Coffee heat rising

Money management

How to Buy Your Next Car in Cash

by
Rolls-Royce-Blue-Phantom

The other day while a friend and I were chatting, the subject of buying cars came up. When I mentioned that I pay for my cars in cash, he expressed some awe: the very idea of not having to make car payments was so far outside his ken it might as well have come from Mars.

“Who can pay for a car in cash?” he wondered.

You can. I can. Anyone can.

You may not be able to pay for your present car in cash, but you can pay cash for the next one. Here’s the strategy:

Take the term of your present loan and multiply the number of years by two. Let’s say you have a five-year loan. Five times two is ten years. That’s how long you’re going to keep the car you’re paying on. Fortunately, most cars are now built to last that long, if you take halfway decent care of them—so, plan to change the oil and stick to the manufacturer’s maintenance schedule.

OK. So you make your monthly car loan payments faithfully, as you agreed to do when you bought the chariot. In five years, the car is paid off.

Let’s say you’ve been paying $450 a month toward the loan.

You know… If you can afford to pay $450 a month to a lender, you can afford to pay yourself $450 a month. Right?

So for the next five years, the remainder of the time you’ve scheduled to drive your now paid-for clunk, what you’re going to do is arrange an automatic transfer of $450 a month into savings.

In five years, when your car is ten years old, you’ll have $27,000 sitting in your automobile purchase savings account. Your car will have some resale or trade-in value—my ten-year-old Sienna, for example, is worth about $5,000. Let’s say yours is comparable: you now have 32 grand with which to buy a new vehicle.

When you do buy the new car, even though you’re paying in cash, figure out what monthly payments would cost if you financed the thing. Take that amount—the new theoretical payment—and put that amount aside over the length of the theoretical loan. In three years or five years, once again you’ll have all you need to buy a new car. Now you can purchase new or new-to-you cars more often. If you decide to drive a car for its entire ten- to fifteen-year lifetime, you’ll have a period in which you need not deduct anything for the future vehicle from your pay.

And you’ll never be saddled with a car loan again.

What if you’re already a couple of years into a five-year loan? What does the math look like then?

It should be about the same: you’re going to keep the car for ten years. After the loan is paid off, you’ll just keep on making those payments, only to yourself instead of to some lender.

What if you pay off the loan early? Bully for you: you can either buy another car sooner, or you can keep the car until it falls apart like the Minister’s One-Hoss Shay. The second strategy will give you a longer period either to save up more money for a fancier ride or to float without having to take the car payment money out of your income.

My first post-divorce car was bought on time. Being averse to loan payments, I paid off the loan as fast as I could. Because a substantial part of a car payment can be interest (less so these days, but when the economy was strong lenders soaked a fair amount of interest out of car buyers), paying toward principal accelerates the pay-off date. By paying a little extra toward principal each month and then taking every windfall (tax refunds, credit card rebates, yard sale proceeds, whatever comes your way) and throwing it into the principal, too, I paid off a five-year note in 18 months.

Then I started paying myself. I didn’t keep the money in my bank accounts, because it would be too easily accessible there—too tempting. Instead, I banked it in a Vanguard short-term corporate bond fund, which I was less likely to raid for indulgences or emergencies. This rather stodgy fund was safe enough, and it earned more than a bank savings account would have paid. Today, I’d put it in a money market fund instead, because a withdrawal from the money market is not a taxable event. If you know you’re going to withdraw $25,000 or $30,000 in one swell foop, it’s best to minimize taxes when that happens.

This plan really takes no more self-discipline than you have to muster to make your loan payments. It takes some time, but once you’ve got the loop going, you’ll never have to pony up a chunk of your paycheck to a car lender again.

Head-banging in the corporate bureaucracy

by

Godlmighty! Yesterday I realized that Fidelity never sent my April 403(b) drawdown. So now on Monday I have to try AGAIN to get those people off the dime.

What torture! I just hate bureaucratic runarounds. I hate them even more when the bureaucracy is private instead of governmental. At least with the government the employees are usually trying to accommodate you.

I have talked to CSR after CSR after CSR—every time you call, you get a different person, and you never can get through to Person 1 who told you X or Person 2 who told you Y. I have asked and been assured now three times by three different people that the drawdown required by the State of Arizona would be made correctly and would be direct-deposited in my checking account. The result is that since last December I’ve gotten two checks sent in the mail. And this month I’ve received nothing.

It just makes me so angry. We originally had the option to invest with Vanguard in its 403(b) plan. As soon as that became possible, I moved most of my 403(b) funds over there, because all my nondeferred savings were at Vanguard, whose fees are low, whose profits are handsome, and whose customer service is excellent. That lasted all of a year—I guess Vanguard must have been too competent to work with Arizona State University.

If I weren’t afraid the state would deny me the rest of my RASL, I’d roll the money over into my big IRA now. In fact, my financial advisor and I hatched a plan to have them roll a portion of the drawdown over to the IRA, but I hadn’t gotten around to doing battle with the bureaucrats about that, mostly because I wanted to see how I would get by in the summer before cutting the drawdown from $500 to $100.

Presumably, though, that wouldn’t have happened, either. The only way I’m going to get the money where it belongs is going to be to roll the entire amount over. And I’m really afraid that’s going to get me in trouble, since the woman who administers the RASL program insists that to be eligible you have to be drawing what she calls a “pension”—i.e., a monthly drawdown from the state’s 403(b) plan.

I’ve concocted a new plan, though. To wit: leave enough cash in the 403(b) fund to cover the time between now and the date the last RASL check is issued, but roll the rest of it over. There are only 22 months remaining, and so the most I’d have to leave in there—assuming I continue the drawdown I’m currently making, which I’d actually like to cut—is $11,000.

Whatever I decide to do, though, next week I’m going to have to bang my head against the bureaucratic wall again. I’m royally sick of that!

Medicare, Medigap, and Long-Term Care Premiums: How deductible are they?

by

In response to my rumination about the strategy for surviving in Year 1 of Bumhood, when Social Security imposes an earnings limitation that amounts to real poverty, readers have speculated that structuring my business as a sole proprietorship rather than as an S-corporation would allow  me to deduct Medicare, Medigap, and long-term care premiums dollar-for-dollar against business income, rather than having to jump the 7.5% hurdle set up for people who itemize. Frugal Scholar made the interesting discovery that “employees of an S corp can take the self-employment health insurance deduction.”

It’s an interesting concept; I just sent off an e-mail to Tax Lawyer inquiring about it.

Somehow, though, I doubt Uncle Sam will let me run Medicare premiums through a corporation. Social Security automatically withholds Medicare Part B from your Social Security check—you don’t get a choice about it. It might be possible to work some sort of scam with the Medigap premiums, but even there…questionable.

The point of incorporating CE Desk as an S-corp, in my case, is to allow me to stay in business during this endless first year of penury, during which the government penalizes me if I earn more than $14,160 because I’m under age 66. I earn about $240 more than that teaching six sections of freshman comp. Without a way to shelter my editing and blogging income, I would have to close both of those enterprises down. As we know, when you quit working at a freelance enterprise, your clients go away permanently, so that when you want to revive your little business, you have to start over from scratch. I’m getting too darned old to start over from scratch! Plus FaM is starting to earn a small but steady income…I don’t want to get rid of that, either.

Channeling the income from the S-corp means that if I earn, let’s say, $5,000, through freelance enterprises, the money belongs to the corporation, not to me. I am an employee of the corporation. My “job” is to direct the corporation. The corporation has to pay me an amount deemed “reasonable” by the IRS. It’s not paying me for my day-to-day editing and writing work; it pays me to be a corporate director. So, on a $5,000 income it pays me a little over $500. That is salaried income.

The S-corp does not shelter the salary you pay yourself from self-employment tax. What it does is convert some (but not all) of your freelance income into a “dividend,” on which none of the social welfare taxes are due. From my pittance, it has to withhold FICA and Medicare, and it has to pay FUTAand the employer’s share of FICA on the amount it pays me. The rest of the money—the part that remains after my “salary” is paid—can either remain in the corporation to be used to cover operating expenses (or just to sit there) or can be disbursed to the corporation’s owner(s) as “dividends.”

Because Social Security views dividends as return on investment, not as salaried income, this part of my freelance revenues doesn’t count toward the $14,160 earnings limit.

While it is true that you don’t pay self-employment tax on the dividend part of your drawdown from the corporation, it also is true that you don’t get credit toward Social Security for that part of your annual earnings. Thus if you did this for a very long time—say, starting fresh out of law school or medical school—you would greatly reduce the amount of your Social Security entitlement when the time comes to retire. If you engaged this strategy, you would have to be certain that you were going to earn and save a great deal of money during your career…otherwise, in your old age you’d end up just as penurious as an aging college English lecturer.

According to Elderlaw, qualified long-term care insurance premiums and Medigap premiums are regarded as medical expenses and are deductible if they exceed 7.5% of your gross income:

Premiums for “qualified” long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including “Medigap” insurance premiums), exceed 7.5 percent of the insured’s adjusted gross income. If you are self-employed, the rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit–your medical expenses do not have to exceed 7.5 percent of your income.

Medigap will cost me about $1,200 in 2010; long-term care is about $960, for a total of $2,160. Medicare Part B will cost me $1,326 this year.

According to IRS Publication 502, Part B premiums are also treated as medical expenses:

Medicare B is a supplemental medical insurance. Premiums you pay for Medicare B are a medical expense. If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid.

Thus the total amount, before I buy any eyeglasses, contact lenses, or prescriptions, that will qualify as medical expenses will be $1,326 + $1,200 + $960 = $2286. And I’m not even adding Medicare Part D into that. The total, with Part D, probably will come to around $2,400.

If I stand down off one class this fall, my total earned income will be $1257(12) + $2,400(5) + $500 + $500(12) = $33,584. That’s Social Security + teaching + freelance income + drawdown from 403(b). Multiply that by 7.5% and you get $2,518. So…one pair of Costco glasses puts me over the 7.5% qualifying threshold—that’s before I visit a doctor, before I buy a prescription drug, before I buy a couple boxes of contact lenses, before I pay for a shingles shot. And the 7.5% is on adjusted gross income, which you can be sure will be less than $33,584.

I don’t earn enough from freelancing to live on (far, far from it!), and so there’s no question of my working the business so that I write off medical costs and everything else against my taxes. If a miracle happened and FaM’s traffic went up about tenfold, I’d have to reconsider that. But unless the government can be persuaded to regard my teaching income as “self-employed” (which Tax Lawyer says it will not do), in my case the S-corporation is probably better than a sole proprietorship, because it allows me to keep the pittance I do earn through freelance editing and blogging from biting into my Social Security earnings.

Next year, when I’m 66 and can work until I drop without being punished for the privilege, will be another matter. But I’ll cross that bridge when I come to it.

When Giving Goes Awry

by

Baker at Man vs. Debt hit the gong at several blog carnivals this week with his rumination on the various excuses not to give money to charities. While the article is well written and I respect the passion with which his readers respond, the enthusiasm for giving away hard-earned wages escapes me.

I rarely donate cash to any charities or churches. There’s a reason for that: charitable giving warped my father’s psychology, influencing his entire life for the not-necessarily-better, and it permanently alienated his two older brothers from each other. Effectively, it destroyed his mother and his family. Because of his experiences, he would never allow my mother to teach me religion or to drag me to church, and he would not permit her or himself to donate to anything.

At the turn of the twentieth century, my grandmother inherited a substantial sum from her father, who had accumulated a small fortune in freighting buffalo hides out of Oklahoma to market in Texas. By the time my father came on the scene, rather late in her life, she was pretty well set: she owned two houses and a commercial property in Fort Worth, and she had money in the bank.

My father was a change-of-life baby: the youngest of his two brothers was 18 years older than he. At the time he was born, his father ran off, abandoning the middle-aged wife to care for the new baby herself. Her two other sons were, by this point, out of the house and launched on their own lives. One became a ranch hand, running cattle in west Texas; the other went to work at a Fort Worth dairy. Both men had their own families, with all the concerns that entails.

Over the next decade or so, my grandmother became engaged with an alternative Christian church that since then has evolved into the mainstream. Neither brother paid much attention to what was going on, although my father realized something was awry by the time he was about ten years old. She was quietly giving money to this church: large amounts of money. The church was gratefully accepting it and offering exactly nothing in return.

The two older brothers learned about this only after it was way too late. They found out when the county seized their mother’s home for unpaid taxes. She couldn’t pay her property taxes, because she had no money. She was flat broke, having given every penny of her fortune to the church.

Did this make her a better person? No. Did it contribute to her personal happiness? Obviously not. Did it make her holy in the eyes of God? Maybe. God didn’t do much to keep a roof over her head, though. Nor did He prevent creditors and the government from taking away what little she had left. She lost both houses and the gas station, and everything she had ever had was gone. There was no help for her from any direction. She died in desperate penury, without a word from the worthies of the church that had taken all her money.

My cattleman uncle blamed his brother, my other uncle, for this state of affairs. He felt that his brother should have been keeping an eye on their mother, since he was the one who stayed in Fort Worth. The two men fought, and after that they never spoke to each other again.

My father was a little boy, but he was old enough to understand that his home was gone, his mother was reduced to poverty, and a substantial inheritance that should have supported her and all three of her sons had evaporated into the coffers of a church. He determined that he would earn back the entire amount that she had lost.

And he did. By the time he reached his goal, forty years later, the dollar amount wasn’t very much, and because he wasn’t an educated man, he didn’t understand that to match the buying power of what she lost, he would have had to save over seven times as much. But that didn’t matter: in his mind he’d regained her losses. As soon as he reached his goal, he retired, imagining he would be set for life.

To do it, he

• dropped out of school in the 11th grade;
• lied about his age to join the navy;
• worked like an animal all his life;
• spent ten grim years of his life, my mother’s life, and my life in a godforsaken outpost in the Arabian desert;
• pinched every penny that came his way;
• based his marriage and his entire life on the accumulation of savings;
• lived a miser’s life right up until the time he died.

To say he was a frugal man is to understate. Saving money became an obsession, and he focused all of our lives on it. Because he didn’t really understand money well, he made some serious mistakes, topmost among them investing all he had in insurance securities, which during the 1950s were returning at a rate of 30 percent. He didn’t realize a) that investments should be diversified, and b) no investment that was earning that much could possibly last long. When the bottom fell out of the insurance securities market, he lost almost everything—just as he stood at the verge of making his goal.

He did eventually earn the lost savings back, but this fiasco added another ten years of hard labor to his financial plan, and it pinched his personality even more than it was already pinched. Overall, he fared pretty well, considering that he had no education and only the opportunities he managed to wrest from life by main force. He kept us in the middle class, and he left about a hundred thousand dollars to his wife, my son, and me.

But his character was changed by his mother’s charity: warped and crabbed. And he was effectively left alone as a teenager, his two brothers spun off like asteroids in deep space. What remained of his family fell apart, and he spent his entire life trying to put what he thought was his birthright back together.

And that’s why I don’t give to churches.

To my mind, charity begins at home. If I give any money away, it’s to my son, who has returned the favor by growing into a decent man. By keeping myself off the public dole, I save the taxpayer a great deal of money.  And let us bear in mind that what I do to keep myself off the dole—mostly teaching—is itself a form of charity: I educate young people for a small fraction of what anyone with comparable skills doing a comparable amount of work with comparable management responsibility would earn in business. She who gives away her time, energy, and skill for the public good donates something worth a great deal more than cash.

. . . to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.

Seven painless ways to save

by

When the job ends on December 31, I’m planning to consolidate all my checking and savings accounts into just three: a checking account, an emergency savings account, and the self-escrow account to pay annual property tax and insurance bills. Right now I use one checking account as a “pool” from which incoming cash is disbursed to a half-dozen “cookie-jar” accounts dedicated to various expense and savings needs. Yesterday, thinking ahead to what the simplified system will look like, I added up all the money that has accumulated in the cookie jars and then estimated the last few pittances due next month. And I was astonished to discover how much cash has quietly accrued, painlessly, without  my trying very hard to save.

Hang onto your hats, folks: over $26,500 is sitting there in the credit union!

That’s about $16,500 more than I thought. What accounts for this startling windfall?

Well, near as I can tell, the combination of a small extra income stream plus certain frugal habits builds saving into your lifestyle in ways that you hardly notice. For example:

• Use a budget to help you live within your means.

How it works: By establishing limits to how much you spend, you rarely spend more than you earn, and you occasionally spend less. Every time you come in under budget, the money you didn’t spend tends to accumulate in your checking account.

• Automate your savings.

How it works: Ask your bank or credit union to divert part of each paycheck to savings. What’s left in your checking account is the amount you view as your net income, and you don’t even think about the savings set-aside. It’s already done by the time you start to budget.

Also, take advantage of any 401(k), 403(b), or other retirement schemes your employer offers. These allow you to save—automatically—with pre-tax dollars, and if your employer matches contributions, you get double the savings at half the hassle.

• Pay yourself first—and last.

How it works: Got money left over at the end of a pay period? Transfer it into a savings account. It doesn’t hurt to have two savings accounts: one to hold automatic savings “payments” from your paychecks for the long term, and one to hold leftovers, which can be used to reward yourself with indulgences and vacations.

• Live within your former means.

How it works: When you get a raise, leave your spending level where it was. Add the new income to the amount your bank or credit union automatically transfers from each paycheck into savings.

During the first six months of 2009, GDU’s ill-advised furlough scheme cut my income by $240 per paycheck. In that period, I learned to live on a lot less pay. In July, when the university started paying us our full salaries again, I continued to live on the “furlough” budget and put the extra income into savings.

• Drop your spending level a small amount at a time.

How it works: Reduce discretionary spending in small, tolerable steps. This allows you to get used to a smaller budget, and a smaller spending budget leaves more from your income to put into savings.

The layoff message has been scrawled across the wall for a long time. At my office, we’ve known since summer of 2008 that sooner or later the university was likely to can us, and as we’ve seen, that suspicion was confirmed in June.  This has given me time to reduce my habitual monthly expenditures from about $1,500 a month to $1,200 and then to $1,000. Or less! The past couple of months I’ve managed to keep the spending in the vicinity of $800. Because I’m still earning until the end of December, all that unspent income has gone into savings.

• Snowball and snowflake savings as you would snowball a loan.

How it works: The “snowballing” principal suggests that you can accrue funds to pay down debt by focusing on a single account and then when that’s paid, add the amount you were paying against that debt to the amount you’re paying against the next debt, speeding payoffs incrementally. “Snowflaking” entails applying every windfall and every bit of “found” money, no matter how tiny, to paying down debt. Well, you can apply that to saving, too:

When you’ve paid off a debt, the amount of the payments can go into savings, rather than being diverted to restaurants and indulgences. Same with unexpected bits and pieces of money—gifts, extracurricular jobs, overtime, bonuses: stash the money in a savings account before you can diddle it away.

Every little bit helps. It’s amazing how fast these dribs and drabs add up. When I paid off the second mortgage on my house, I had the credit union put the $169/month into savings instead of leaving it in my checking account. Same with another $200/month payment I managed to escape. Lo! That’s $369 a month, $4,428 a year of “free” money.

• Divert all income from a second income stream to savings.

How it works: A key way to protect yourself from layoffs, pay down debt, and build savings is to build a second income stream. If you don’t need that income to live on, for heaven’s sake keep it!

I have three side income streams: teaching, blogging, and freelance editing. None of them earns much, in the large scheme of things. Taken together, I probably haven’t netted ten grand in 2009. But everything I earn from these ventures has gone straight into savings. Over time, as we can see, it certainly has added up.

It has added up: so painlessly that I hadn’t even realized how much, really, was stashed in the half-dozen credit union accounts I’ve been using. I have to admit that I had no intention of keeping that much money in low-interest checking and savings accounts.

I’d figured to start unemployretirement with a base “cushion” of $10,000, which I expect will tide me over the first year when Social Security rules will allow me to earn no more than $14,160. Ten grand plus $15,000 of Social Security plus $14,160 of teaching income should just net enough to cover my expenses. So, next month, when I’m certain of how much is in there after my last paychecks, vacation pay, and whatnot, I’ll transfer about $16,000 of those surprise savings from the credit union into my investment accounts.

If, as my financial managers expect, the economy continues to grow in 2010, that should go a long way toward reviving my retirement fund!

Retirement/unemployment: A slightly brighter light

by

A meeting with the investment adviser yielded a little decent news on the pending unemployment (i.e., forced retirement) front. He figured out that $10,000 of the $25,000 sitting in the whole life insurance policy my ex- bought back in the early 1980s is not subject to taxes.

So, he proposes that I withdraw that in January 2010 and use it to pay my share of the mortgage on the investment house. This should keep taxes low and, because it’s not earned income, will not work against me in the Social Security earnings limit department. With the mortgage covered and the likelihood that the community college teaching gigs will max out the earnings limit, I may not have to take a drawdown from investments at all next year.

This, he thinks, will allow my much-battered investments to recover from the depredations of the Bush economy.

If, as planned, I add the net amount of the vacation pay GDU will owe me to the living expenses fund, I should end up with about the same monthly income that I have right now. It will delay having to raid my retirement funds for as long as a year, and meanwhile, it’ll give me a chance to apply for full-time work. The community college district has had a hiring freeze going for quite some time; that one job has opened up means the ice-pack may be melting. Between now and next fall, several more opportunities may arise.

O’course, the fly in that ointment is Medicare. Even with the inflated health-care premiums presented to us in this month’s open enrollment, the cost of cobbling together coverage comparable to my present health-care coverage will be about 10 times what I’m paying now. That’s going to be a big hit, and because of the earnings limitation, I won’t be allowed to use freelance income or take on a summer course to take up the slack.

So…2010 is gonna be a little pinched, but it should be survivable. As for 2011: it’ll just have to take care of itself.