JoeTaxpayer

From Innumeracy.com:
Innumeracy: A term meant to convey a person’s inability to make sense of the numbers that run their lives. Innumeracy was coined by cognitive scientist Douglas R Hofstadter in one of his Metamagical Thema columns for Scientific American in the early nineteen eighties. Later that decade mathematician John Allen Paulos published the book Innumeracy. In it he includes the notion of chance as well to that of numbers.

From “Money Merge Advantage“, an MMA agent’s blog:
“In FACT… The software alone could still beat the 2nd scenario (putting the $300 discretionary to the mortgage each month)… WITHOUT using that discretionary income AT ALL. Yes, SERIOUSLY!”

If you have no idea what Money Merge Accounts are, or what I am talking about, please see my Money Merge Links page for references and then read on. In the blog I reference, the example starts with $250K, 30 yr, 6.5% mortgage. Then we are told a bi-weekly will provide some $75,800 worth of interest savings. No problem there, a bi-weekly is like paying 8% higher than the required monthly payment, usually in the form of a 13th payment snuck in once a year. The examples then offer that $300 more each month will cut the mortgage down to 19 yrs 8 months, which I still follow. But then the blog writer claims that with no extra money, beyond the $300, MMA will cut the mortgage to 14 yrs 4 months! This is beyond the wildest claims I’ve seen so far, and completely beyond reason.

Lastly, came the quote above, suggesting that with no extra funds available, the HELOC shuffle alone can produce savings greater than a $300 monthly principal payment would achieve. This raises new and troubling questions. The couple in the example have a net income of $3800/mo. If their HELOC were 0%, and they borrowed this $3800 at the beginning of each month, and paid it back at month’s end, it would gain them just under $21 per month, nowhere near $300. And no HELOC offers a 0% interest rate. At best, the HELOC is a percent or two under the fixed rate mortgage. This is simple math, folks, and no “sophisticated algorithms” are going to change the fact that 1+1=2 or that the best one might squeeze out of their HELOC shuffle efforts is $20-$30 per month, certainly not $300.

Joe

written by JOE \\ tags: HELOC, income, innumeracy, interest, mma, money merge account, Mortgage, saving, sophisticated algorithms, UFF

A couple weeks back in a post titled Money Merge Hyperbole, I discussed the Money Merge product offered by UFF, and focused on the fact that in their published example, it’s clear that the use of a HELOC doesn’t provide any incremental savings. A kind reader points out on his web site, My Debt Elimination Calculator, that HELOC can provide some savings depending on a number of factors. Among them, the time of the month that income comes in, when bills are due, and the relative differences in HELOC interest rate, mortgage rate, and checking account interest. I agree with this. I’m from the “numbers don’t lie” camp and Greg offers numbers to back up his comments on that post. In his examples, the HELOC system saves $2550 more than the prepaying method on a $100K mortgage. (This is for the more realistic example where the borrower doesn’t have the (unrealistic) extra $1000/mo, but a more reasonable amount which will reduce the mortgage to 24 years from 30. In this case, Greg’s software is capturing over $100/yr in extra savings by using the HELOC. I certainly can’t knock a system that beats what I saw on official MMA sites but only costs $30. Take a look through the link above.
One point I must concede is this: It’s easier to make a purchase (waste money) when it’s from cash in the bank than when you are taking that money as a HELOC withdrawal. Maybe that’s what the MMA people are trying to say, but that message is lost to me among all the hyperbole.

I will close with this question and thought. If UFF, with the chance to put their product in the best light, cannot provide an example with real numbers which shows any savings beyond that of the prepaying (which I can illustrate with a free spreadsheet) yet create this illusion of ’sophisticated algorithms’ taking millions of dollars to develop, how do they justify a $3500 price tag? On the flip side, you have been introduced to Greg, (whom I just met via my blog) a Computer Scientist who was able to write code providing a solution that actually impressed me looking at his example. I’m sure this debate isn’t over.

Joe

written by JOE \\ tags: debt elimination calculator, free spreadsheet, HELOC, interest, mma, money, Mortgage, Savings, sophisticated algorithms, spreadsheet, UFF

I continue to be amused by the debate over whether the ‘Debt Snowball‘ that Dave Ramsey suggests is the best method for fast debt reduction. I wrote about this some time ago on my Feature Web Site, and got quite a bit of email telling me how I ignored the emotional side. They quoted Dave Ramsey, “personal finance is 20% head knowledge, 80% behavior”.
Today I came across the web site “Consumerism Commentary”, which had a nice spin on paying the highest interest debts first (as I suggest), but calling this method “The Debt Avalanche“. Sounds good to me. Nice article.

Joe

written by JOE \\ tags: dave ramsey, debt, debt snowball, Finance, interest, irs, Personal Finance

I recently fielded this multi-part question;

First, is conversion from a traditional IRA to Roth IRA still OK when over 70 and taking RMDs (required minimum distributions)?

Ok? It’s fantastic!! I will first tell you that I believe that Roth’s value while working is slightly exaggerated. Your scenario above is ideal. I have an 80+ yr old client who is in the 15% bracket. Each year we convert just enough to ‘top off’ that bracket so the next hundred dollars would have been taxed at 25%.

Second, does the “conversion” count as part of RMD?

No, the conversion must take place after you calculate the RMD. Our RMD is based on 12/31/07 year end balance. We can do the Roth conversion any time during the year, but that RMD is fixed.

Third, is it possible to transfer stock directly from Traditional IRA to Roth IRA — using current valuation on day of transfer as the basis for amount of conversion?

Yes - you can convert stock, the broker will report that value based on the day of conversion. There is no wash sale selling in one IRA and buying in another, anyway.

Joe

written by JOE \\ tags: IRA, irs, required minimum distribution, roth conversion, roth ira, tax, traditional ira

If this past April 15, you found yourself on the receiving side, getting a refund on your taxes, consider adjusting your withholdings. The IRS web site has an online calculator which will help you determine the correct number of exemptions to claim on your W4 submitted to your employer. If you were using your tax withholdings as a vacation fund, why not consider having a fixed amount saved from each paycheck and moved to a savings account? At least if you need these funds during the year, they will be available. Otherwise you are lending Uncle Sam money and not getting any interest.

Joe

written by JOE \\ tags: interest, irs, money, Savings, tax withholdings, Taxes, w4

In a simulcast of publishing both here, and my main web page, where I publish a monthly article, I am happy to offer my List of Lists;

Ever since 1977’s “Book of Lists“, our fascination with lists and sets of rules has grown. David Letterman’s Top Ten List has been going on for decades with no end in sight. These are Rules of Money that I’ve saved over the past few years, enough to post my favorite “List of Lists”. If I missed one of your favorites, please leave a comment and I will add it.

• 25 Rules to Grow Rich By
• 9 money rules to live by
• 16 favorite money rules of thumb
• 5 money rules to live by
• Jim Cramer’s 25 Rules of Investing
• Charlie Munger’s 10 Rules for Investment Success
• The 10 Most-Hated Money Saving Tips
• Eight Secrets of Financial Happiness
• 10 Reasons You are Not Rich
• 20 timeless money rules
• Dilbert’s “Unified Theory of Everything Financial”
• 50 Tips to Help Establish Your Emergency Fund
• Ten Things You Need to Know About Money
• Seven Reasons to Welcome a Recession
• 15 ways to improve your credit score
• 50 Ways To Raise Your FICO Credit Score

Take your time, enjoy the list, and send me your thoughts.
Joe

written by JOE \\ tags: 20 timeless money rules, book of lists, charlie munger, Credit, david letterman, emergency fund, fico, fico credit score, Investing, investment, investment success, jim cramer, money, recession, rich, saving, TIPS, top ten list

The New York Times offers an interactive page offering beautiful graphs of the change in home prices in different parts of the country.

Clicking on the image above will take you to the Times’ site where you can view the changes in the region you wish.

Joe

written by JOE \\ tags: Finance, Home, investment, money, Mortgage, new york times, subprime

Consumer Reports recently offered an article titled “Your Debt; 8 Benchmarks For Borrowing“, which, for the most part, I liked and will consider adding to a List of Rules I’m assembling. Among the warning signs;

• 28% - Monthly Mortgage (including property tax and insurance) should not exceed this number. Really? That’s exactly what I suggested in my post Mortgage 101, so I’m in full agreement there.
• 80% - The first mortgage should not exceed this level. A lower debt to equity ratio is better. Interesting, I made the same comment in Mortgage 101, but that was more to benefit the bank, not the borrower. I’ll maintain that if the payments are still within the guidelines, there’s nothing magic about 80%.
• 6 - month’s worth of income as emergency money. I wrote about this as well, a couple weeks back in my controversial Emergency Funds post. This may be a worthy goal, and right for many, but not at the top of my list. I have been aggressive in retirement savings, well above average, managed the mortgage with serial refinancing to capture a low rate and an amortization that will end the mortgage well before retirement, and funded college in full for a child who is only 10, yet I’ve ignored this rule.

The CR article goes on with guidelines that are still worth reading if not following right to the letter.

Joe

written by JOE \\ tags: amortization, debt, emergency fund, Finance, income, Investing, Retirement, saving

I recently read an article on CNN/Money’s website titled “Credit card rewards are a real rip off“. The page starts with a legitimate gripe, “You got burned with frequent flier miles, which were nearly impossible to redeem and hardly worth the hassle, so credit card issuers turned to other kinds of incentives to entice you to charge more.” Now, I’d be hard pressed to argue with that. I typically use the miles to upgrade to first class on longer flights for a more comfortable ride, but rarely have been able to use miles to get the original ticket, too few seats are available per flight, and tend to get booked well in advance.
But CNN goes on to trash other reward programs as well, suggesting that “though rewards do spur consumers to spend more, the study found that confusing rules and restrictions make most reward cards more trouble than they’re worth.” Really? Let me share my card reward experience:
I use Amex Open. It rebates 5% on gas from dollar one. I calculate the rebate at $600+/yr on just that. Same 5% on any office supply store purchases.
A Fidelity Mastercard that gives 2% (they changed to 1.5 for new applicants, but I kept the 2%) into a 529 account. My child is 10 and we will have a full semester of college paid free with the cards rebates. We only charge what we can pay in full each month.
There is responsible credit card use. We prove that. If one will be too tempted and run the card up on purchases they cannot pay in full, they should use cash only. Me, I’ll enjoy the rebates.
Joe

(Well, just when I finished setting up this post, the mail came, and Amex advised me, that due to the high cost of gasoline, they were reducing the gas rebates down to 3% on this card. Still, that’s cash back in my pocket, just no so much.)

written by JOE \\ tags: Amex, CNN, cnn money, Credit, credit card, credit card rewards, gas, money, reward experience

I received enough email asking why I picked on Obama for what may have been a slip of the tongue regarding distribution of income gains. I think that our elected officials, whoever they are, need to speak with precision and when it comes to numbers, be close enough to exhibit an understanding of what they are discussing.

So, this past Tuesday, I hear Sen John Barrasso (WI) being interviewed by CNBC on the current gas price concerns. He offered that the average American uses 1500 gallons of gasoline each year. I’ll not split hairs to suggest that he meant the average driver, that was understood. But let’s think for a minute. 1500 gallons, even at 20 MPG (which is low, earlier, CNBC said the MPG was up to 30 MPG this year, which seemed high) that’s 30,000 miles per year. That just seemed wrong to me, so a few seconds with The Google and I found the Energy Kid’s Page, a site hosted by the department of energy. There, I found the number to be 500 gallons average with 12,000 miles driven by the average driver. This made a bit more sense to me, and this data was confirmed by the California Energy Commission, which states a US average of 464 gallons used per year. These numbers differ by less than 10%, but are far from the 1500 gallons the honorable Senator from Wisconsin stated.

The price of gas is high, painfully so. In any dialog about economics, it’s important to have your numbers right. Now, at work on Monday, I know that every dollar rise in gasoline impacts the average driver by $500 per year. I don’t aspire to the Cliff Clavin award, but I do want to know my facts before I quote them.

(I just found another beautiful New York Times graphic titled, “The Varying Impact of Gas Prices” illustrating the percent of one’s income going to gasoline purchases, across the country. Take a peek.)
Enjoy the weekend!

Joe

written by JOE \\ tags: barack obama, distribution of income, economics, energy, Finance, gasoline, innumeracy, john barrasso, mpg, president