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Personal Finance

Is frugality unAmerican?

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One narrative subplot in the ever-escalating media buzz over the economy is that the new fad for frugality, for paying off debts, and for living within one’s means is bad for America and bad for the global economy. When people stop buying, the story goes, retailers stop selling, lenders stop lending, importers stop importing, and manufacturers stop manufacturing. All the worthies in these sectors then close stores, go belly-up, and lay off employees, who are forced to behave frugally, pay off their debts, and live within their means, causing more retailers to stop retailing, more lenders to stop lending, more importers…and so on to infinity.

So it is that seedy characters like you and me, eccentrics who subscribe to the wacky theory that we should spend no more than we earn, refrain from buying every piece of junk set under our noses, and maybe even put some of what we earn into savings, are responsible for bringing this country to the brink of depression.

Yes. That’s you and me, fellow PF blogger: our little terrorist coterie has darn near brought about THE FALL OF THE AMERICAN EMPIRE! Worse! THE COLLAPSE OF THE ENTIRE PLANET’S ECONOMY!

Think of that.

Well, I am thinking of that. And I think not.

The way I see this, we’ve arrived in our present predicament not because consumers stopped spending but because they spent so much, so profligately, and so stupidly. Consider: If over the past two decades 80 percent (say) of Americans had been living within their means—if they had been educated adequately on personal finance matters and understood the basics of lending, saving, budgeting, and investing—we would not be in the mess we’re in.

  • Most Americans, having navigated clear of the shoals of unmanageable debt, would have plenty of money to spend on the things they need and—yes!—want.
  • Few people would have been naïve enough to get themselves into booby-trapped mortgages for absurd amounts of money that King Croesus himself couldn’t afford.
  • Most people would have had a fair idea of what a house is really worth. Because the public in general would have resisted buying at absurdly inflated prices, real estate prices would never have blown out of control, and so no housing crisis would have occurred.
  • Retailers would still be selling products at a steady pace.
  • Manufacturers would still be making products at a steady pace.
  • Layoffs would not be occurring.
  • The President of the United States would never have thought of responding to the horror of 9-11 by telling Americans to go out and spend themselves silly. (Who knows? Maybe his speechwriters would have been forced to come up with something more worthy of a world leader, like “We have nothing to fear but fear itself.”)

Nope. We ants are not responsible for the collapse of the economy, nor are we the ones who are digging its grave. The grasshoppers did it. The grasshoppers and all the greedy little critters who got rich off them.

The newfound penchant for frugality that the newspapers and broadcasters tell us is now the hot fashion will no doubt pass. But if it doesn’t, that won’t be a bad thing. We will have hard times—we’re going to have hard times whether we all go out and load up our credit cards or not. But if members of the American public learn to get a grip on their spending and figure out how to manage their money so they can have what they want without getting themselves over their heads in debt (or if, more amazing still, they figure out what’s really important in life), in the long run the economy will be healthier and stronger. And the world will be a better place.

A New Plan: Retirement

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Over the past few days, I’ve about made up my mind that if I get laid off after the Board of Regents meets in December, I will not try to get another full-time job at all. Nor will I take regular draw-downs from my much-stressed retirement savings.

No.

Yes. I think I can live on a combination of Social Security and freelance editing, if I can earn a minimum of $1,000 a month. This would allow me to do the following things:

1. Quit. Yes!!!! Quit, quit, quit!
2. Leave the planned 4 percent retirement drawdown invested until the market turns around.
3. When I reach 66, return the money I’ve drawn from Social Security to the government and reset my payments to the “full retirement” level, substantially increasing my monthly income and collecting a chunk of tax refunds for the Social Security grab I paid at ages 63, 64, and 65.

Life would be very pinched for the next 2 1/2 years, until I reach 66. However, at 66, the increased Social Security payments would put me back in the middle class, and, with any luck at all, my savings will have recovered enough that I can safely draw down 4 percent. These two factors would make the rest of my life tolerable. When M’hijito and I sell or rent the Renovation House, I would then have enough income that I wouldn’t have to do any paid work at all to maintain a reasonable lifestyle.

Here’s how I see this:

Health Insurance: I will be eligible for Medicare in 18 months. COBRA lasts 18 months. The cost is $475 a month, but most of that will be covered by the amount GDU will owe me for accrued vacation pay. Thus that amount will not have to come out of month-to-month cash flow.

Renovation Loan: I will pay that off, using the money I have earned and squirreled away for the purpose. This will save the $170 payment and the $204 a month I pay toward principal, cutting my monthly expenses by $374. The amount of the loan, it is to be hoped, will be returned in a few years, after M’hijito and I sell the Investment House, on which I spent the funds.

Emergency and unexpected expenses: The amount I can generate from freelancing and Social Security will cover only routine costs. It will not cover a plumber’s bill, a car repair, a veterinary visit. However, I have about $18,000 saved up to buy my next car; this amount doubles as an emergency fund. I can use some of that to cover surprise expenses, or make an occasional drawdown from the big IRA.

Routine savings: The $200 a month I normally set aside to buy such things as clothes and other little indulgences will go away. The only way I can survive on freelance income plus Social Security is to dispense with regular savings. I am, however, allowed to earn as much as $1,125 a month without having Social Security taken away from me (isn’t THAT generous?). My plan assumes a regular freelance income of $1,000. Any amount more than that can go into a savings account. I hope.

Budgeting: In addition to foregoing the routine $200/month savings deposit, I will have to cut $300 a month off my living expenses budget. That means, basically, that $300 will have to come out of the grocery budget. Since there’s a little play in that budget anyway, this probably can be done simply by changing the way I eat and by purchasing nonfood goods second-hand at thrift shops and yard sales, rather than buying everything new.

If I do these things and they work (second part of that is the big IF), I will be OK in the winter months when utility bills are low. During the summer, when temperatures exceed 110 degrees day after day, staying out of the red will be difficult, but I think it can be done. I will start with a cushion of about $900, back-up money that’s already sitting in the credit union. That will rise to around $1085 by the end of June, as budget underruns stack up. As utility bills bloat, my cushion will drop to a low of about $815 in October. In November, though, it will begin to grow.

Should I sell my house and move to Sun City, where real estate and living expenses allegedly are cheaper?

Hell, no! First, after the foreclosure across the street, my paid-off house is now worth less than I paid for it BEFORE the bubble. My house is very pleasant, it’s centrally located, and it’s paid off. I did a little math and discovered that it costs me about $93 a month more to live here than it would to live in Sun City, assuming I do not engage in full Scrooge McDuck lifestyle. I believe that after commissions and closing costs, I could net—if I’m lucky—about $258,000 on the sale of my present house. In Sun City, I could buy a house for around $200,000.

Such a place would need about $10,000 worth of upgrades and renovation to bring it more or less up to date and make it into something I’d want to live in. Consider: My house is pretty nice, with a big lot, a beautiful pool, wonderful bearing citrus trees, a private front courtyard, skylights in three rooms (real skylights, not aluminum tubes), a new roof, expensive tiling throughout, an updated kitchen, and a spiffy gas stove. For $200,000, what you get in Sun City is a 30- to 40-year-old tract house whose quality and style come under the heading of “better than living in a trailer…just.” Cabinetry and trim are veneered in plastic; there’s no gas service, so you have to use an electric stove; landscaping is gray, green, or (worse!) white pebbles; and the general atmosphere is Early Mausoleum. Spare me, God!

Well, my friends, I think She will. Spare me Sun City, that is. I really do believe I can hop off the treadmill, delay drawing down savings until the market turns around, and live on Social Security and freelance earnings for the next three years.

Now. All we need is for President Raven to croak “Nevermore” come the first part of December: declare a state of financial emergency at GDU and lay me off. Ohhh please, Mr. Raven: d-o-o-o-o-n’t throw me in the briar patch!
😉

Battening down in the hurricane

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It’s probably a bit late to batten down the hatches, since the perfect storm has already made landfall. On the other hand, I wasn’t really expecting to get laid off, and now that looks like a strong possibility. So, today I’m taking a series of steps to help weather bad times. Some of these, I think, apply to just about anyone in most situations. Here’s some plywood to nail over the windows:

1. Pay off or be in a position to pay off debt

My strategy: Prepare to pay off $21,000 Renovation Loan

This is a second mortgage, not an equity loan, but because it is a loan against my house it does put me at risk of foreclosure if I can’t make the payments, which I will not be able to do if and when I lose my job. I already have $11,000 in cash savings snowflaked for this purpose. Along these lines, I moved $5,500 out of short-term corporate bonds and $5,000 out of Vanguard’s Wellington fund, the two non-retirement funds that are losing the least.

2. Identify all potential cuts in budget and prepare to implement them.

My strategies:

• Pay off the Renovation Loan, to save $374/month (the regular payment plus payments toward principal made to eliminate the loan by the time I intended to retire).
• Cancel the newspaper, cell phone, DSL (good-bye Funny about Money!), long distance service, and monthly yard clean-up. Savings: $139/month.
• Cash out the whole life policy. Savings: $30/month. This also yields $23,000 less 28% tax = $16,560 in cash, about six months’ worth of living expenses.
• Quit putting $200/month into a savings account for casual expenditures. Cut all indulgences to zero.
• Cut back budget for all other living expenses that are not regularly recurring bills.

These maneuvers will cut my monthly recurring bills from $821 to $482 a month:
1010DepressionStrategy1
As a practical matter, I probably will not cancel the DSL, since I need it for my freelance editorial business. Also, Funny is now getting about 6,000 hits a month. It may be worth monetizing it. If I did that, I would have a good argument for deducting the cost of DSL from my income taxes. It’s not much, but every little bit helps.

I could, in theory, cancel my homeowner’s insurance, saving about $65 a month. However, that’s a risky move. We’ve already seen that the minute I jacked up the deductible I darned near set fire to the kitchen. Murphy’s Law suggests that if I cancel the $780/year hit for homeowner’s insurance, a gigantic storm will come through, blow off the roof and, in a single lightning strike, burn down whatever remains.

With the monthly self-escrowing for principal payments and the monthly $200 general savings gone, monthly savings set-asides drop from $704 to $300.
I budget $1,500 a month for nonrecurring living expenses. If I’m very careful, do not indulge myself in anything, have no vet bills, and have no repair bills for the house or car, this amount can be as much as $300 more than needed. So, I’m figuring about $1,200 is what I will need each month to live on, above and beyond the costs of running the house.

3. Figure how much will be needed to live in reduced circumstances.

My strategy: Add up projected reduced savings, monthly bills, and budgeted “other” living expenses.

1010DepressionStrategy3Okay. That’s better than the $3,000 a month I’m spending now. Over a thousand bucks a month better.

4. Try to figure out where the money will come from.
At the rate the market is going, I’m assuming there will be nothing left in my retirement savings. If I use the $23,000 that will come from cashing out my whole life insurance policy as an emergency fund to cover such things as veterinary, car, and house repair bills and to cover the $5,050 a year cost of COBRA, then I’m left with this:

My strategy: add up the next year’s sources of spendable income.
1010DepressionStrategy4

This assumes the tax on Social Security will only be around 20%, but it may be significantly higher, since I will have earned my regular salary for ten months of the 2008.

The RASL (amount GDU has to pay me for accrued sick leave) and vacation pay figures are net.

As you can see, even with the RASL pay and the one-time vacation time payment, I’ll come up short at least $6,600 in my first year of enforced retirement. It’s possible that I might be able to net that much with freelance income—a typical freelancer earns about $10,000 a year, working full-time.

If I don’t get a job, I am going to be in deep trouble. But I probably can get something working at a WalMart or even cleaning house. The rich will always be with us, and they’re always in the market for servants to do their menial work.

5. Consider whether there are any other options

My strategy: Figure what happens if I try to live on cash savings for the next couple of years.

If I don’t pay off the Renovation Loan but instead use the $21,000 cash savings and the $23,000 that will come from cashing out my whole life insurance policy, then we come up with a survival fund of $44,000. We have to add $170 a month back into the monthly cost of living. RASL is good for three years. The vacation pay is a one-time thing, affecting income in only one year. Without vacation pay, my shortfall will be around $10,000; without RASL and vacation pay, it will come to around $14,000.

1010DepressionStrategy5
As strategies go, living on principal is less than ideal. I suppose I could do it if I were pushed to the wall. But selling the house and living out of the back of the van would keep me going longer.

6. Count blessings.

My strategy: Quit focusing on the tsunami’s roar and pick flowers by the roadside.

• At least I have a roof over my head and the resources to pay it off
• No mortgager will be able to evict me from my home.
• It will take the county tax assessor two or three years to put me out after I begin to default on taxes.
• M’jihito has a job and is young enough to recover from whatever happens to this country, assuming anyone in the sub-Richistan classes can recover.
• I have a nice paid-off van with plenty of room to sleep in.
• I know how to cook from scratch.
• Beans are delicious and I know lots of ways to cook them.
• The veggies I planted have started to sprout.
• My health is good and so I at least can work, if I manage to overcome the prevailing cultural bias against older people.
• The Copyeditor’s Desk is getting steady work and could (maybe) crank $10,000 or $12,000 a year for each of its principals.
• They haven’t canned me yet.
• It’s fall and so I won’t have to run the HVAC system for another six or seven months.
• The weather is drop-down dead gorgeous.
• The dog is unfailingly cute.

P1010572

Update, December 2013: As it developed, my estimates of the taxes were overblown. My job lasted until December 31, 2009, and so salary from GDU did not trigger a tax on Social Security, which I started drawing in 2010. Only a portion of one’s Social Security is taxed, and that’s only if you earn more than a certain minimal figure. As it developed, forming an S-corporation ensured that would not happen and sheltered most of my freelance income and all Social Security income from taxes.

After the layoff finally came, more than a year after this post appeared, it proved impossible to find another job. Even had the job market not dried up in the Great Recession, my age worked against me — employers wouldn’t give an old lady a second look for positions that read like they were written with my skills and experience in mind. By that time, though, I had already paid off the loan, cut my living expenses significantly, and made arrangements with a community college to teach the maximum allowable number of courses on an adjunct basis. Although adjunct pay works out to something less than minimum wage, between that and Social Security I managed to stretch a $14,000 emergency fund to cover five years, and then some.

By staying put in the market, I eventually managed to recover most of the losses in retirement funds. Five years later, total savings (including the whole life policy, which I never did cash out) are about where they were before the crash of the Bush economy. My son and I spent several years underwater on the house he and I copurchased, while he worked a miserable job at a company that overtly abused and grossly underpaid its workers. Today his house is worth what we owe on it and mine is worth what I paid for it. He has a better job and hopes for a promotion. I will never work for The Man again, and am glad of it.

1010Obamanos

Blowin’ in the wind…

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Well, it’s time to nail some suspenders onto the old oaken barrel, since that’s what we’ll be wearing now that our shirts are lost.

Called the redoubtable financial advisors this afternoon. It must be said that they sound pretty nonplussed over there. On the other hand, even though they allow that conditions are unprecedented, historic, and weird, they continue to insist that cashing out whatever pittance you have left in the market is a bad idea. One of the senior partners remarked that if the market continues to drop at today’s rate, it will only take about 14 days for it to arrive at zero.

“Is that a logical possibility?” he asked rhetorically.

“No,” he answered himself. If that happened all the stock in the land would be worthless. You could pick up an IBM certificate off the street, for free. This, he believes, does not compute. He and his colleagues are convinced the fall will stop sooner or later and the market will bounce back up.

We shall see.

The answer to another question is also blowing in on the wind: the University Academic Committee is having a little emergency meeting come Monday morning to discuss how to cope with a 20% budget cut. I’m told this is the first step toward the rumored layoffs.

We shall see about that, too. Personally, I no longer care what they decide. I’ve done all I can to protect myself should any such layoffs actually occur: applied for a half-dozen jobs that look like good fits, laid out a plan to pay off the Renovation Loan, and developed a strategy with the financial advisors to weather a period of unemployment.

Interestingly, though, I’ve spoken with a couple of auld acquaintances who, I discovered, happen to be on that committee. They tell me no announcement regarding layoffs of any specific job class was made, nor do they believe my particular set is likely to see blanket layoffs.

There’s not a thing I can do about whatever action the Great Desert University takes. And I am not going to get myself exercised over something I can do nothing about.
Thaes ofereode,thisses swa maeg.

Dumb tax

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F’cryin’ out loud. In the “I can’t believe it’s possible to be that stupid” department, here’s a memo: when the binger goes off to tell you the bread dough has finished rising, get up and attend to it!

Yesterday afternoon I was dorking around on the Internet, my favorite time-waster, when I heard the breadmaker hollering “beeeep beeeeep beeeeeeeep,” signifying the dough was kneaded and risen, so I should retrieve the stuff, put it in a pan, and preheat the oven while the bread made its second rise. Did I get off my duff? Ohhh noooo. As I recall, what I did was mutter “please. shut. up.” Then forgot all about it.

Forgot it, that is, until I walked into the kitchen and found the stuff had continued to bubble up, overflowed the container, run down into the breadmaker’s innards, and then, its yeasties exhausted, collapsed back on itself.

That was a fine mess to clean up.

Determined not to lose five cups of flour plus the ancillary ingredients, I had the bright idea of adding a little more yeast, turning the stuff back into the freshly cleaned breadmaker, and letting it knead and rise again.

Sounds good, doesn’t it?

Lemme tellya: it doesn’t taste good! The result was a large blob of bread dough with a strangely rancid, bitter flavor.

At first I thought I could pass it off as sourdough. On second taste…well, no.

Into the garbage with it.

So, I had to mix and bake a whole new batch of bread dough. This occupied my attention until about 9:00 p.m., annoyingly enough. Dumb tax!

Isn’t it interesting how many of the stupid things that happen TO us are actually stupid things that happen BECAUSE of us? Consider how much of the present financial chaos falls into that category.

Now, I will say: I didn’t vote for our present national leadership and thought anyone who did was nuts; I did not get myself into debt over my head; I do not even run a balance on a credit card.BUT…yes, but: stupidly I left the bulk of my retirement money in the stock market, even as I could see the out-of-control train racing up the tracks. If I was smart enough to think of investing monthly savings (meant to pay off a small loan) in the money market, howcum I wasn’t smart enough to think of transferring at least some of my stock holdings out of Vanguard’s Wellington and Windsor II funds into the same Vanguard Premier Money Market fund?

Right now that moron Bush is on the air saying sure, he knows people are losing their retirement savings, “but I think in the long run they’re gunna be fine.” Long run? That illiterate, bird-brained idiot. When you’re 65, 75, 85 and retired or (as I’m about to be) laid off, there IS NO LONG RUN!

We appear to be a nation of morons who have followed a moron into predictable disaster. I will not disown my personal contribution to the national dumb tax fund, nor, I suppose, can any of us. Our dough has bubbled up, spilled over the bowl’s edge, collapsed back onto itself. The breadmaker alarm has been binging for a long time, while we have muttered “please. shut. up.”

Does any of this have meaning for individuals?

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Hard to tell, isn’t it?

I just checked my Vanguard funds. Though they lost a little, it’s not enough to drive one out the high-rise window. Doesn’t mean things won’t be worse tomorrow, of course…still, I think it’s best not to study the day-to-day rises and falls of your investments but to keep your eye on the long view.

A pretty murky view just now, it must be admitted.

This morning I spent almost five hours on the application for the new job; still have to write the cover letter.

And I wrote a set of spreadsheets preparatory to meeting with my financial advisor about how to deal with the coming layoff. I wanted to lay out all the relevant factoids: current gross & net pay, projected Social Security entitlement, cost of Cobra ($471 a month! Up from $25), estimated unemployment payments (amazingly piddling–possibly not even worth the hassle of applying), RASL (the amount GDU has to pay for my unused sick pay, an astonishing $17,230), and the estimated amount of my total savings.

Today I learned that GDU has to pay me my hourly rate for 264 hours of unused vacation time: something over $7900. That will help!

Not only that, but I’m also owed 32 hours of use-it-or-lose-it time, for which I will not be paid. So I think I’ll take four days of vacation time starting this week…and not think about GDU even once during the entire period!

With these figures in hand, I calculated several possible scenarios, ranging from retiring today to getting some sort of job. If I can’t get work (and at my age it’s unlikely), things are going to be difficult, indeed.

Oh, well. That’s a bridge to cross later. Maybe not much later…but later.

IMHO, the current stürm und drang will take a while to come home to you and me: not until we see our jobs disappear, credit dry up, and the huge chains that have pushed out local businesses close down—shrinking supplies of food and manufactured goods. That may take some time. With a large helping of luck, it’ll never happen.

What a sad spectacle our country’s grasping, small-minded, doctrinaire partisan politics have spawned. For shame!

The Continuing Saga…

1.Unemployment for Christmas?
2.Does any of this have meaning for individuals?
3.Rumors start to fly
4.On the trail of the elusive job
5.Beating the layoff stress
6. How low can I go?