Advice for the 'Poor Rich'

[momopi]

http://finance.yahoo.com/banking-budget ... -budgeting

Advice for the 'Poor Rich'
by Brett Arends
Thursday, September 23, 2010

Everybody hates Todd Henderson.

In case you haven't heard, he's the University of Chicago law professor who unwisely blogged last week about his financial woes in a post headlined "We Are the Super Rich."

Mr. Henderson and his wife, an oncologist, make more than $250,000 a year, and apparently they're struggling to get by. If President Barack Obama gets his wicked way, and tax rates rise for those earning more than $250,000 a year, Mr. Henderson says it will mean real sacrifice in his family.

It's too easy to pelt Mr. Henderson with rotten eggs, as so many have now done. (He yanked the post, but way too late—and on the Internet, one's blunders never die.) But can we, instead, give him some useful advice?

Sure.

Adjust your expectations. "I can show you a client of mine right now who lives in a suburb of Chicago, he's a doctor, makes $350,000 a year, and he routinely racks up $25,000 on his credit cards," says Michael Kalscheur, a financial planner at Castle Wealth Advisors in Indianapolis. The reason? Too many people have "unrealistic expectations," says Mr. Kalscheur. They figure they should be vacationing in Italy, driving expensive cars, the whole deal. "We need to knock him upside the head. He's got to stop spending money." Every financial planner will tell you the same thing: The real challenge is tackling the psychology.

Refinance your mortgage. I have no idea how big and expensive your home is, but you can now get a 30 year jumbo mortgage at around 5.3%. Even on a $1 million loan that comes to $5,500 a month, and it's tax deductible. If your home is so expensive that you can't even afford it at these rates, you can't afford it. Sell it and move somewhere more affordable. If you're underwater on the mortgage, talk to the bank. Forget about "equity," which may not exist, and look at the cash-flow.

Get a grip on your discretionary spending. Carry a pocket notebook with you for a month, and write down everything you spend. Get your wife and children to do the same. It will help you understand where your money is going. Almost every financial planner will tell you that this is invariably a huge eye-opener. As Jonathan Sard, a financial advisor in Atlanta, says, you may find you spend $100 in Target every time you go in for light-bulbs, or spend $300 taking your kids to a White Sox game. With everyone it's different, but you need to know where the losses are. If writing everything down is too much of a challenge: Junk the plastic, and just carry cash. This is instant budgeting. If you carry $500 a month, that's all you can spend.

Stop blaming the government. According to the Congressional Budget Office, a household earning $265,000 a year is in the top 20% in the country, and one earning $395,000 is in the top 10%. (The relevant thresholds are $190,000 and $290,000, respectively. And those figures were from 2007, a more prosperous time). So you're near the top of the tree in the richest country in history. At the same time, contrary to what you seem to think, federal taxes are not extortionate by modern historical standards. According to the CBO, families in the top 20% pay average federal taxes of 25.1%. The figure in President Reagan's final year in office: 25.6%.

Think about relocating. No kidding. It's not about how much you earn, it's about how much you get to keep, and if you are paying too much to live in an expensive town like Chicago, you may be much better off earning less somewhere cheaper. You and your wife both have highly portable jobs. According to the ACCRA Cost of Living Index, someone earning $350,000 in Chicago could get the same standard of living on just $230,000 a year in, say, Austin, Texas or Cincinnati.

Reconsider the investments. You say you're putting money into the stock market each month, even though you are paying off huge student loans. You need to do the math. If your investments are through a 401(k), they make sense: They're saving you taxes, maybe taking advantage of a company match. But if they are in addition to your 401(k) plan, they may not make sense right now. You are probably better off using the money to pay down that debt.

Rethink the two cars. Are you leasing them? How much are they costing you a month? This is one of the biggest ways middle class families blow their cash. I can't believe the number of people who think these moving white elephants are a status symbol. When I see an expensive car go by, all it tells me is that the owner is (a) insecure and (b) has no sense. These days you can get a decent set of wheels for a lot less than $10,000. Buy used. Pay cash. Run it till it dies.

Rethink the schools. You're sending your children to private school. But how much is it costing you? I take your point about terrible local public schools, but can you move to a neighborhood with better public schools? Or downscale to less-expensive schools?

Talk to a tax accountant. You say you're using TurboTax. With your income, you might benefit from some professional assistance. Are there deductions you can take that you're not using? Are you subject to Alternative Minimum Tax? Should you make your fourth quarter state and federal tax payments before Dec. 31? You may be able to help your financial position.

Go after all the little costs. You're hemorrhaging money. Get the kids to mow the lawn or do it yourself. Bake your own bread. Cook your own meals. Buy generic brands and bulk brands. Go to Costco, Sam's Club and other discount clubs. Junk the landline. Junk cable for Netflix. Rethink your banking: You're probably bleeding money through needless "fees" every month. Forget the "conspicuous consumption." Go for the conspicuous unconsumption. Brag about how little you spend. Find new ways to avoid spending money.

Oh, and one more thing. Never, ever, ever again blog about how hard it is to live on $300,000 or $350,000 a year at a time when one middle-aged man in four can't find a full-time job, and one in five can't find any job at all.

Write to Brett Arends at brett.arends@wsj.com

[momopi]

For reference: the blog entry from Todd Henderson:

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We are the Super Rich « Truth on the Market: Posted on September 15, 2010

The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way.

I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t.

I, like the president before me, am a law professor at the University of Chicago Law School, and my wife, like the first lady before her, works at the University of Chicago Hospitals, where she is a doctor who treats children with cancer. Our combined income exceeds the $250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.

The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.)

Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time.

We pay about $15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be.

Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive.

If our taxes rise significantly, as they seem likely to, we can cut back on some things. The (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total. But more importantly, what is the theory under which collecting this money in taxes and deciding in Washington how to spend it is superior to our decisions? Ask the entrepreneurs we employ and the new arrivals they employ in turn whether they prefer to work for us or get a government handout.

If these cuts don’t work, we will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them. The irony here, of course, is that the government is working to save both of these industries despite the impact that increasing taxes will have.

The problem with the president’s plan is that the super rich don’t pay taxes – they hide in the Cayman Islands or use fancy investment vehicles to shelter their income. We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to be hurt by the president’s plan. The next time the president comes home to Chicago, he has a standing invitation to come to my house (two blocks from his) and judge for himself whether the Xxxxxxxxxs are as rich as he thinks.

[momopi]

My comment to Mr. Henderson:

1. Hey IDIOT, if your accountant isn't doing his/her job to help you save money and get a bigger refund check, GET A NEW ACCOUNTANT. Unless if your taxes is very complicated, an accountant's services will only cost you few hundred bucks a year. Ask around your workplace to see if anyone is very happy with his/her accountant, and ask for that accountant's phone #.

2. The interest in your mortgage is tax deductible. If you're upside-down on your loan go apply for an loan modification. Can't afford your home? Why did you buy something you couldn't afford in the first place? Would you advice Jose, the guy who mows your lawn, to buy a $80,000 Mercedes that he couldn't afford?

3. Your property tax is tax deductible. Quit bitching. Real estate already offers some of the biggest tax deductions and exemptions in the tax code.

4. If you made a combined income of >$250k/year and your monthly discretionary $ is less than a few hundred bucks, you flunked home econ 101. Do yourself a favor and hire a financial advisor.

5. Instead of threatening to withdraw your daughter from her art class at the community art center, how about YOU learn to live within your means better? Either learn to spend less and save more, or find some way to make more money. It's that simple, Mr. Henderson. Here, let me recommend a book:

[MrPeabody]

The government has destroyed the middle class through inflation and taxes. Just, think of it, in the 1950s a man could afford a house, a wife, and several children, and retire with a nice pension. Today, two people making $250,000 a year can’t make ends meet. To live the life of the average middle class man in the 50s, you would have to be a multimillionaire today. The standard of living has declined, but the rising numbers created by inflation gives the illusion of prosperity.

[Rock]

The government has destroyed the middle class through inflation and taxes. Just, think of it, in the 1950s a man could afford a house, a wife, and several children, and retire with a nice pension. Today, two people making $250,000 a year can’t make ends meet. To live the life of the average middle class man in the 50s, you would have to be a multimillionaire today. The standard of living has declined, but the rising numbers created by inflation gives the illusion of prosperity.

I actually think the argument is a lot more complex than that. Sure, the rich have gained control of a much larger chunk of the pie than they had in the 50s. But today's pie is MUCH larger too. We've become much more efficient and created a lot more from the basic resources of the planet. And for the record, couples who can't live reasonably on $250K per annum in the US today, even in Manhattan, are most likely egotistical show-offs and big-shot wannabes.

Also, eople will always compare themselves to one another, its just in their nature. When there's too big of an imbalance, some will be very unhappy. If everyone had 50,000 per year of income (today's dollars) and owned net assets of $500,000 (an extreme case), there would probably be a less complaining than if there were 2 classes - L class and H class - with L class making $100,000 per yer and owning $1 mn in net assets but H class (5% of population) making and owning say 50 times what L class did.

Anyway, lets get back to the pie. I have not done any kind of detailed study on this issue so I will just give my off-the-cuff impressions through a few examples of what I believe is probably true. Please correct me where you can show I am wrong.

- Today a smaller percentage of people starve, both in the US and globally. We have access to more calories and grow taller. I've realize that many of us have also become obese and the quality of these calories can be questioned. So its a mixed blessing. But for those who are determined to eat healthier and stay in better shape, its still just as possible if you can avoid being seduced by all the crap out there. Work-out options, nutrition, and knowledge are much better today than then. Today's top athletes are bigger, faster, more muscular, more efficient, etc. Life expectancies have increased and a higher percentage make to to extreme old age (90 and above).

- Information and entertainment options are 1,000s times richer than what was available in the 50s, both in quality, quantity, and timeliness. And its cheaper and more widely available.

- Education has also become generally much more expensive at the uni level on a relative basis. But these days, anyone who wants to self educate can do it cheaply and effectively with the Internet. All you need is enough raw intelligence.

- Health care is a mixed bag. Its harder and much more expensive to get quality access. But its of a much higher standard too. In the 50s, insane asylums were similar to torture chambers in many ways. Lobotomies were performed on some unruly patients. A decade earlier, Rosemary Kennedy, younger sister of JFK, was lobotomized at the insistence of her father. She lived the rest of her life as a near vegetable.

- I know things seem weird today with femanazism, PC, Homeland Security, ect. But in the 50s, we were dysfunctional in different ways. There were communist witch hunts, laws which discriminated strongly against certain races, blatant homophobia, and a high level of police corruption in the major cities. A decade later, we suffered the Vietnam debacle and hippie movement.

- Traveling abroad to see the world was much more expensive on a relative basis and accessible to a much smaller percentage of the population. Those of us who wanna find less spoiled and better quality women are much more likely to be able to do so now than in the 50s.

- Long distance telephone communication was unreliable and exorbitantly priced in the 50s. Today its virtually free and of much better quality.

- In the 50s, people generally had choices, but not many. Choose a major, choose a career path, choose a company, choose a house, choose a wife, have kids, and grow old raising them, do the 9 to 5, watch 3 network channels, and listen to the same music everyone else listens too. There really weren't many niche opportunities. There were a few round and square holes to choose from and that was basically it. Today, you really have thousands of choices. For anyone who is at all creative or has non-conventional desires (which really, most of us probably do at heart), today is much better time to be living in than the 50s. Warren Buffet recently said something to the effect of - people who are young today have much better prospects than he could have ever hoped for in his day, in ever way.

Bottom line is, comparison is not black and white. But if you gave me the chance to be re-born with choice of growing-up in a median income 50s American environment and lifestyle, or a median income one from today, I would not hesitate to choose the latter.

Add to this or correct where appropriate.

[momopi]

The government has destroyed the middle class through inflation and taxes. Just, think of it, in the 1950s a man could afford a house, a wife, and several children, and retire with a nice pension. Today, two people making $250,000 a year can’t make ends meet. To live the life of the average middle class man in the 50s, you would have to be a multimillionaire today. The standard of living has declined, but the rising numbers created by inflation gives the illusion of prosperity.

That's just silly. If a couple making >$20k/month can't make ends meet, they obviously flunked home econ 101. I'd say they need to ask the mom (or mother in law) to move in and manage the household for them.

If you bought a new 3,500 sq ft million dollar house in South Orange County, California, even with property taxes and mello roos, the monthly mortgage (plus escrow account) is ~$6,000. The mortgage interest & property tax is fully tax deductible.

Like, WTF did this couple buy? Multi-million dollar McMansion?

[Rock]

The government has destroyed the middle class through inflation and taxes. Just, think of it, in the 1950s a man could afford a house, a wife, and several children, and retire with a nice pension. Today, two people making $250,000 a year can’t make ends meet. To live the life of the average middle class man in the 50s, you would have to be a multimillionaire today. The standard of living has declined, but the rising numbers created by inflation gives the illusion of prosperity.

That's just silly. If a couple making >$20k/month can't make ends meet, they obviously flunked home econ 101. I'd say they need to ask the mom (or mother in law) to move in and manage the household for them.

If you bought a new 3,500 sq ft million dollar house in South Orange County, California, even with property taxes and mello roos, the monthly mortgage (plus escrow account) is ~$6,000. The mortgage interest & property tax is fully tax deductible.

Like, WTF did this couple buy? Multi-million dollar McMansion?

Why did you delete the ballpark housing and income stats you posted on typical middle class lifestyle in 50s and change your post? Many people seem to falsely believe life in the 50s was easy and storybook like. Maybe too many old movies? Well, did you ever think that the old classics might misled us about the good old days just like movies today mislead foreigners about life in modern America.

[MrPeabody]

In the 1950s, it wasn’t unusual to have 3 children, and you could even find families that had 6, 7 or even 10 children. Do you know anyone who has 3 children today? The cost of raising a child has gone through the roof, so people limit their family sizes, and usually conclude they can only afford one child. And, feminism was a gimmick to get the women working so that now two people need to work to provide what one person could provide in the 1950s. If two people are now necessary to work to support the same standard of living, it appears obvious that the standard of living has gone down.

The one thing that has improved dramatically is technology. It is much faster to use a word processor then a typewriter where you have to white out every mistake. And you have more choice of airplanes for travel. But has technology really improved the actually quality of life? For example, today associate lawyers type all their own work. It seems that technology has benefited them. But wait, lawyers in the 1950s would dictate to a secretary. Dictating is much easier then typing it yourself, so has the technology actually benefited associates or made their lives more difficult? In the 1950s, a man would come out in a nice uniform and pump your gas, fill your tires, and check under the hood. Today, you do it yourself. In fact, thanks to technology, you pretty much have to do most things yourself, instead of having someone help you. You even check yourself out at the supermarket. And as for airplanes – look at some old pictures of what it use to be like compared to today where you are packed into a seat so small you can hardly breath. So has technology made your life easier or more difficult? And then there are all the unemployed people made useless by technology and outsourcing of jobs, which is destroying the middle class. And there is the destruction of the communities. And finally, did you know that American women use to be considered the sweetest most desirable women in the world? Need I say more? As for me personally, I am not talking from movies, because I was born in the 50s and remember some of it ( the 50s culture actually lasted to about 1964).

[momopi]

Why did you delete the ballpark housing and income stats you posted on typical middle class lifestyle in 50s and change your post? Many people seem to falsely believe life in the 50s was easy and storybook like. Maybe too many old movies? Well, did you ever think that the old classics might misled us about the good old days just like movies today mislead foreigners about life in modern America.

Life in 1950s America

According to 1950 US Census (http://en.wikipedia.org/wiki/1950_United_States_Census), there were approx. 150 million people living in America, roughly 1/2 of today. Only 50% of the adults had HS degree and less than 5% had college degree (even with GI bill). There were 46 million homes in the US at approx. 51% were owner occupied. 60% of families owned a car (vs. 1 in 7 in UK). The median American family income was $3,200 to $3,300 per year, and the family spent ~30% of its income on food.

Back then men married at age 22-23 and women at age 20. There was probably a surplus of marriage age women in the US from WW2 casualties. Roughly 300,000 American servicemen were killed in WW2 and the survivors brought back 250,000-300,000+ war brides from abroad. Women in Europe married American GI's because WW2 had killed 60 million people and a whole generation of European men were wiped out.

In 1950 an average new construction house was 983 sq ft, compared to 2,200 to 2,400 sq ft SFR in 2006. By 1959, 7% of new construction homes had air conditioning, but overall only 2% of all homes had A/C. 30% of homes in America did not have running water. Compared to today, there were no cell phones, no cable/satellite TV, no video games, no internet, no personal computers, and no monthly bills associated with the above mentioned utilities.

The poverty rate in 1950s was 22.4%, compared to 14.3% in 2009. Unlike those in poverty 60 years ago, 46% of the American poor today (defined as being below the poverty line) own their homes, 66% live in homes with 2 rooms per person, 80% has air conditioning, 75% own cars, 62% have cable or satellite TV, and 89% are well fed.

Real poor people living in poverty is a small % in America. 6% of the poor (0.86% of total population) live in crammed living conditions, like the sterotype 4 Mexicans to one room with bunk beds, and 2% of the poor (0.3% of total population) goes to bed hungry at night, i.e. motel kids left to fend for themselves while the parents are working 2 shifts at blue collar jobs.

Generous people, such as this restaurant owner, provides free dinner to them 6 days a week:
http://www.youtube.com/watch?v=LioiYW9_ ... ion_711981

In the 1950s, it wasn’t unusual to have 3 children, and you could even find families that had 6, 7 or even 10 children. Do you know anyone who has 3 children today? The cost of raising a child has gone through the roof, so people limit their family sizes, and usually conclude they can only afford one child. And, feminism was a gimmick to get the women working so that now two people need to work to provide what one person could provide in the 1950s. If two people are now necessary to work to support the same standard of living, it appears obvious that the standard of living has gone down.

I have a friend with 5 kids, and another with 3. But those are exceptions. Most stop at 2, or none (DINK = Double Income No Kids).

2009 US Fertility rates
Total 2.05
White 1.83
Black 2.09
American Indian, Eskimo, Aleut 1.85
Asian or Pacific Islander 1.98
Hispanic 2.89

The largest factor in birth rate decline has more to do with urbanization. If you look at countries like Japan, where women were expected to quit work after marriage to be a stay-at-home wife and raise kids, the birth rate still crashed. They even banned birth control pill for decades to combat the decline in birth rate and it did not work.

America actually has a fairly balanced birth rate as an industrialized country, because our suburban lifestyle encourage families and children. However, due to the cost of living differences, it's much harder to raise a family on single income in places like California vs. Texas.

My ex coworker Dave in Orange County was able to do it by choosing to buy a cheaper town-home in the city of Orange, so his wife could afford to stay home and raise their 2 children. In contrast, another friend, Ken, living in outskirts of Austin bought a brand new SFR w/large lot for less and his wife can afford to stay home to raise their 2 kids, because their mortgage is only something like $500-$600/month before taxes. Dave from the first example took the company's relocation package, sold his town-house in CA and moved to San Antonio. He made enough $ from the sale of his home to buy a new SFR in San Antonio with cash (the equity gains were tax exempt).


Now, if you want to bash about high prices, I can point you to this example:
http://www.icdcoc.com/

Full time day care is $1350/month, and pre-school is $1155/month for the first year in my neck of the woods. ;p