouts. I personally am not so sure. I am not convinced that people have had a massive epiphany since the middle of 2008.

I would submit instead that people are simply more self-absorbed now. Before, during Bear, people felt like it was happening to those big, bad investors and that it would have no impact on them. Now, people have seen their retirement accounts chopped in half in the midst of a significant economic slowdown on a global scale where credit is painfully tight. In short, people are too worried about how to eat to be concerned about moral hazard. So, I think that the amount of pressure on government officials is weak now that Obama is about to take office.

This doesn't negate the principal concept though; moral hazard still exists if we shield people from the consequences of their actions. Indeed, the current bailout and stimulus packages are projected to be approaching 1.7 trillion dollars. This is money that America will likely be trying to repay for the next 50 years. Isn't that a hazard? And we haven't even talked about Social Security or Medicare. What do you think? Are we on the right track with the TARP, the stimulus or is it too dangerous to continue down this path?

Saturday, January 10, 2009

Counting My Blessings -- And How it Happened

Recently, I got some very good news with regard to work-related compensation. In this economy, and in this troubled time of unemployment, any good news is really great news. So, for us right now, we're looking at a bonus, albeit smaller than expected. In addition, there will be a three percent raise.

So many people are losing their jobs, that there are not situations where people who even have their jobs may not be getting raises or bonuses at all. So, I'm quite grateful. I think that it is important that people are grateful for what they have and realize that this is a time to be even more conservative.

In this regard, I'm practicing what I preach here. And even in a good economy, this type of behavior is a good idea. It will make you more likely to keep your job when times are tough and more likely to get a raise and/or promotion when times are good. I'm convinced that these principals are what has helped me succeed in my current job.

1. Work hard. This is general, but in practical terms it means that you want to be someone who gets the work done, gets it done quickly and correctly.

2. Show initiative. Never say no to new work or challenges at work. If you're concerned about being able to do it, ask for help, but never refuse opportunities.

3. Be Grateful and non-confrontational. You have a job! Regardless of what you're putting up with, it beats being unemployed. While you want to be strong, you want to make sure you're being strong in order to do a good job, not just to be obstinate.

4. Add Value. This is a bit of a cliche, but you generally want to add value to the companies bottom line. No matter what your position is, you can add some value either by saving money or by generating additional revenue. Make sure you work hard on projects that are related to adding value and saving money and take note of your efforts.

5. Track your efforts; other people are. Come in early, stay late. Show that you're putting in extra time on weekends if needed, and never complain about the commute or extra hours. If you do this consistently, you're in much better shape. Other people may notice when you leave early so make sure that your work is without reproach and you'll be able to succeed.

Sunday, January 04, 2009

The Next Financial Crisis

This week, Suze Orman did a show called "Face it to Erase it". This show was not anything incredibly new but one point that she made toward the end has really made me consider some of the macro economic implications.

For example, there is a significant, nearly 800 Billion dollar outstanding credit card debt in the United States. An entire show was dedicated to people with large amounts of debts, but it became quite obvious to me that the vast majority of these people who were calling in were likely in a position to be unable to repay their debts. And these are not tiny debts. 10, 20, 40, even 80 thousand dollar debts.

Suze made the observation which was quite pointed; this is the next major financial crisis for the United States. This is important because of the fact that credit card companies and banks are in the position of adding a significant burden to individuals here as they significantly raise interest rates and reduce lines of credit. The callers and other information out there has made it clear that this is already happening.

What impact this would include is unclear. But it seems quite certain that there is a significant chance that this will further decrease retail spending over the next 12 months and that this will also increase the rates of bankruptcy. The ripple effects of this kind of situation is not clear. The FED has reduced rates to almost zero, but this does not matter if people cannot get additional lines of credit.

In this environment of decreased leverage, it is hard to imagine what the end-results of this will be....but I think that we're going to see the following trends over the next few years:

-- fewer stores and malls and an increased use of cash for transactions.
-- less consumer options; this will happen as more companies who were operating with little revenue are unable to survive.
-- options that remain will be of lower quality and higher prices as a result of decreased competition and also a desire to "recoup" costs associated with the down markets.
-- an increased interest in "safe" financial instruments like money markets and fixed income securities. Even though many people consider the demand for treasuries to be a bubble, it seems like there is going to be significant demand for government-type, safe, taxing-authority backed instruments. Income from these instruments, when compared with the yields found elsewhere is often as good or better, especially when tax-breaks are considered.

Thursday, January 01, 2009

Looking Forward to 2009

So it is a new year and with each new year there is a new opportunity for change and improvement. I'm actually guilty of being quite optimistic. This past year, the economy was the main story, hands down. But I'd like to say that I think that things will look better in 2009. And even more than many people, I think that we're going to be quite pleased by about 6 months through 2009, sometime in the summer.

I need to be very clear that I have nothing other than a hope and a prediction, no real solid evidence. It's just my feeling. The amount of wealth destruction that has happened as the global economy has deleveraged is staggering. So, I think that as we begin to add leverage again, we're going to realize that it was not quite as bad as we thought it was.

I'm very specific in why I feel this way. I think that most people want things to go well. That is, I think there's more optimists than pessimists overall. And I think that despite the increased unemployment (nearly 8% last time I checked), that still means that 92% of people are employed. And those 90+% are the people who matter when it comes to getting this economy back on track.

The mentality of many people right now, myself included, is that there is too much risk. Risk exists in whole areas that felt rather safe 6-12 months ago, even if they weren't. Health seemed safer. Jobs seemed safer. The ability to get another job felt more certain. And the price of energy seemed more stable along with prices. In some way, the decrease in gasoline prices has helped, but it has contributed to my increased uncertainty. If it can go down so rapidly, why can't it increase in just the same manner? And when might that happen?

So how to react? Save. Then stop, rethink. Wait. Save more. Save even more. Look around, and save more. That is what people are doing. Reconnecting with family, friends, saving more, consuming less, and refocusing on what they think is important in life -- not stuff. However, eventually, things will get somewhat easier again and those people (myself included) will start to spend again. And once that happens, I think that we'll see an increase in consumer confidence. That is what I think will improve.

Besides that, I think that the changes that a new presidency will bring will also help. More than specifics, just the mentality that things are different will help. Again, perhaps it is just blind optimism, but I think that we're near the bottom of consumer confidence. Here is some interesting info from gallup. And if confidence goes up and people spend more, the economy (including job and stock and housing market) will recover over time. I'm not looking for instant gratification...just an end for this long downtrend.