Apple, in an apparent bid to deny product shortages and hacking for the holidays, said yesterday that they'd not allow more than 2 iPhone sales per customer. More interesting is that they will not be allowing customers to use greenbacks to make their iPhone purchases, only credit cards. One assumes that a debit card with a credit card logo may be used as well. It brings up an interesting point. Are we on our way to the all cash society that so many have suspected?
There are already many things that you can't buy with actual cash, and I'm sure that Uncle Sam would love to rid themselves of the hassle and expense of printing money. Of course we'd get no kind of tax relief even if they were saving money, they'd just find somewhere else to spend it, I'm sure. Many government officials would love to rid the world of cash for the law enforcement benefits it would provide. It would be much harder to launder money (but the really large Criminal enterprises would still do it), make illegal drug and weapons transactions, not report income for tax purposes, and so on. And you can just forget about that extra $50 your wife doesn't know about...
Many banks would love to only make electronic transactions and take their little electronic cut from each. That would streamline their operations, minimize their labor costs, allow smaller branch offices, and reduce product (money) handling and distribution expenses. The cash machine wouldn't be, a cash machine, that is. When visiting the bank, you'd just bring in your pay check, if you don't have electronic deposit, and they'd fill your debit card, just as they do now. There would be no option for getting cash back.
The reality is that most companies will never want to get rid of cash unless they have no choice. Businesses, Apple and a few other companies (Macy's) notwithstanding, will want to maximize their payment options in order to maximize revenue. The exception to this is when it costs more to make the transaction than the incremental revenue the added transaction generates for the business. In most cases, maximizing payment options will allow the business to appeal to the widest range of customers, and thus generate the maximum amount of total revenue. So, if it's only up to the business community, don't count on cash going away any time soon, unless cash transactions are rendered prohibitively expensive. If that day ever comes, look out, dodos will be using cash to line their nests.
Wednesday, October 31, 2007
Tuesday, October 30, 2007
How Federal Taxes Affect Your Retirement Accounts
With luck you're going to retire one day. With careful planning you're going to retire with substantial amounts of money in your retirement accounts. One of the things that will impact the ultimate success of those retirement accounts is how taxes will affect them. They can take a substantial chunk out of your nest egg, or a much smaller nibble, it's all up to how you, and your tax adviser choose to allocate your resources.
From a tax perspective, there are three broad classes of retirement vehicles; taxable, tax deferred, and tax exempt. Why wouldn't you just stick to tax exempt vehicles and avoid the whole tax issue altogether? Well, you could, and some have, but that limits your choice, and your probable investment return, in the name of federal tax savings. Vehicles such as tax exempt municipal bonds (munis) can offer an attractive option for investors, but typically the level attractiveness rises with the investor's tax bracket. Investors in higher tax brackets will avoid comparatively higher levels of taxation than lower income investors. For these investors, the avoidance of federal taxes may swing the pendulum more in favor of tax exempt investments. In many cases though, tax exempt investments offer substantially lower yield than other choices, and the reduced yield is not sufficiently compensated for by their exempt status.
Many more retirement accounts consist of tax deferred retirement instruments. These include traditional IRAs, 401(k) plans, 403(b) plans (403b plans are for public employees and non-profit private organizations), and Roth IRAs. There are tax differences between these three. The Roth IRA is taxed when the money is earned, but not when it is withdrawn, assuming you withdraw the funds after you turn 59-1/2 years of age. Prior to that age, you'll incur the wrath of the IRS in the form of a 10% penalty, in addition to any taxes you may owe.
Traditional IRAs and 401(k)s are similar in that they use pretax income to fund the plan, and then the retiree / investor is taxed when the money is withdrawn. If you are in lower tax bracket after retirement it is most advantageous to use a traditional IRA. Most people are in lower tax bracket after they retire, because the years immediately preceding retirement are usually the peak earning years. Most people will find that their situation warrants using a Roth IRA plan at the beginning, especially for the first 20 years or so of their contributions, when they are in comparatively lower tax bracket. If your federal income tax rate is the same at contribution and withdrawal, it does not matter when you are taxed. The results will be the same if pay taxes before you contribute, or when you withdraw. If you don't believe me, consider the following:Traditional: Your 1st year $7,500 pretax contribution, invested for 40 years at 8% yield = grows to $162,934. You pay taxes at your income tax rate, as dictated by your taxable income. If you are in the 28% tax bracket (for 2007 = 28% on marginal income between $64,250 - $97,925) and we assume your actual tax rate works out to 22%, you'll lose $36,505 in income taxes on this portion of your distribution, bringing your after-tax distribution amount to $127,088.
Make the same assumptions for a Roth plan and you'll get the following:$7500 – 22% taxes paid before contribution = $5,850 net contribution. $5,850 invested for 40 years at 8% = $127,088. See, I told you so. When it gets murky is when your tax rates are not the same, as is usually the case as your life progresses. You'll want to see a very competent tax and retirement adviser to assist you with your retirement planning so you can maximize your retirement assets and minimize your tax consequences.
NOTE: If you control how much money you take as distributions you can control not only your income tax, but have a very significant effect on how much taxes you on your social security benefits as well.
Which of these is best for you depends upon your specific situation.401(k) plans are company sponsored, while IRAs are private. The big advantages of a 401(k) is that the funding is automatic and comes right out of your paycheck. This can be a huge advantage for discipline challenged savers. The biggest advantage from an investment perspective is that many companies offer to match all, or portion of the employee's contribution. The power of this almost cannot be underestimated. It's really quite powerful, and can contribute substantially to a comfortable retirement. A traditional IRA is similar to a 401(k) for most practical purposes, except that the investor self funds the account and their employer has nothing to do with it.
Traditional IRAs and company sponsored retirement plans have another age requirement. You must begin to take minimum withdrawals (distributions) when you reach 70-1/2 years of age. Roth plans do not have this age restriction, so if you plan on bequeathing one of these to someone, this may be the way to go, as it can sit there, growing, after you're deceased. When the lucky recipient does begin withdrawing the money when the so desire, and pay income taxes on it with no additional penalties.
Traditional and on-line brokerage accounts are examples of non-tax deferred investment accounts. There also are some automatic pans such as Dividend ReInvestment Plans (DRIPs) where the dividends form a company's stock are automatically reinvested in purchasing more stock. With a DRIP, you will pay income tax on the dividends you receive in the year they are received, even if they are immediately reinvested. That is something to keep in mind when considering dividend paying investments that aren't tax deferred.
From a tax perspective, there are three broad classes of retirement vehicles; taxable, tax deferred, and tax exempt. Why wouldn't you just stick to tax exempt vehicles and avoid the whole tax issue altogether? Well, you could, and some have, but that limits your choice, and your probable investment return, in the name of federal tax savings. Vehicles such as tax exempt municipal bonds (munis) can offer an attractive option for investors, but typically the level attractiveness rises with the investor's tax bracket. Investors in higher tax brackets will avoid comparatively higher levels of taxation than lower income investors. For these investors, the avoidance of federal taxes may swing the pendulum more in favor of tax exempt investments. In many cases though, tax exempt investments offer substantially lower yield than other choices, and the reduced yield is not sufficiently compensated for by their exempt status.
Many more retirement accounts consist of tax deferred retirement instruments. These include traditional IRAs, 401(k) plans, 403(b) plans (403b plans are for public employees and non-profit private organizations), and Roth IRAs. There are tax differences between these three. The Roth IRA is taxed when the money is earned, but not when it is withdrawn, assuming you withdraw the funds after you turn 59-1/2 years of age. Prior to that age, you'll incur the wrath of the IRS in the form of a 10% penalty, in addition to any taxes you may owe.
Traditional IRAs and 401(k)s are similar in that they use pretax income to fund the plan, and then the retiree / investor is taxed when the money is withdrawn. If you are in lower tax bracket after retirement it is most advantageous to use a traditional IRA. Most people are in lower tax bracket after they retire, because the years immediately preceding retirement are usually the peak earning years. Most people will find that their situation warrants using a Roth IRA plan at the beginning, especially for the first 20 years or so of their contributions, when they are in comparatively lower tax bracket. If your federal income tax rate is the same at contribution and withdrawal, it does not matter when you are taxed. The results will be the same if pay taxes before you contribute, or when you withdraw. If you don't believe me, consider the following:Traditional: Your 1st year $7,500 pretax contribution, invested for 40 years at 8% yield = grows to $162,934. You pay taxes at your income tax rate, as dictated by your taxable income. If you are in the 28% tax bracket (for 2007 = 28% on marginal income between $64,250 - $97,925) and we assume your actual tax rate works out to 22%, you'll lose $36,505 in income taxes on this portion of your distribution, bringing your after-tax distribution amount to $127,088.
Make the same assumptions for a Roth plan and you'll get the following:$7500 – 22% taxes paid before contribution = $5,850 net contribution. $5,850 invested for 40 years at 8% = $127,088. See, I told you so. When it gets murky is when your tax rates are not the same, as is usually the case as your life progresses. You'll want to see a very competent tax and retirement adviser to assist you with your retirement planning so you can maximize your retirement assets and minimize your tax consequences.
NOTE: If you control how much money you take as distributions you can control not only your income tax, but have a very significant effect on how much taxes you on your social security benefits as well.
Which of these is best for you depends upon your specific situation.401(k) plans are company sponsored, while IRAs are private. The big advantages of a 401(k) is that the funding is automatic and comes right out of your paycheck. This can be a huge advantage for discipline challenged savers. The biggest advantage from an investment perspective is that many companies offer to match all, or portion of the employee's contribution. The power of this almost cannot be underestimated. It's really quite powerful, and can contribute substantially to a comfortable retirement. A traditional IRA is similar to a 401(k) for most practical purposes, except that the investor self funds the account and their employer has nothing to do with it.
Traditional IRAs and company sponsored retirement plans have another age requirement. You must begin to take minimum withdrawals (distributions) when you reach 70-1/2 years of age. Roth plans do not have this age restriction, so if you plan on bequeathing one of these to someone, this may be the way to go, as it can sit there, growing, after you're deceased. When the lucky recipient does begin withdrawing the money when the so desire, and pay income taxes on it with no additional penalties.
Traditional and on-line brokerage accounts are examples of non-tax deferred investment accounts. There also are some automatic pans such as Dividend ReInvestment Plans (DRIPs) where the dividends form a company's stock are automatically reinvested in purchasing more stock. With a DRIP, you will pay income tax on the dividends you receive in the year they are received, even if they are immediately reinvested. That is something to keep in mind when considering dividend paying investments that aren't tax deferred.
Monday, October 29, 2007
Was Facebooks Valuation Too High?
Just a word about company valuations, and the amount paid my Microsoft yesterday for a small, 1.6% share of web 2.0 pioneer Facebook; $240 MILLION?? That sets the valuation of Facebook at an astounding $15 billion. As a way of comparison, that sets the value of Facebook higher than the market cap of the following Fortune 1000 companies: Weyerhaeuser ($14.89B), Heinz ($14.8B), Marriot ($14.73B), CIGNA ($14.4B), Safeway ($13.89B), Campbell Soup ($13.7B), and Macy’s ($13.66B). Now, I am unsure how the rest of the world feels, but that seems a bit high to me by way of comparison. Microsoft’s (NASDAQ: MSFT)market this morning was a little over $292B, with an EBITDA last year of over $20B.
Looking at Facebook's 50 million registered users, many analysts and investors apparently disagreed with me, as MSFT rose on the news of the acquisition. Microsoft has been looking to more effectively gain market share and monitize Google's cash cow, the online advertising market. It seems that investors are looking at this as just the way for Redmond to make that happen. Most analysts conotinued to maintain positive outlooks for the software giant's stock.
Looking at Facebook's 50 million registered users, many analysts and investors apparently disagreed with me, as MSFT rose on the news of the acquisition. Microsoft has been looking to more effectively gain market share and monitize Google's cash cow, the online advertising market. It seems that investors are looking at this as just the way for Redmond to make that happen. Most analysts conotinued to maintain positive outlooks for the software giant's stock.
Sunday, October 28, 2007
How to Save Money on Car Insurance
Car insurance is possibly one of the largest bills you have to pay, after housing, food, and the paying for the car itself. What you pay for car insurance is determined by many things, and thankfully most of them are within your control. There are the usual suspects, such as the type of car you drive. Teams of actuaries at the insurance providers have determined that your Porsche 997 turbo should be much more expensive to insure than your wife’s 2004 Corolla, and both will cost more if you live in New York City, than if you live in Billings.
So, short of moving and trading in your prized sports car in for a family econo-box, what can you do to save money on car insurance? There are some things that go for almost any kind of insurance, be it car, home, boat or anything else. Then there are some savings tips that are more specific to car insurance.
General ways to same money on car insurance –Keep your deductibles as high as you can stomach. After all you’re not going to turn in a claim unless it’s probably over $1,000 anyway, so keep your deductibles for your different coverages at $1,000 or higher if you have a policy that allows it. If not, well, see section 2. You’re not going to turn in a claim for less than $1,000 because that is another strategy for saving money on car insurance; don’t use it unless you absolutely have to. It’s pretty common knowledge that most insurance companies use a claim as an excuse to raise your rates, so don’t make one.
Way to Save Money on Your Car Insurance -1Review your coverage to make sure you’re not paying for anything you shouldn’t be. I’ve seen people pay premiums for months on cars they had already sold, for example. Then evaluate the level of coverage you have in each area. Some may be lowered or eliminated entirely. For example, do you really need collision insurance on that ’85 Dodge Colt? Probably not. It will end up costing you more for the insurance than the car’s worth, so if it gets hit in the parking lot (or you hit something), the loss will probably exceed the value of the car. The company will declare it a total loss (where the term “totaled” originates). You’ll collect a check for the retail value of the car, in most cases. Since, on the car in question, that’s about $900, you can see how paying $45 a month for collision insurance would be a bad deal.
Way to Save Money on Your Car Insurance -2There are some other things that insurance companies look at to determine how much you’ll pay for their services, fair or not. One such item is your credit score. The insurance providers have determined that there is a link between your credit rating and the risk you present as one of their insured. As such, as your credit score falls, the price of your car insurance rises. So, not only will you save money on a mortgage, auto loan and credit card by keeping your credit score high, you’ll save on your car insurance as well.
Way to Save Money on Your Car Insurance -3Bundle your insurances together and you’ll likely get a muti-policy discount. If you have your homeowners, auto, life and business insurance with the same provider, they typically reward you with a bit of savings on all your policies. The exact amount you’ll save is influenced by too many factors to count. You’ll also save money if you insure more than one car with the same provider. I’m not advocating you rush down to Bill’s Bargains on Wheels and drive off in another car so you can save money on insurance, but if you have multiple vehicles in your family, insure them all at the same place.
Way to Save Money on Your Car Insurance -4There are many lifestyle choices you can make that will impact your insurance. Weather you buy your home or rent, married or single, your highest level of education, your job (or lack thereof) and if you have kids can all influence how much you’ll have to pay for car insurance. Some companies offer discounts for how you pay as well. If you have your payment automatically deducted every year, you’ll pay less than if you send a check every month, for example.
Way to Save Money on Your Car Insurance -5Get your discounts. All should, but many people don’t. Get their insurance discounts, that is. It’s possible that you could qualify for one or more discounts and not even know it. Discounts are offered for many different reasons. There are policy discounts for professional association memberships, senior citizens, multi-car (as mentioned above), club membership discounts (car clubs, travel clubs, AAA, and other clubs will offer discounts as benefits to their members).
Way to Save Money on Your Insurance -6Properly equip your vehicle and you can earn lower insurance rates as well. Get the important safety features, such as extra air bags, stability control, amiable headlights, etc. and some companies will reward you for your interest in safety by giving you a cheaper rate on your insurance.
So, short of moving and trading in your prized sports car in for a family econo-box, what can you do to save money on car insurance? There are some things that go for almost any kind of insurance, be it car, home, boat or anything else. Then there are some savings tips that are more specific to car insurance.
General ways to same money on car insurance –Keep your deductibles as high as you can stomach. After all you’re not going to turn in a claim unless it’s probably over $1,000 anyway, so keep your deductibles for your different coverages at $1,000 or higher if you have a policy that allows it. If not, well, see section 2. You’re not going to turn in a claim for less than $1,000 because that is another strategy for saving money on car insurance; don’t use it unless you absolutely have to. It’s pretty common knowledge that most insurance companies use a claim as an excuse to raise your rates, so don’t make one.
Way to Save Money on Your Car Insurance -1Review your coverage to make sure you’re not paying for anything you shouldn’t be. I’ve seen people pay premiums for months on cars they had already sold, for example. Then evaluate the level of coverage you have in each area. Some may be lowered or eliminated entirely. For example, do you really need collision insurance on that ’85 Dodge Colt? Probably not. It will end up costing you more for the insurance than the car’s worth, so if it gets hit in the parking lot (or you hit something), the loss will probably exceed the value of the car. The company will declare it a total loss (where the term “totaled” originates). You’ll collect a check for the retail value of the car, in most cases. Since, on the car in question, that’s about $900, you can see how paying $45 a month for collision insurance would be a bad deal.
Way to Save Money on Your Car Insurance -2There are some other things that insurance companies look at to determine how much you’ll pay for their services, fair or not. One such item is your credit score. The insurance providers have determined that there is a link between your credit rating and the risk you present as one of their insured. As such, as your credit score falls, the price of your car insurance rises. So, not only will you save money on a mortgage, auto loan and credit card by keeping your credit score high, you’ll save on your car insurance as well.
Way to Save Money on Your Car Insurance -3Bundle your insurances together and you’ll likely get a muti-policy discount. If you have your homeowners, auto, life and business insurance with the same provider, they typically reward you with a bit of savings on all your policies. The exact amount you’ll save is influenced by too many factors to count. You’ll also save money if you insure more than one car with the same provider. I’m not advocating you rush down to Bill’s Bargains on Wheels and drive off in another car so you can save money on insurance, but if you have multiple vehicles in your family, insure them all at the same place.
Way to Save Money on Your Car Insurance -4There are many lifestyle choices you can make that will impact your insurance. Weather you buy your home or rent, married or single, your highest level of education, your job (or lack thereof) and if you have kids can all influence how much you’ll have to pay for car insurance. Some companies offer discounts for how you pay as well. If you have your payment automatically deducted every year, you’ll pay less than if you send a check every month, for example.
Way to Save Money on Your Car Insurance -5Get your discounts. All should, but many people don’t. Get their insurance discounts, that is. It’s possible that you could qualify for one or more discounts and not even know it. Discounts are offered for many different reasons. There are policy discounts for professional association memberships, senior citizens, multi-car (as mentioned above), club membership discounts (car clubs, travel clubs, AAA, and other clubs will offer discounts as benefits to their members).
Way to Save Money on Your Insurance -6Properly equip your vehicle and you can earn lower insurance rates as well. Get the important safety features, such as extra air bags, stability control, amiable headlights, etc. and some companies will reward you for your interest in safety by giving you a cheaper rate on your insurance.
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