In Charge It to My Kids Thomas Friedman makes the correct point that I have made previously (Washington Paying Out Money it Doesn’t Have – Inheritance Tax Repeal). Politicians like to tax your grandchildren to pay for what they are spending today.
…
added Ms. Perino. “I just think it’s completely fiscally irresponsible.”
Friends, we are through the looking glass. It is now “fiscally irresponsible” to want to pay for a war with a tax. These democrats just don’t understand: the tooth fairy pays for wars.
Huge deficits created by spending tons of money that you don’t have, is just taxing your grandchildren. It is not a sign of being fiscally responsible. It is a spending today and charging it to your kids – which is a bad idea.
If you want to cut (or not raise) taxes the honest way to do so is to cut spending. It is not honest to claim you are not raising taxes when you spend more than you have and pass on debts. Those debts are just future taxes. Those electing these politicians that just add more and more debt to the future are mortgaging the country. Those debts will come due. That is obvious.
You can seem to have a free lunch (or free roads to nowhere or whatever other frivolous, or important, spending you want) for awhile (decades actually for a country with a very strong economy) but eventually people will have to pay for the debts the current credit card culture of those in Washington. Those decades of spending what they don’t have might well start causing real pain in the next 10 years, or perhaps such irresponsible behavior can go on several more decades (a strong economy can hide spendthrift habits). but eventually that spending will have to be paid for – either by your children or grandchildren.
Related: Buffett on Taxes – Warren Buffett on the similar trade deficit (where those in the USA directly, instead of though their elected government) spend beyond their means:
A few months ago we posted on the effect your FICO (“credit”) score would have on your mortgage payment. Given turmoil in the credit markets we though it would be interesting to revisit that post.
Example 30 year mortgage rates (from myfico.com – see site for current rate estimates):
| FICO score | APR May | APR Aug | payment/mo May | payment/mo Aug |
|---|---|---|---|---|
| 760-850 | 5.86% | 6.27% | $2,362 | $2,467 |
| 700-759 | 6.08% | 6.49% | $2,419 | $2,525 |
| 660-699 | 6.37% | 6.77% | $2,493 | $2,600 |
| 620-659 | 7.18% | 7.58% | $2,709 | $2,819 |
| 580-619 | 8.82% | 9.32% | $3,167 | $3,311 |
| 500-579 | 9.68% | 10.31% | $3,416 | $3,603 |
Amounts shown for borrowing $400,000 and rates as of May 7th. For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.
Frankly I was expecting the rates to show the widely reported expanding of the risk premium (charging increasingly higher rates for riskier borrowers). For example, in May the difference was 382 basis points (9.68% for the lowest FICO range and 5.86% for the highest. However the current difference is just 404 basis points – hardly a big increase. The reason must be that the MyFICO page shows rates for homes with 20% down at the high end of scores and 20-40% down below there.
Related: 30 Year Fixed Rate Mortgage Rates – Learning About Mortgages
The quantitative schools of investing rely on very high powered mathematics (often drawing on physics and engineering graduate students). They tread on very dangerous ground (often engaging in complex and highly leveraged speculation) and make errors in assumptions about the market conditions upon which the mathematical models they use to invest are based. Fat Tails and Limitations of Normal Distributions describes one common mistake:
Stock market data clearly shows that a normal distribution does not provide a good model of the market. Not every system is defined by a normal distribution – it is common for distributions to be close to normal but there is no reason any system need be. Many statistical tools have as an underlying assumption that the system in question is a normal distribution (therefore to use the tools you need to determine if the system can be classified that way – if not some tools can’t be used).
Crazy as it seems, very smart people continually forget that the markets often experience panics, euphoria, behave in ways that models do not predict, seize up and fail to function… Against the Gods by Peter Bernstein provides a good picture of the chaotic nature of financial market risks. A good book on an example of a mathematical model failure, Long Term Capital Management: When Genius Failed. Another excellent book on financial market chaos is: Manias, Panics, and Crashes: A History of Financial Crises.
I keep thinking people will learn but so far the faith in numbers seems to outweigh the past examples of overconfident failures.
Related: Data doesn’t lie but you can be fooled – investment risk – Statistics for Experimenters
Sorry but that is a symptom of massive ignorance. Not knowing an incredible important aspect of your largest financial decision is like not know what days you are suppose to show up for work. There is a minimum amount of knowledge people should have that sign a mortgage. I think at least 34% of mortgage holders need to read this blog. Ok, I probably alienated all of them, so if that is the case then they should read some of the blogs we list in our blogroll.
There is a big problem in that logic – it could maybe make sense if you had good reason to believe rates will be lower in the future than when you took out the loan (but that is a very questionable). I don’t know why someone would think that in the last couple of years – the risks have been much better than rates would go up a few hundred basis points than down that much. Basically I can see someone that is very financially savvy using an adjustable mortgage to qualify and if they know they will move in a fairly short period…
Related: Learning About Mortgages – Mortgage Defaults: Latest Woe for Housing – How Not to Convert Equity – 30 year fixed Mortgage Rates
The federal debt is not officially calculated the way that other accounting is done. Future obligations are not included, thus promising ever larger payments for health and retirement programs are not accurately reflected in government official debt totals. There are some legitimate arguments for why using exactly the same standards as others does not make sense for the federal government accounting. However the current methods make it too easy for politicians to claim they are not spending our grandchildren’s money for promises they make today. Rules ‘hiding’ trillions in debt:
Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. By comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined.
Foisting debts on our grandchildren because we elect politicians that refuse to either cut spending (and promised spending) or raise taxes is a sad legacy of the last 30 years for the USA.
Related: Washington Paying Out Money it Doesn’t Have – Is the USA Broke – The Fallacy of Estate Tax Repeal – Social Security Trust Fund
So I had a Discover Card. They charged me for charges I didn’t authorize. They then force me through their maze of policies telling me that it was not possible to be more customer friendly – their policies couldn’t be any different they were the policy (as if that made any sense). So Discover Card had to shut down my account. I told them if they couldn’t provide better service then I didn’t want a new account after they closed my account which was the only way they wouldn’t charge me for charges I didn’t authorize. They owed me $240 from their cashback bonus program. Now they refuse to pay me the money I earned because they say that it is their policy not to pay the cashback bonus if an account is closed.
After going around on that for awhile and them assuring me it was their policy and it was not possible for it to be done any other way by them or anyone else I asked what happened if someone died. Oh then the account is closed and we pay the money we owe on the cashback bonus. So obviously it isn’t that the account being closed makes it impossible for Discover to pay what was owed. It seems pretty obvious it is just a good way to take money Discover owes and just count on people not wanting to waste their time fighting to get what Discover owed them. Maybe one of their marketing people told them doing this to people that just had a parent/spouse… die might be bad publicity so they decided to actual pay what was owed in those instances. Jeez why can’t credit card companies just provide good service and treat customers well instead of only doing the absolute least they can that won’t spark outrage from the public and legislative action to prohibit such practices (I image not paying what was owed to people that died would spark legislative action if it wasn’t already illegal).
Is it really legal to charge someone for charges they didn’t authorize and when they tell you they didn’t authorize them refuse to do anything about it if they don’t close their account and then say we are not going to pay your cashback bonus because your account is closed? it seems to be yet another instance of credit card companies doing everything they can to take money from customers. Of course they claimed it was impossible to do anything else it was their policy to do it this way and no other credit card company is any different.
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Have less than $25K in savings? Get in line
What is a very rough estimate of what you need? Well obviously factors like a pension, social security payments, age at retirement, home ownership, health insurance, marital status… make a huge difference in the total amount needed. But something in the neighborhood of 10-25 times your desired retirement income is in the ballpark of what most experts recommend. So if you want $50,000 in income you need $500,000 – $1,250,000. Obviously that is difficult to save over a short period of time. The key to retirement saving is consistent, long term commitment to saving.
Related: Saving for Retirement – Start Young with 401k and Roth IRA – Retirement Delayed: Working Longer
Congressional Budget Office on the Alternative Minimum Tax (AMT):
The Looming Challenge of the Alternative Minimum Tax, Alan D. Viard, Federal Reserve Bank of Dallas:
Related: Families Face Alternative Minimum Tax, NPR – Brookings Institution article on the AMT – Preparation Softens Blow of Alternative Minimum Tax – IRS on the AMT
It is difficult to imagine trying to live without the convenience of credit cards. Yet many get into financial trouble in part due to their misuse of credit cards. By following a few simple rules you can avoid the missteps and use credit cards to improve you personal finances instead of falling into the credit card traps.
First, don’t use your credit card for loans. Pay off your balance each month. Pretty obvious advice but way way too many people don’t follow it. If you use your credit card for a loans – 98% of the time that is a mistake and big risk to your personal financial future. Don’t do it. There is a reason pretty much all the advice from financial advisers on credit cards starts with this – it is the most important advice.
Second, if you don’t follow the advise above pay off your loan as soon as possible. Payment the minimum payment is huge mistake. You should not be making any discretionary purchases if you are not paying down your credit card debt substantially each month.
Continue reading credit card tips.
The main point of this article is the increasing evidence of problems due to loose underwriting for mortgages of the last few years. Mortgage defaults: Latest woe for housing:
The overall mortgage delinquency rate was 4.7 percent in the third quarter, just slightly above the 4.4 percent rate of a year earlier, when it was a historic low.
The problem of loose credit is real and important. But isn’t it really amazing how 4.4% is the historic low for mortgages over a month late? That seems really high too me. Obviously 13.2% for sub-prime loans shows how risky it is to take out such a loan. In my opinion, the delinquency rate for over 90 days late is a more important figure (but these numbers can serve as a leading indicator).
Related: articles on investing – investment dictionary – How Not to Convert Equity