Too Many Carrots?

I came across a great article today that I felt compelled to write about.  The piece, Life and Taxes, was written by Yaron Brook for Forbes.  First, I would like each reader to stop for a moment and consider all of the impacts taxes have on your day-to-day life and on your financial decisions.  The most obvious effect of taxation is the large chunk of income tax withholding that drains cash from each paycheck.  Almost certainly you will recall the property tax, sales tax, FICA tax, gas tax, and sin taxes too.  What Dr. Brook made me realize is that taxes actually have a much larger impact that just draining away your money.

Taxes are a means for the government to control the people.  How is that possible you say?  By rewarding the behaviors that the government deems moral and punishing the behaviors that the government deems immoral.  There are carrots (ie rewards) for buying a home (mortgage interest deduction), saving for retirement (401(k) and IRA), having children (dependent and childcare deductions), and getting an education (Lifetime Learning Credit, Hope Credit, etc).  There are also penalties, extra taxes, for driving a car with poor gas mileage (guzzler tax) and smoking and drinking (sin taxes).  On the surface it appears that influencing or regulating these behaviors is indeed beneficial.  Instead, I would agree with Dr. Brook that in fact this system is terrible for both the individual and society as a whole.

For example, how can it be bad to incentivize saving for retirement?  The simple answer is because it distorts the free market mechanics of the economy.  A better answer, and the one I focus on, is how it affects the individual.  As a person intent on saving for my retirement I am going to save, invest, and prepare for the future no matter what.  Now, because there is a government tax structure called a 401(k) it controls my behavior.  Rather than select the investment brokerage I prefer, I am instead effectively handcuffed to a single provider.  To get my tax break I am forced to pay a third party, which I did not select, management fees and commissions.  Without this government intervention I'd be free to pick the lowest cost, best service provider and likely keep more of my money.  The market place would respond to the increased freedom and choice given to the individual and in response companies would compete for my business. 

Under the current system I am also limited in the investment vehicles available to me.  Mutual funds, often with high costs, are the investment of choice in most 401(k) plans.  The government and its retirement tax legislation discourages novel investment ideas and exotic asset classes.  I am also restricted as to when, why, and how I access my own money.  Again the government controls my behavior and my money by using the 401(k) legislation and the carrot of tax deductions.  There is also a stick, to punish me, should I need to spend my own money before I reach the government designated age (59 1/2).  Clearly early retirement is discouraged and the system is weighed against it.  There is in fact, an illusion created by the system that everyone should work until the designated age.  Why?  It could be because it is good for the government but not necessarily for the individual. 

Furthermore, not everyone has access to a 401(k) account.  This skews the system of rewards further by punishing people who fit outside the accepted worker/drone role that the government overtly encourages.  How many people would be more apt to take a different job, become an entrepreneur, or work as an independent consultant if the 401(k) system did not tip the scales.  The same is even more true when we consider the tax incentive toward employer centered health insurance.  Look at how much this government tinkering distorts our life choices!  I am an employee less because that is what is best for me, but more because the government has created a tax system to pigeonhole me into that role.

There is even an entire legion of white collar professionals that exist solely to deal with the implications of the tax code and our governments policies of taxation.   Accountants, tax preparers, IRA custodians, 401(k) plan providers, human resources benefits experts, and the entire IRS exist solely to execute this government moral agenda.   If there was a vastly simplified tax legislation none of these people would be needed.  In fact, most personal finance blogs too would have very little to talk about too if the government would butt out of our personal spending choices.  No more headlines like: 46 Tax Deductions that Bloggers Often Overlook, My 401(k) to IRA Rollover Decision Process, or Bush Proposes Health Insurance Tax Reform.  We could stop spending so much time reading blogs and analyzing the tax implications of our finances and simply make the best choice for us, as an individual.

There are dozens of other examples:  buying too much house, having too many children, being content with underemployment, paying inflated tuition, being less productive (work less) because of punitive tax rates.  These are all symptoms of tax policies which steer individuals to fall in line with the government determined ideal.  The conceit that government can better decide than individuals is at the heart of this issue.  Dr. Brook and I are in agreement that we are more than capable of making decisions for ourselves without any government meddling.

It could also simply be the unintended consequences and unfortunate side effects, but it all distorts the market none the less.  The more I learn the more I wish government would stay out of my finances and let us use our freedom to make our own decisions about what is right for our money.

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Airlines Are Not My Friend

If you've read the news over the past two days one of the leading stories is that American Airlines has cancled 1,000 flights.  Unfortunately I have been snagged in this travel nightmare today.  I had a quick two night business trip that was to conclude with an evening flight home today.  Of couse my flight was one of those that were cut.

 

I learned of the problems around mid-morning when a coworker jumped on the web during a break in our meetings.  I remembered that I had been scheduled to fly on an S-80 for my return trip so I immediately logged into my frequent flier account to check my status.  The remarkable thing was that the airline's website barely even mentioned the issues.  A plain link to a quick PR blurb was all of the information given.

 

Next I pulled up my intinerary and was happy to find that my flight was still listed for departure at its original time.  Satisfied that things were looking fine I went back to work.  Unfortunately, right before lunch I again logged in to print my boarding pass.  That effort was met with a website error and the suggested remedy was to "speak with ticketing agent at the terminal."  That message is NEVER a good sign.  Still my itinerary showed that I had a flight and that it was on time.  Something was up.

 

My next move was to get on the phone with AA customer service.  I was pretty suprised that the phone call was met with a message, "All representatives are busy.  Please try your call again."  What?  They wouldn't even put me on hold?  That is a REALLY bad sign.  I tried calling a dozen more times and kept getting the same message.  The system would not let me talk to a real person, and the automated prompt said that my itinerary was still valid and on time.  Lies! 

 

In a last ditch effort I followed the voice prompts to dig through the automated system until I was prompted to say "Agent" if I had a special need.  A little weak I know, but that seemed to be the only way to talk to a real person.  At that point I advanced to actually being on hold, which I considered progress.  I then spent over 90 minutes on hold.  During which time I drove across town (speaker phone rocks), ordered food, ate, and had plenty of leasurely water cooler talk.  My cell phone battery died shortly thereafter, without me ever talking to a real person.

 

I had already checked out of my hotel and my rental car needed to be returned.  It looked like I was about to get stranded at the airport.  I called the car rental company and they were kind enough to let me know that if I were to return my car, I would be unable to rent another.  All of the cars were booked so if I gave up my car I'd be without wheels.  My solution was to immediately drive to the airport to talk to a ticket agent, but in order to keep my car I left it in hourly parking.  The rep on the phone said it would be $75 if I were to ditch the car in the parking garage.  If I could get a flight I'd pay $75 but if not I'd still have a car.  It would be totally worth it either way.

 

After about an hour in line at the airport I was finally able to talk to a real person.  I finally caught a break when they were able to find a commuter jet that had an open seat tomorrow morning bright and early.  I immediately set to work getting my hotel to hold a room for tonight and extending my car rental.  I caught another break when I was able to secure a room (places had booked up quickly) and even got them to match the prior night's rate despite the fact that they doubled the rate overnight.  You've got to love a company that charges everyone double due to this sudden scarcity.  Capitalism at its best.

 

So now I have returned to my hotel.  I've spent the whole afternoon and evening working to get myself home, but now I've gotten as far as the hotel where I started the day by the time I was scheduled to arrive home.  Today has been a-hell-of-a-day.  Thankfully A little experience let me keep my rental car and some bargaining and quick action let my hotel room at a semi-reasonable rate.  I have a boarding pass in hand that will get me home only 15 hours late.  I managed to work the system well enough that it didn't turn into the total nightmare it easily could have been. 

 

Today I learned that the airlines are not even close to prepared for this type of problem.  They don't have enough phone lines or the ability to scale up their customer service numbers.  They also are completely unable to give any useful information on the internet or by phone.  In this day-and-age it is rediculous to expect someone to be face to face at the terminal to get a flight rebooked.  I hope that this experience is a wake up call for all of the airlines (I'm sure none of the others would have done any better than AA) for their maintainance programs and their customer service departments. 

 

I love to travel but these days it is becoming more and more of a bitter experience if I have to give up my fate to the airline industry.  Come on guys, lets get our acts together. 

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Introspection Found in a Suit

Over the weekend I was honored to be an usher at the wedding of two great friends.  We had a really great time celebrating, and I got that warm fuzzy feeling that you get at a wedding when you know that the couple is truly meant for each other.  I also had to Dress to Impress and wear a suit.  I hate dressing up.

I've reached the point in my life where I can no longer get away with khaki pants and a button-up shirt at formal gatherings.  This was very apparent when I under-dressed for my cousin's wedding last summer.  It was an outdoor wedding on a hot summer day and I thought comfort and practicality would prevail in the wardrobe choices of the guests.  I was wrong.  While I hate dressing up, I learned that I hate under-dressing even more.  Who wants to stick out and look like a schmuck in front of the whole family by being the only guy not wearing a blazer?  I felt like a lightening rod for the biting wit of my judgmental family.  Ugh.

I own a nice suit that I bought three years ago to wear to my job interviews as graduation approached and I had to secure a "real job."  Unfortunately, a sedentary job and diminished athletic activity has taken its toll on my physic.  Thus, in order to avoid any hushed Chris Farley jokes at my expense I needed a new suit jacket.  The marketing machine of the local mens formal store was kind enough to sucker me into buying more that I intended by offering the evil and manipulative "free" bonus.  With the purchase of a $99 blazer I was awarded a pair of free matching pants.  The sales person also convinced my wife that I needed a new tie to complete the package.

I planned to buy a $79 blazer and instead got a $99 blazer, matching pants, and a tie.  After alterations and taxes the total bill was $160.00.  I'm a sucker, BUT at least I didn't look like a schmuck at the wedding.  I also took solace in the fact that this entire package is exactly half of what I paid for my last suit.  Yep, my last suit that was worn about a half dozen times and outgrown in three years cost $320.  

The way I look at it today is that I've made progress.  I've realized that the way I dress does matter from time to time.  I've realized the direct costs of being in bad physical shape, and since January I've been at the gym 3-4 times every week.   I've grown more frugal and spent half as much to buy a suit, simply by ignoring the brand name.  Finally, I've realized that I am not a financial robot and that slips and compromises are a part of the process. 

Who knew that buying a suit could be such an introspective process.  Thanks for reading.

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Carnival Update

Over the last week I've been included in a pair of quality carnivals. The first is the Carnival of Real Estate hosted by Searchlight Crusade. The editor disagreed with my recreational approach to real estate I called House Lust. I agree that it can be dangerous, but if you are conscientious I think cruising the open house circuit can still be an informative and fun way to spend a pretty weekend.

One of my articles was also included in the Carnival of Ethics, Values, and Personal Finance. I've always thought it is important to recognize that personal finance is much less about numbers and more about our values, goals, and aspirations. Check out the carnival for some great reading.

One last thing I want to include in today's round up is the creation of a new category of post on Aspire 2 Wealth. Recently I've written two posts on the topic of Behavioral Finance. I am a big fan of this area of research and so over the next few weeks and months I will hopefully continue to cover more aspects of this neat (financially powerful) science. Check out Your Brain Make Building Wealth Hard and More Ways Your Brain Tricks You if you missed them the first time.

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Costs of a Luscious Lawn

As Spring has crept up on me and it is time to start working on some outdoor projects. One of the most pressing is the dirt and weed patch that is lovingly called my back yard. It is a mess and far from the fun and functional space I need.

To address the problem I've started with a little research. Starting with no clue about cultivating a grassy yard I have learned that in my part of the country there are two options: burmuda or fescue. Burmuda grows like a weed and is very tolerant of the hot sunny climate and better suited to lower amounts of watering. On the downside, burmuda is totally brown 5 months out of the year and never the soft carpet of green I would ideally grow. Fescue on the other hand is an attractive green color year round and can be made to flourish. Its weakness is that it is best suited to shade and requires very regular watering.

Fescue depends so much on regular watering that the local garden center recommended it only if we were willing to install a sprinkler system and run it 4+ days a week. My frugality, moderate as it may be, prevents me from ever seriously considering a sprinkler system or signing up for massive water bills just for the sake of a better shade of green. After facing water restrictions from drought last summer I am also weary to be so wasteful. Thus, I feel I am left with burmuda as my only real option for my yard.

Now I also have to determine how I want to approach "installing" the grass (I'm an engineer, not a gardener). The two basic options are to seed the lawn or buy sod. With each choice there are a number of secondary choices.

Surface seeding involves tilling the whole yard and adding lime and compost. As another option, I could seed the yard with a special "plug" planting device. What should I do about aeration? On the upside, seed is relatively inexpensive, ~$150 would cover the whole yard. Unfortunately each step in the process requires buying extra products and renting equipment that are costly instead. Finally, none of this comes with any guarantee of results.

If I choose to sod the yard there are is a different slate of challenges. The largest of which is the upfront cost of the sod which would run a minimum of $720 even if I choose to install it myself. Self installation of sod is again without a guarantee of results, but it has a benefit of far fewer complications and no special equipment required.

I've also considered putting the whole process in the hands of an expert. The companies I have called will charge about $40 a month for application of an assortment of fertilizers and weed killers. Lime application is $33 once per year. Profession seeding or sodding of the back yard would run over $1,000 for either option, but seeding is cheaper and will condition the soil in addition to just adding grass.

For now I'm stuck in decision paralysis. None of the available options really meet my budget constraints or my original idea of a luscious green yard all year round. I am currently leaning toward buying sod and installing it myself. It would serve as a trade off for me to provide the labor but pay extra to simplify and streamline the process. I am open to all comments and suggestions. How much is a gorgeous lawn worth and what route would you take to get it?

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More Ways Your Brain Tricks You

Today I came across a great article about more ways your brain tricks you into making bad financial decisions.  The article, Why You're a Big Sucker, explains how a few blind spots in cause us to make bad consumer decisions and cost us money.

Two examples resonated with me personally.  The first is how the word FREE tricks us into doing some very stupid things.  In short, when a marketer or sales person is giving you something for free there is always a catch.  In my case, I called a toll free number advertised on the radio to collect my "free" trip to Las Vegas.  Of course, I found out when the marketing materials arrived there was indeed a free trip, except for the $29.99 handling fee, the $79.99 conditional cancellation fee, and the mandatory 2 hour time share presentation.  Oh, I also forgot that my wife and I could only collect our plane tickets if we were flying from a designated airport (all on the West coast) or were willing to pay a $200 travel destination upgrade to allow us to fly out of Atlanta (still a 3.5 hour drive from our house).  I also learned that by giving out my person information I landed myself on direct mailing list for every scam under the sun; I was a big sucker.

The next example that hit home is the idea that prices are relative to your surroundings.  When I am in Best Buy looking at televisions, the $1,500 42" LCD TV seems like an absolute bargain when it is put up next to the $2,700 50" LCD and the $3,300 55" Plasma.  A sneaky merchant will add a moderately priced set into a lineup of pricey sets and then tack on a "free bonus."  Of course, $1,500 for a TV is a lot more expensive when considered in a vacuum, but when it is sitting next to a whole row of more expensive options it can seem like a great deal.  Amusement park food also comes to mind when I think about the relative cost of available options.  When it costs $8 for a hamburger and $4 for a 20oz Coke a frugal person will pick the $4 hot dog and a $2 bottled water.  The situation has induced you to spend way too much money, but still get the illusion of being responsible with your money.  In other words, be sure to keep costs in their true perspective and keep the situational bias at bay.

I am regularly fascinated with the ideas behind Behavioral Finance.  A few days ago I wrote another article on the topic that you should check out as well titled, Your Brain Makes Building Wealth Hard.  Thanks for reading.

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New Worth Update: April

March has been an eventful month in my personal life. Here are the numbers:

Assets		$ Diff	% Diff
Cash	$3,934	$126	3.31%
Stocks	$0	$0	-
Bonds	$0	$0	-
Annuities	$0	$0	-
Retirement	$17,001	$866	5.37%
Home	$191,900	$0	-
Other Real Estate	$0	$0	-
Cars	$16,123	$0	-
Personal Property	$0	$0	-
Other	$0	($151)	-
Total Assets	$228,958	$992	0.44%

Debts		$ Diff	% Diff
Home Mortgage(s)	$177,272	($187)	-0.11%
Other Mortgage(s)	$0	$0	-
Student Loans	$0	$0	-
Credit Card	$10,918	($70)	-0.64%
Car Loans	$10,365	($351)	-3.28%
Other	$1,566	($58)	-3.57%
Total Debts	$200,121	($666)	-0.33%

Total

$28,837

$1,658

6.10%

There were several notable financial happenings during the past month. On the downside, the market continued its downturn and new retirement contributions of $995 resulted in only $866 in gain. Progress on the credit card front was also hampered by car repairs that left the balances virtually treading water.

Largely because of the uncooperative stock market, we are behind pace to make our net worth 2008 goal. Thus far we have added $4,408 year to date and our target was $6,000. We are currently at 73.4% of our Q1 goal and 18.4% of our full year goal.

On the positive side I celebrated my 25th birthday. We also added to our cash savings so our emergency fund has now broken the $2,000 mark. I feel much better knowing that we have cold hard cash for a rainy day. The plan is to continue the $100 per month emergency fund contributions on the way to saving 3 months worth of cash (or about $11,500).

Overall, In all major categories, assets increase and debts decreased so I think we are finally on the right path. That is all for this month. Onward and upward on our path to wealth.

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