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7 weeks left to fund your IRA for 2005 February 28, 2006

You have less than 7 weeks left to fund your IRA for 2005. If you qualify, the Roth IRA is the one you want to put money into because even though you are putting in after tax dollars, as long as you keep the money in until you are 59 there is no further tax on it, ever. The growth is tax FREE.

The traditional IRA, on the other hand, is typically after-tax dollars as well, but the growth is tax DEFERRED. so you will pay tax on the capital gain between now and age 59, but you don’t have to pay it until you are 59 (or later). This is helpful because you can take money out whenever you want and presumably wait until you are not making any money and in a lower tax bracket before you take the tax hit. But there will be a bill to pay eventually. So the balance is between paying the tax every year, versus getting the deferral. definitely advantageous, but nothing close to the Roth IRA.

You’re eligible to make a regular contribution to a Roth IRA even if you participate in a retirement plan maintained by your employer. These contributions can be as much as $4,000 for 2005 through 2006. (If you’re 50 or older by the end of the year, add another $500 for 2004 and 2005, and $1,000 beginning in 2006.) There are just two requirements.

Tax Around the World: Japan February 24, 2006

Today’s series on Tax Around the World features Japan, the second largest economy in the world after USA. Taxation of an individual’s income in Japan is progressive. The tax rate for an individual in 2005 was between 10% - 37%, and is proposed to be between 10% - 40% in 2006.
The following table shows Japan individual income tax rates for 2005:

2005 Japan National Tax Brackets

Tax Base (Yen) Tax
1 - 3,300,000 10%
3,300,001 - 9,000,000 20% of base exceeding 3,300,001
9,000,001 - 18,000,000 30% of base exceeding 9,000,001
18,000,001 and over 37% of base exceeding 18,000,001


For 2006, the national individual income tax rate will be changed as below. The income tax bands would increase from four currently to six.

2006 Japan National Tax Brackets

Tax Base (Yen) Tax
1 - 1,950,000
(US$ 16,685.21)		 5%
1,950,001 - 3,300,000
(US$ 28,236.50)		 10% of base exceeding 1,950,001
3,300,001 - 6,950,000
(US$ 59,467.78)		 20% of base exceeding 3,300,001
6,950,001 - 9,000,000
(US$ 77,008.64)		 23% of base exceeding 6,950,001
9,000,001 - 18,000,000
(US$ 154,017.28)		 33% of base exceeding 9,000,001
18,000,001 and over 40% of base exceeding 18,000,001

(n.b.: as of 2/23/06, 1 USD = 116.87 Yen)

Source:
KPMG Tax Corporation (pdf file)

Average American Family Income Declines February 23, 2006

According to an AP story, the average income of American families, after adjusting for inflation, declined by 2.3 percent in 2004 compared to 2001.

The Federal Reserve reported Thursday that the drop in inflation-adjusted incomes left the average family income at $70,700 in 2004. The median, or point where half the families earned more and half less, did rise slightly in 2004 after adjusting for inflation to $43,200, up 1.6 percent from the 2001 level.

The median, or midpoint for net worth rose by 1.5 percent to $93,100 from 2001 to 2004. That growth was far below the 10.3 percent gain in median net worth from 1998 to 2001, a period when the stock market reached record highs before starting to decline in early 2000.

After technology stocks crashed in 2000 and in 2001, the 9/11 incident in NYC, it makes sense that the average income of American families declined. Although the economy in America is reported to be strong now, companies are cautious about their spending. As for net worth, I’m not sure if that includes the values of their homes or stock, but if so, a net worth increase of just 1.5% from 2001 to 2004 is pretty small. (The negative savings rate as reported earlier doesn’t include the value of the home or stock portfolio). With the inflation rate at around 2%, decline in family income, and net worth, it’s obvious we have to take steps to create a better spending plan and save for our future. The USA can’t count on our home equity as a source of money too long!

Source:
By MARTIN CRUTSINGER, AP Economics Writer

Population Migration to NYC February 22, 2006

A follow-up to my post yesterday on moving to a less expensive city to save money, NY Times had an article on the population boom projection into NYC. So if I said that moving from an expensive city such as NYC will reduce housing costs for most people, why the increase in population in NYC? I think it’s the same reason that real estate in NYC will weather a National real estate bust. From Urban Digs post yesterday, NYC will lag in a slowdown because:

  1. NYC is the financial capital of the world, thus jobs are fairly abundant,
  2. NYC is a hugely diverse city that anyone from any culture can feel comfortable to call home,
  3. Most apartments in NYC are co-ops,
  4. Speculative Markets Hit First,
  5. Limited land to build on so there’s always a demand for real estate

The intresting part of that article is that since 75% of NYC is co-ops, a housing downturn will protect them against speculators that would’ve bought and are no longer afford to keep their apartments because of increased interest rates or job loss. If NYC becomes less affordable in housing but increase in population, where and how will everyone live there?

Click for larger image:

Source:
New York Times, 2/19/2006
By Sam Roberts

Real Estate, Migration, and Saving More February 21, 2006

I’ve talked about getting to the next income bracket by either saving more or earning more. The mantra in life for financial freedom is that it’s not what you earn, it’s what you keep that will get you towards your financial goals. One way to save more is to migrate to a less expensive area. For many of us, housing costs make up most of our expenses, so bringing down housing costs will allow us to save much more.

I read an interesting entry at “Calculated Risk”, a blog about economics and finance about US migration patterns. He compares the migration to housing prices:

There are two regions seeing significant migration inflow: the West (excluding California) and the Southeast (excluding Florida). It is no surprise that western states like Arizona, Oregon, Nevada and Idaho have seen housing prices surge based on the migration data.

However, a similar pattern is not happening the Southeast. The states seeing inflows, like the Carolinas and Georgia, are not seeing above average house price increases. Perhaps there is more available land and higher rental vacancy rates.

Based on his assessment, home values in the Southeastern states are relatively less expensive. Also, based on the migration patterns, these high inbound states such as GA, SC, NC, AL, TN, and KN should bring more demand in housing.

Another blog, Adventures in Money Making, had an entry about “understanding real estate market cycles and how do to your own reserach“. He talks about researching population migration as an indicator of real estate cycles. For example, the California market periodically experiences a rapid runnup in pricing, then it crashes, stagnates, and then rises again. As housing becomes less and less affordable, people start to migrate to neighboring states.

As baby boomers grow older and become empty nesters, it’s likely that they will also downsize to save costs on heating, real estate taxes, and maintenance. They will be in a lower income tax bracket but the savings in cost will be a lot less than if they stayed in their large homes. For us, we’re willing to downsize for a while, but our housing payments are pretty low and finding a rental or another home to move to isn’t likely with the current prices in the area. Stay tuned for our other ideas on cutting monthly costs.

Winning the $365 million lottery…yes will get you to the top income tax bracket BUT… February 20, 2006

…but will is solve your problems?
Someone in Nebraska just won a record winning $365 million Powerball, but until the winner has sought legal counsel or financial counsel, we won’t know who won.

My friend has a good philosophy about buying Lotto tickets. He only buys when the jackpot exceeds, say, $200 million. Not buying a ticket gives you 0% chance of winning, but buying one ticket gives you an infinite increase in winning a lotto jackpot, so $1 is worth that chance.

The ticket holder has the option of taking the money in one lump sum or installments over 30 years. The cash option is $177.3 million, or $124.1 million after taxes. On the installment plan, the first payment would be $6,507,986 after taxes. As I posted in my “Tax Around the World” series on Canada, lottery winnings aren’t taxed, so they would’ve won the full $365 million, but $124.1 million after taxes in the US isn’t too shabby.

I rarely buy lottery tickets, but my wife bought $5 worth. Needless to say, we did not win, but had we won, my wife told me that she will give half to charity, some to our parents, but wouldn’t give cash to any of our siblings. She said that by giving my sisters cash, they would always expect more, and it wouldn’t be good for their relationship with us and with material things. She would pay for their education, or their kids education, but it would do a dis-service to them by making money the focus of our relationship with them. My initial reaction was that this is pretty harsh, but the more I thought about it, the more I agree. The richest people in the world like Bill Gates and Warren Buffett don’t believe in passing down too much money to their kids because they want their kids to be self sufficient and work for money. I respect that. Better to have their money spent on universities or research on a cure for diseases than a bunch of Paris Hiltons in the world. The self made wealthy people are entitled to use their money for social causes and not pass on everything to their kids.

America’s Debt Diet on Oprah summary February 19, 2006

My wife showed me Oprah’s show on Friday titled America’s Debt Diet. Oprah is teaming up with Jean Chatzky, David Bach and Glinda Bridgforth, three of the nation’s top financial experts to create a step-by-step action plan that may help get you out of debt. I think it’s great that she is bringing attention to America’s personal debt problem. There are three families that are sharing their money problems with Oprah’s audience (i.e. half of the women in America). Watching this made me cringe. Here’s each family’s summary:

The Bradleys:

The Egglestons:

The Widlunds:

I noticed while watching the show that each family says that they are “horrible with money”, but it’s not the lack of income or hardships, rather it’s more about their relationship with money and maybe it’s a way to escape their personal problems. From the outside these families are happy and successful, but on the inside, the money problems are tearing the couple (and families) apart. As Oprah noted, eliminating debt is about financial and spiritual freedom. I can’t imagine how much stress and anxiety that these families (and others) have about the amount of debt. Makes me wonder, do I know anyone like them?

Changing small habits, save big money February 17, 2006

I’ve made three changes in my life in 2006, which have made a difference in my finances:

  1. I eat breakfast at home
  2. I pack my lunch
  3. I don’t take the subway if I can walk it

It takes some dedication, but it has paid off so far this year. For breakfast, I’ll wake up 10-15 minutes earlier to give myself enough time to eat, scan the paper, and drink a cup of tea or coffee. I know for some people, waking up earlier is not an option (*cough*, the wife, *cough*) but for me, eating at home is worth it. I get up pretty early at 5:30am. There was an entry on My Open Wallet, another personal finance blog I regularly read, about how much breakfast in the city can cost, specifically if you have a bagel with butter or a topping. I usually get a bagel and a coffee, or a donut and a coffee, which would cost about $2 - $3 in most NYC delis. You can also get a donut and a coffee for $1.25 in those street carts you see outside. It seems cheap, but in a month, you can save $60 by eating breakfast at home. If you buy bagels at the store, each bagel costs $0.20-0.70 depending on where you buy them. My local Whole Foods charges $0.69 per bagel, probably the costliest place to get your groceries. I get mine for $0.40 each for a 5 pack. So that’s $2 per week vs. $15 spent on breakfast.

For lunch, I’ve saved anywhere from $15 - $25 per week by packing my lunch with leftovers from dinner. This has already been discussed to death in the personal finance blogs, but that’s real money saved. Average of $80 saved per month.

Finally, I’ve stopped taking the subway to and from work. The subway fare is $2. I usually take the subway in the morning and after work. So I save $4 per day, $20 per week by not taking the subway. It’s only one stop, so walking is not bad at all. My rule now is that if a subway ride is less than two stops, I’ll walk (unless I’m in a hurry). There’s an added physical benefit too!

So here’s a summary of my savings by changing my habits

  1. Eating breakfast at home: Saved $65 per month
  2. Packing my lunch: Saved $80 per month
  3. Not taking the subway: Saved $80 per month

That’s a grand total of $225 per month saved! Real money saved. Didn’t think that $2 breakfast added up, huh?

How much do you need to retire? February 16, 2006

MSN Money has an interesting article about how much money you need to save up for retirement. The MSN article states:

Young workers don’t need to get hung up on a specific target for their retirement nest egg. Save as much as you can as early as you can and you’ll be off to a great start. Although there is no hard-and-fast rule, Christine Fahlund, senior financial planner with T. Rowe Price, recommends that young workers try to save 15% of their gross salary (including employer matching contributions) in order to replace 50% or more of their salary in retirement (the later you start, the more you’ll need to save).

I started putting money into my company’s 401k program relatively late at age of 27. But since then, I’ve put in the maximum allowed. We try to put away about 25% of our gross income into retirement savings. I’m assuming that by the time I retire, there will be no government assistance as the US as the current national debt is US$8.2 trillion dollars. There’s an interesting book called “The Number” which talks about “how much money do you need to secure the rest of your life?”



I don’t have “The Number” for myself, but as MSN says:

The sweet spot for the optimum retirement-savings number seems to lie between the two extremes. So someone looking to generate $40,000 a year in retirement strictly from personal savings would need a nest egg somewhere between $500,000 (12.5 times the initial withdrawal) and $1 million (25 times the initial withdrawal).

Do you have your Number?

Source:
By Kiplinger’s Personal Finance Magazine on MSN Money

Craigslist Money Forum…useful or not? February 15, 2006

Occasionally, I look on Craigslist’s money forum to look at trends in the topics of discussion. I’ve noticed that there are lots of questions about how to save more money. It seems like a lot of people are struggling with debt payments and increases in living costs, so saving more is not an option for some people. CL is a good place to start, but sometimes you get some BS posts, but that’s anywhere on the net.

A couple of threads about budgeting and managing loans:

Do you think CL is useful for money information?

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