There's Still Time for Charitable Giving (2009-12-21)

by David John Marotta

The markets are up, and yet most nonprofits are still struggling financially. If you are charitably inclined, there's still time for end-of-year giving.

Charities are hit especially hard during tough economic times. They face reduced giving and often greater needs. They must find supporters who will donate more to offset those who will give less.

Charity freely offered is a virtue distinctly more valuable than any government program funded by taxes, which are an obligation and a duty. With no resources of its own, the government can only take the production of others and redistribute it. Political support for government entitlement programs is like being generous with your neighbor's credit card. Those who seek to be charitable must first produce more than they consume to have something to share. Only when you give of your own resources is it truly charity.

Americans are a generous people. But we don't like to pay taxes. Instead of giving cash, there are two additional ways you may be able to give so more of your money goes to charity instead of the IRS.

First, giving appreciated stock allows you to donate more generously. By contributing appreciated stock directly to charity, you can avoid the 15% capital gains tax. For example, if you sell $1,000 worth of appreciated stock, you will have to pay a 15% tax on the gains. If most of the stock's value is appreciation, the tax you owe will approach $150, leaving only $850 for charitable giving.

But if you transfer the stock directly to charity, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when it sells the stock. By giving stock, you can save on capital gains taxes and can make a bigger gift.

Second, if you are age 70 1/2 or older, there is another powerful way to give. This year you are allowed to make tax-free qualified charitable distributions (QCDs) directly from your IRA account.

Normally you would be obliged to take the distribution, increase your adjusted gross income (AGI) and then gift to charity as a charitable deduction. The difference may not be obvious, but it's there. Many calculations in the tax code are tied to your AGI. Increase your AGI and you increase your phaseouts and other additional taxes. Take $100,000 from your IRA and give it to charity, and the tax code still punishes you despite your generosity.

The QCD provision allows you to gift directly from your IRA. Although you won't get a deduction, it doesn't matter because it won't count as AGI in the first place. Each account owner may give up to $100,000 in 2009 without having to pay income tax on the distribution. Gifts from IRAs are also an excellent estate-planning tool, if you are interested in making a large gift to reduce the size of your estate. The details are complex, so contact your tax professional or financial planner to make sure you are complying with the IRS rules.

If fear and worry about your own investments are eclipsing your charitable nature, there's help. Find out the state of your own finances, so you are confident you can afford to be a donor rather than a recipient of charity.

Not knowing is sometimes worse than finding out. Fear drives out emotions like kindness and compassion. And such angst may block purposeful giving from the heart. As St. Paul admonishes, "Each man should give what he has decided in his heart to give, not reluctantly or under compulsion, for God loves a cheerful giver" (2 Corinthians 9:7).

With the unemployment rate currently at 10.2%, this is an especially good year to focus on organizations that support families in financial need. Although everyone has been affected, some families have been singularly hurt and are in need of a little extra help.

Contributions this year could also determine the very survival of some nonprofits. Organizations, especially those without endowments, have been especially strapped this past year. Although the fundraising letters of many organizations can often seem desperate and dire, this year they are most likely to be true.

If you want to know if your gifts to charity are being used as well as they could be, you are not alone. Four of five Americans worry that the charities they support are not stewarding donations well. Fortunately, checking up on them is simple.

Because charities don't pay taxes, Form 990 serves only as an informational return. But for the curious donor, it provides a benchmark to compare the relative health of charities. On the form, you'll find data about how much of your donated dollars go to overhead versus program services. The form also includes facts on revenue streams, general expenses, wages paid to key employees, plus a list of board members.

Although charities are required to send you a copy of their 990 upon request, the fastest way to locate a free copy is to go online. GuideStar.org and FoundationCenter.org both provide free access to 990s as well as search tools to find other charities in your state or city.

Management and fundraising is expensive. Do you ever wonder how much of every dollar you donate actually goes to such overhead costs? Form 990 provides a clear breakdown of funds spent on overhead and fundraising compared to expenditures on program services.

When examining a charity's spending, experts suggest that 65 cents (or more) of every dollar should be spent on program activities. However, due to the type of service the charity performs, more or less may be allocated to program services. For example, an art museum typically has higher operating costs because of its specialized facilities and security requirements and may allocate as little as 50% of the overall budget to program services. A food bank, in contrast, might be able to devote more than 90% of gifts to feeding the hungry. The key here is to compare similar charities to each other.

A host of online tools can give you additional insights about the nonprofit in question. Charity Navigator, at <a href="http://www.charitynavigator.org" target=_blank>www.charitynavigator.org</a>, lists ratings for charities based on their financial health. And the Better Business Bureau Wise Giving Alliance measures public charities against its 20 standards for charity accountability. Their analysis of nearly 1,600 national charities can be found at <a href="http://www.give.org" target=_blank>www.give.org</a>.

When you give to charity, you make an investment. By doing a little homework, you can be sure your gift gives you the best possible return on your investment. And although certainly giving is its own reward, giving wisely increases the blessing.



from http://www.emarotta.com/article.php?ID=368

Marley's Ghost Was Haunted by Regret (2009-12-07)

by David John Marotta

"Marley was dead." That's how Charles Dickens's  "A Christmas Carol" begins. Jacob Marley, dead exactly seven years to the day, is the real ghost in the story. We see Ebenezer Scrooge's life in light of his partner's death. Although the way the two men approached their finances may seem identical, when we take a closer look, subtle but important distinctions emerge.

In his book "Why Smart People Do Stupid Things with Money," Bert Whitehead describes different financial personalities. He depicts a "miser" as someone who is strongly motivated by fear but has a natural inclination to save.

Whitehead maps financial personality on two different scales. The first measures people's tendency toward greed or fear. As a miser, Marley is motivated by fear (low risk acceptance), whereas his longtime partner Scrooge tends much more toward greed (high risk acceptance). The second scale measures an individual's tendency to save or spend. Here both Marley and Scrooge are practiced savers.

When two portly gentlemen stop by Scrooge's office soliciting charitable donations, they discover that Marley has been dead for seven years. One comments, "We have no doubt that Marley's liberality is well represented by his surviving partner." The narrative continues, "It certainly was; for they had been two kindred spirits."

Liberality cannot come from someone who is personally fearful. Distrust drives out emotions like tenderness and compassion. Scrooge confirms this condition in Marley as he looks through his ghostly form and remembers ironically that it was said of Marley he had no bowels. Marley had no empathy for others because he was too anxious for himself.

To Americans celebrating a traditional credit card Christmas, the distinction between a scrooge and a miser may seem insignificant. Both types are cold skinflints who don't spend money to make merry at Christmas. Although their tendency toward frugality may match, however, their investment philosophies do not.

"Misers," Whitehead writes, "are champion savers, but they have little to show for it. They are fearful about investments, even straightforward ones that are simple to explain and understand. At the most extreme, these are the people who keep all their money in a mattress or cans buried in the backyard. More commonly, people with miser-like tendencies hoard their money in bank accounts and Treasury bills."

Unlike scrooges, misers are fearful, a trait they share with Whitehead's other personalities, bon vivants and spendthrifts. All three types worry there won't be enough money. Spendthrifts spend it before it's gone; bon vivants spend it, but only on themselves; and misers hoard it in case they need it later. However because risk and return often go together, playing safe generally does not lead to building real wealth. Wealth is not just what you save; genuine wealth grows from what you save and invest.

Marley may have been a good man of business, but Scrooge was such an opportunist that on the day of his partner's death he "solemnised it with an undoubted bargain."

Scrooge lives in Marley's former chambers. But where Marley saw security, Scrooge envisions opportunity. Scrooge stays in three of the rooms and rents out the others, both above and below his quarters, as offices. He even leases the cellar to a wine merchant.

Misers like Marley don't like to take any such chances. They prefer investments that are touted as secure and come with guarantees. For example, fear often motivates misers to buy life insurance as an investment. Salespeople tout the safety of their company and switch fluidly between guaranteed returns and rosier projections or illustrations.

Misers also buy annuities, which they believe are tax shelters or will guarantee an income for life. With immediate annuities, misers can be so enamored by the annual lifetime return of 6%, they fail to notice the guaranteed 100% immediate loss of their principal. They also generally don't factor in the incredible drag of inflation and the devaluing of the dollar.

It can take a while before misers understand the long-term effects of their actions. They can be shocked to find their financial institution bankrupt, their ultimate taxes higher than necessary and their cumulative return less than savings bonds.

Misers may sleep well tonight, but they won't eat well in 20 years. They are relieved not to have been invested over the past 14 months, although balanced portfolios have shown gains. They are especially glad not to be invested in emerging markets, even though that's the asset class with the highest gains. They are content earning less than 2% while the government devalues the dollar with inflationary spending.

Not taking any risks is a recipe for long-term regret. Some risks are worth taking in life, including calculated financial risks. The danger of a miser's long-term regret is easily avoidable. The solution, of course, is financial education.

There are many worthy long-term investments. But misers worry that much of the financial world is just trying to part them from their money. They need someone who sits on their side of the table to teach them. Misers have learned to love saving their money. Now they just need to learn to love investing. And misers can be very quick learners.

A second regret of misers, and the true moral of Dickens's story, is saving money without any purpose. Marley dies having translated very little of his money into anything of value. Dying having spent the smallest amount is even more meaningless than dying with the most. At least Scrooge invested his money. And after seven years he had probably doubled it.

Perhaps one reason why misers are tightfisted is because they haven't learned how to handle investments. They can't share from an abundance of wealth because they've been too cautious in handling their finances to afford such largess.

Neither Scrooge nor Marley ever asked what the money was for. Marley held on to his out of fear of not having enough. In contrast, Scrooge saved and invested, so he was more able to look beyond his counting house when the spirits haunted him. Marley, looking back on his life, was the first to warn Scrooge, "The dealings of my trade were but a drop of water in the comprehensive ocean of my business!"

We might well feel sorry for Marley. He did nothing wrong. He just wanted to be left alone. His sins were of omission, not commission. To paraphrase the words of the Book of Common Prayer, it wasn't that he did the things he ought not to have done. It was that he left undone the things he should have done.

As Jesus preached, Marley was like "the one who received the seed that fell among the thorns . . . who hears the word, but the worries of this life and the deceitfulness of wealth choke it, making it unfruitful" (Matthew 13:22).

Marley wanted to be left alone to deal with his business. But after death he laments, "Mankind was my business. The common welfare was my business: charity, mercy forbearance, and benevolence, were all my business." Marley saved money but never understood why.

Failing to ask what the money was for left Marley in death with "No rest, no peace. Incessant torture of remorse." And time matters for both investments and our lives. In the long run, we all will be gone from this life, so we must make the most of time, both for our investments and for our lives. The two, it turns out, are inexplicably intertwined. Our wealth is just a placeholder for what we value.

Marley tells Scrooge bluntly in the first chapter of the book, "Any Christian spirit working kindly in its little sphere, whatever it may be, will find its mortal life too short for its vast means of usefulness." And in the final chapter, Scrooge has learned the lesson and found the joy it brings. Having found his affections changed, he finds that "everything could yield him pleasure."

Work kindly in whatever sphere God has placed you. Know what the money is for. And remember Marley's admonition: "No space of regret can make amends for one life's opportunities misused!"

 

from http://www.emarotta.com/article.php?ID=366

Best Christmas Presents (2009-11-30)

by David John Marotta

Many people spend more during the holiday season than they can afford. Guilt or shame drives them to put too many big-ticket items under the tree. But the satisfaction is both short-lived and shortsighted. Understanding the economics of gift giving may help you decide when and what to buy for Christmas.

You might take comfort in Wharton School professor Joel Waldfogel's book, "Scroogenomics: Why You Shouldn't Buy Presents for the Holidays." In his economic analysis, people are the most efficient when spending their own money, producing at least a dollar in satisfaction for every dollar they spend. But spending money on those we don't know well results in what Waldfogel calls a "deadweight loss" of about 20%.

A deadweight loss is an economic term signifying a loss by one party (in this case the giver) that is not offset by a corresponding gain by another party (in this case the receiver).

With Christmas spending in the United States at $100 billion, this loss results in "an orgy of wealth destruction" to the tune of about $20 billion.

Waldfogel's study found that givers with infrequent contact were those most likely to give less appreciated gifts. This group includes aunts, uncles and grandparents who live in another town. He compares these gift givers to the loss experienced when some government bureaucrat guesses at what we really need and makes choices for us. According to economists, people are better off when they make their own choices. For this obvious reason, Waldfogel suggests giving money or gift cards instead.

His original 1993 paper, "The Deadweight Loss of Christmas," was perceived as an attack on the holiday. So Waldfogel clarified that his critique is a study of the economic inefficiencies caused by the commercialization of Christmas and gift giving to strangers.

To the criticism that he had taken the joy out of Christmas, he responds that after watching desperate last-minute shoppers, he thinks the joy was taken out of Christmas long before his critique.

Of course railing against the commercialism and waste of Christmas is a cliché. Finding creative ways of showing your love and caring for others is more complex and nuanced. Here are some categories of gift giving and receiving you may find helpful.

First, learn to distinguish between a gift and a present. It's a gift when you give something the other person wants to have. It's a present when you give something you want the other person to have. When we offer a dictator military support, it is a gift. When we give him a copy of the Constitution, it is a present. At Christmas, sometimes we are trying to give gifts; other times we are trying to give presents.

Some gift giving is a social expectation and a test of the relationship. For example, for couples who are dating seriously, the message is much more important than the medium. Give a book the other person despises, and you have revealed how little you pay attention to your loved one's opinions. But a pair of gloves, with a heartfelt note saying, "These will keep your hands warm when I'm not there to hold them" would show your affectionate side. Or perhaps the receiver doesn't like romantic mush, and you are expected to know better.

Parents can help extended family members select gifts for their children by providing specific wish lists to ensure that what they buy will truly be appreciated. If you aren't confident, include a gift receipt. You are guarding against deadweight loss when the recipient can exchange the gift or return it for cash.

Families can help make exchanging a gift more socially acceptable. It doesn't mean that the recipient did not appreciate the gesture or does not love the giver. Sometimes with after-Christmas sales, if you have the receipt you can get the original value back, purchase a different make or model at a discount and still pocket a sizable amount of cash.

And in families where children don't have any spending money, cash may be the best possible gift. Handling cash with all the complexity of choice is an experience that offers irreplaceable life lessons.

Presents are handled differently. A present is when you buy Grandpa an iPod because you know he would never buy it for himself. Or when you give Grandma a computer with a built-in video camera so she can enjoy more contact with her grandchildren. It is a present if you want the recipients to have it more than they realize they want it.

Thoughtful presents may kindle new interests or prove inspiring. For example, they can encourage children to develop their talents or expand their horizons. My favorite Christmas gift idea comes from "The Homecoming," the first movie about the Waltons, in which the father buys John Boy paper and pencils. His gift, which affirms his son's choice of writing as a career, is the emotional climax of the story.

Try asking people, "What Christmas present changed the course of your life the most?" to see how much influence you can have. A pair of binoculars sparks a love of ornithology. A telescope fuels a fascination with astrophysics. A microscope leads to a biology career. An electronic toy prompts your daughter to join a robotics competition.

Not all presents need to be academic. A graphics tablet can lead to a design career. A guitar can inspire your son to form a new band. Or a video camera can lead to a later career choice in filmmaking.

Discovering talent, calling and vocation is never foolproof. Every success will be accompanied by many more failures, but that's what it takes to help children find their passion. Sometimes the risk of giving a present that may or may not be wanted is worth the possible deadweight loss. It is like research and development in the pharmaceutical industry. Most experiments are dead ends, but the whole process is worth the one success. Think of presents as R&D for the course of someone's life.

Presents that expand a child's horizons are a satisfying way to fight the commercialism. Another way is to work toward redefining our expectations for Christmas. That's what Christmas is all about. Their website explains, "It's not about reinventing the holiday. It's about changing the way we look at gift giving and receiving."

At the site you can arrange for gifts to nonprofit organizations in lieu of personal gifts and send gifts in someone else's name to his or her favorite charity. Consider their wise words: "There is no question we are in the midst of difficult financial times. And if it has you feeling unsure or uncomfortable this holiday season, imagine how purely difficult it's becoming for people who already, or are about to, depend on the generosity of others for the things that only a donation can provide."

Finally, some parents who are still unemployed will disappoint their children if they are hoping for expensive gifts this year. I've known a few families who had to tell their children that celebrating a traditional American credit card Christmas would jeopardize the family's financial security. Many parents are experiencing the first economic setback in their adult lives. Being financially cautious doesn't mean you love your children any less. And if you can be positive and reassuring, you needn't try to shelter you children from household economics.

The greatest joy of the holiday season is not bought in a store and does not increase your credit card debt. There is a better way to celebrate that builds long-lasting family ties.

Recognize that serenity during the holidays comes from taking time to celebrate values that don't show up in your net worth statement. Start by asking your family to share their fondest holiday memories. Make a list of all the things you have gotten right in past years and make them annual family traditions. Add a few new ideas each Christmas. The best holiday traditions don't cost a lot of money, and they aren't wrapped and put under the Christmas tree.

 

from http://www.emarotta.com/article.php?ID=365

Fourteen Tax Management Techniques (2009-11-23)

by David John Marotta

No one approaches financial planning with the goal of paying more taxes. Tax management, like all financial planning, is based on the premise that small changes made over time can achieve big goals. Good investment returns are important. But over the next few years, comprehensive tax management may reap even greater gains.

Don't file your taxes in April and then forget about them for the next 10 months. By investing a little time throughout the year, you can create compounded value. The 14 techniques described here may help you lighten your tax burden.

1. Check line 45 on your 2008 IRS form 1040 to see if you paid any alternative minimum tax (AMT) last year. People subject to AMT pay an average of $6,000 more than they would otherwise. AMT turns tax planning upside down. Because conventional wisdom may not apply, be sure to review your financial affairs with a professional.

2. This year offered a spectacular opportunity for realizing capital losses. Realized losses can offset realized gains. They can also be deducted against ordinary income up to $3,000 a year. Any excess above $3,000 is carried forward and can be deducted in future years.

3. You can realize capital losses and still stay fully invested. Sell the security, and then wait 31 days before buying it back. Alternately, double up. Purchase the same number of shares you currently hold. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a so-called wash sale, which would prevent you from taking the tax loss.

4. Individual stocks offer more opportunities to realize capital losses or gift capital gains. This is useful primarily in larger portfolios. A portfolio of individual stocks collectively may mimic the return of an exchange-traded fund and still provide additional tax savings. For example, although the total return might be 10% for the year, one of the individual stocks has doubled and two others lost 50% of their value. By holding individual stocks instead of the fund, you are able to sell the two stocks that have a 50% negative return and take the loss on your taxes. Holding the stock that has doubled in value postpones paying capital gains.

5. Using appreciated stock for charitable giving can avoid paying capital gains entirely. This allows you to contribute up to 15% more than you could with a cash gift.

6. This year also extended the opportunity to make qualified charitable distributions. If you are 70 1/2 or older, gifts you make directly to charity from your IRA are not counted as income. In this way you can reduce your tax deduction phaseouts for additional savings.

7. Perhaps you are considering funding a 529 college savings plans for your children or grandchildren. Contributions in some states (including Virginia) qualify for a state tax deduction if executed before the end of the year. Up to $4,000 per account can be taken, with the remaining amount carried forward to future years. Account owners over age 70 are allowed to deduct any amount they contribute to a 529 plan in 2009.

8. Keep in mind that if you make your fourth-quarter state estimated tax payment prior to year-end, you can use it as an itemized deduction next year.

9. You may also give $13,000 per person in 2009 to an unlimited number of individuals without gift tax implications. Families interested in maximizing intergenerational wealth transfers should explore with a professional how trusts can minimize their tax burden and maximize estate planning.

10. Putting investments in the correct investment accounts can also generate significant savings. Fixed-income investments belong in traditional IRA accounts. Interest is taxed at ordinary income tax rates, but the entire value of an IRA account is taxed at ordinary income tax rates anyway upon withdrawal. Appreciating assets should be in taxable investment accounts where the growth will be at a 15% capital gains rate, which is likely much lower than your ordinary income tax rate. Additionally, any foreign tax paid on foreign stock investments is tax deductible in a taxable account. Finally, those investments with the greatest potential for growth belong in Roth accounts where no tax will ever be paid. This tax management alone may boost your after-tax returns by as much as 1% annually.

11. Although small business owners shoulder much of the tax burden, they also enjoy more tax-maneuvering flexibility than other taxpayers. Reducing your taxes may be as simple as deferring income until next year or accelerating Section 179 expenses in the current year.

12. If you own a business, consider stashing cash in a retirement fund to reduce your tax liability. With a solo 401(k), you can contribute to the plan both as the employer and as the employee. As the employer, you can contribute either 20% of self-employment income or 25% of compensation income, depending on your company's structure. Plus, as the employee, you can contribute another $16,000 ($22,000 if age 50 or older). Finally, for the employee portion, tax planning can help you choose between a Roth 401(k) or a traditional pretax contribution.

13. Converting traditional IRA assets to Roth IRA accounts offers a chance for additional tax savings. Couples with an adjusted gross income below $100,000 can always consider a Roth conversion. Next year everyone, regardless of their tax bracket, can convert or contribute to a Roth IRA. And because 2010 is also the last year of the Bush tax cuts, you can use the conversion as a way to avoid the coming tax tsunami in 2011. Make plans now to prepare for next year's conversions.

14. Finally, a complex technique called "Roth segregation accounts" could earn your investments even more savings over the next two years. By segregating your Roth conversions in 2010, you can undo (or "recharacterize") those that underperform and keep the winners. This strategy offers you 20 months to determine which accounts to keep. It's as profitable as betting on the horse race after you know the winner.

Although just a small part of a larger comprehensive financial plan, savvy tax management requires professional assistance. Seek the guidance of a personal fee-only financial planner and certified public accountant (CPA), fiduciaries with a legal obligation to act in your best interests. The laws and ensuing complexities are changing annually, and as a result so is the optimum path.



from http://www.emarotta.com/article.php?ID=364

Mindless Spending 2: You'll Get By with a Little Help from Your Friends (2009-11-16)

by David John Marotta

Both mindless eating and mindless spending rely on our subconscious need to follow scripts to pace our consumption. Community plays a huge role in regulating our financial destiny--either a path of savings that builds real wealth or a path of spending that leads to impoverishment.

In one study cited in <a href="http://www.mindlesseating.org/" target=_blank>Brian Wansink</a>'s book "<a href="http://www.amazon.com/gp/product/0553384481?ie=UTF8&tag=davidjohnmarotta&linkCode=as2&camp=1789&creative=9325&creativeASIN=0553384481">Mindless Eating</a>," people were invited several times to a lunch of pizza, cookies and soft drinks. They were watched both eating by themselves as well as in groups of four or eight. When the subjects ate alone, researchers used a baseline that allowed them to categorize people as typically light or heavy eaters. Interestingly, when people dined in the groups, the quantity they ate changed.

Light eaters ate more in a group, and heavy eaters ate less. Both kinds of eaters conformed somewhat to the average pace and quantity of the group's consumption. Mindless spending works the same way.

If you tend to be a conservative spender, shopping in a group can easily entice you to buy more than you would normally. Conversely, if you have trouble saving money, taking along a frugal friend will help you resist. In fact, following the lead of penny-pinching friends or family can help you evaluate your own lifestyle and change the way you view money.

Millionaire couples may have very little in common except that they all answer "yes" to these three questions: "Are you frugal? Were your parents frugal? Is your spouse even more frugal than you are?" A culture of frugality builds a lifestyle of wealth. You subconsciously learn an appropriate lifestyle from those around you.

My wife and I formed our spending habits right out of college. Our first community of friends earned very little. Their lifestyle made even ordering pizza an extravagance. Combined with the example of my parents' depression-era thrift, we started saving and investing early.

In contrast, if your parents golf at Farmington or play tennis at the Boar's Head Country Club, you may struggle to maintain a frugal lifestyle. If your friends live rich, you will too. Your spending scripts will be based on comfort and convenience. You will get the deluxe model with all the features. And you will invariably buy the added service, protection and accessories.

Spending money just to socialize with friends is an especially common trap. Teenagers who work all day for minimum wage and then go out for dinner and a movie can easily end the day having spent more than they earned. Meals out in expensive restaurants with elaborate appetizers, drinks and desserts add both to the bottom line as well as to your waistline. Consider inviting friends over for potluck and a game night, and everyone might afford to send their children to college.

Spending money is contagious. If you go to the mall and a friend is hunting for the perfect purchase, it's easy to get caught up in the excitement. If you want your turn in the spotlight, you have to be shopping as well. Even if what you buy is small, the expense still depletes your finances.

And if you don't spend money or you resist going to the fancy restaurant or the full-priced movie, you risk being perceived as cheap. You may even worry that your friends won't invite you because you spoil the party.

By voicing your concerns, however, you may allow others to agree without feeling as uncomfortable. Truth be told, the person most worried about the expense is often the most secure financially. After all, wealth is what you save, not what you spend. And if your friends won't adjust to help you meet your financial goals, maybe you need different friends.

A life of country clubs, facials and galas will obligate you to spend money. If your social life includes such activities, budgeting will be difficult. Your financial stability may ultimately require developing relationships with people who are more fiscally conservative. It's your choice either to live rich or actually be rich.

Spending habits begin very early as we follow the lead modeled by our parents. In many homes, financial matters are a well-kept secret. Children are left to guess and infer from their elders’ actions and cryptic remarks. As a result many children learn habits that threaten their ultimate happiness and success.

<a href="http://www.kinderinstitute.com/" target=_blank>George Kinder</a>, author of "<a href="http://www.amazon.com/gp/product/0440508339?ie=UTF8&tag=davidjohnmarotta&linkCode=as2&camp=1789&creative=9325&creativeASIN=0440508339">The Seven Stages of Money Maturity</a>," asks his clients to write an autobiography that focuses on their relationship to money and the beliefs they have acquired. This exercise can help you examine your ingrained assumptions about money. Belief is powerful. As people think, so they will act.

And if everyone around you is doing something, it seems normal. Consequently, one person in a family can't single-handedly change the family's financial DNA. Deeply entrenched traditions generally will overwhelm any one family member who tries to question them.

So galvanize the whole family behind budget changes. It takes explicit communication. Children as young as four years old can contribute and learn from the process. There's no stigma attached to living within your means. If a budget isn't a team effort, then one family member will end up holding the purse strings and everyone else will be resentful.

Both spouses must start on the same page and with the same degree of humility. Every financially struggling family has one partner who believes he or she is the careful one with money and that any financial problems are the other person's fault. Most of the time, this generalization is untrue. It is relatively easy to be frugal by comparison if you abdicate all the spending decisions to your spouse. That way you can enjoy the results of spending without any of the guilt.

Serving as a role model in the family includes setting the pace and nature of spending. Learn to regulate when and how much money gets spent. Norms are set in the trenches of everyday spending, not in criticizing the number of presents on Christmas morning.

Even the most reclusive among us relies on spending scripts and norms to regulate when to open their wallet and when to refrain. If you are happy with your spending scripts, that's great. But if you are trying to change them, you need a little help from your friends.

Behavioral changes are best reinforced when you ask everyone you know to help you make the change permanent. It takes explicit thought and energy within your social network to overcome mindless spending scripts. And it takes a consistent effort for at least a month or more before new habits begin to take root.

The task is challenging but certainly not impossible. And small behavioral changes can result in building significant long-term wealth. The reward of financial peace and security is worth developing a prudent and thoughtful lifestyle.

 

from http://www.emarotta.com/article.php?ID=363

Mindless Spending: Frequency Matters More Than Height (2009-11-09)

by David John Marotta

Dieting and budgeting face similar hurdles in the American lifestyle. Some of us live to eat; others eat to live. Attempting to reduce our spending is every bit as challenging as trying to slim our waistlines. Some shop to live; others live to shop.

We can better understand mindless spending by looking at some of the psychological studies that <a href="http://www.mindlesseating.org/" target=_blank>Dr. Brian Wansink</a> describes in his book "<a href="http://www.amazon.com/gp/product/0553384481?ie=UTF8&tag=davidjohnmarotta&linkCode=as2&camp=1789&creative=9325&creativeASIN=0553384481">Mindless Eating</a>." He explains, "Everyone--every single one of us--eats how much we eat largely because of what is around us. We overeat not because of hunger but because of family and friends, packages and plates, names and numbers, labels and lights, colors and candles, shapes and smells, distractions and distances, cupboards and containers."

"We all think we are too smart to be tricked," warns Wansink. "That is what makes mindless eating so dangerous."

One study compared the amount people would drink using two differently shaped glasses. One glass was tall and skinny. The other was short and wide. Each glass had the same capacity, but people would drink 25% to 30% more from the short glasses than the tall ones.

Interestingly, our brains focus too much on the height of objects and underestimate the effect of their width. So people with short wide glasses had to fill them more before they believed they had consumed the same amount as those with the tall skinny glasses.

We all think we can't be fooled by something as obvious as the shape of a glass. But our brains are wired that way, without exception. If you want to drink less, you can measure every portion or simply buy tall skinny glasses. Better yet, buy glasses that are very narrow at the bottom or elevated on a stem.

Finances work the same way, and by extension, so does mindless spending. Many families are struggling to get a handle on their savings. They are trying, often in vain, to find ways to cut back. But when we are worried about our expenditures, we tend to look at the dollar amounts more than the frequency of our purchases.

For example, a young woman named Emily inherited a sizable sum of money. She could have used it to make a sizable down payment on her first house. But instead of protecting her windfall, Emily attached a debit card to the account for the convenience of paying for a few items she needed.

In less than two years she had spent most of her inheritance in increments of no more than $35. That doesn't seem like a lot of money because the $35 height is relatively small. Given a width of three times a week, the height isn't even noticeable. The same $105 Emily spent would have seemed like a much larger budget item if it had been in a single purchase. In that case she might have refrained from handing over her debit card so casually.

Other purchases were $50 monthly memberships or $100 a month services. Very few of these purchases were over $100, but when they were added up, Emily had drained her account.

The frequency of a purchase matters even more than its height. But our brains tell us to be more concerned about the height.

Marketing firms use this principle all the time to bypass our defenses when they break annual purchases down into low monthly payments.

An offer I received in the mail recently explained its cost as "Only $4.99 per month with an annual subscription (billed as one payment of $59.88)." The advertised rate only applied if you were willing to purchase the entire year. If you wanted to be billed monthly, the rate was $9.99.

Advertising a $59.88 annual subscription fee as $4.99 per month relies on the fact that consumers are more sensitive about height than breadth. Note that the primary way they advertised the subscription, $4.99 a month, was not one of the options! Even more deceptive would have been making the offer 16.4 cents a day for an annual subscription. Less than a penny an hour!

They even marketed as a feature the service of charging your credit card automatically each year: "All subscribers get the hassle-free advantage of the Unlimited Automatic Renewal Program. At the conclusion of your first term and each subsequent term (one year or one month) we will automatically renew your membership upon expiration for the same period so you get continuous service unless you tell us otherwise."

Madison Avenue takes advantage all the time of the way your brain works. So it's in your best interest to learn to use your brain to your own benefit.

We recommend that every household have a dollar limit that domestic partners agree not to exceed without consulting the other. This way they can avoid budget busters, single items that can wreak havoc on a spending plan. The same caution ought to be put in place for any reoccurring charge, no matter what the price.

Similarly, when people are seeking ways to reduce their spending, they tend to look at big-ticket items or daily needs. A much less painful and more productive alternative is to look at the purchases you don't have to decide about every day (e.g., automatic subscription services).

Consider that the average family spends hundreds of dollars on a host of monthly services such as iPhone, Skype, TiVo, Netflix, Palm Pre, GPS Pet Locator, World of Warcraft, The Sims Online, anime subscriptions, comic subscriptions, health clubs, season tickets, and online file sharing or backup. Average people who can't afford to pay for their own health-care costs pay twice that amount in monthly subscription fees.

And each of these monthly fees is laden with extra features for an additional charge. Before the era of cell phones, I would save my quarters. If I needed to call home, I would stop at a pay phone. In addition to driving safely without the distraction of talking at the same time, which of course is still advisable, my phone expenses for the month were minimal. The latest base cost for an iPhone over two years is about $4,000, which could go a long way toward covering a family's annual health-care costs.

If you can afford a full-featured cell phone, by all means indulge. I assume you've done your retirement planning and are saving more than enough each month. If not, and you only need a cell phone for emergencies, however, buy a single-use cell phone and keep it in your car. You will only pay for the minutes you use, and the money you save will be significant.

If you saved and invested $2,000 a year at market rates of 10% a year, you would have about a million dollars in 40 years. Every young person with an iPhone is missing a million dollars at retirement to fund that trendy subscription.

Cutting back on reoccurring spending is easier because you don't have to decide every day to refrain from spending. Sometimes it is as simple as deciding to eliminate features. Extra charges accrue for voice mail, another for call waiting and still another for unlimited text messaging. If after you have dropped all these subscriptions and features you decide you really miss them, you can always add them back later.

If you are trying to cut back on your spending and save money, review every reoccurring charge on your credit card. Try living without the service or at least eliminating features. Many companies will release you from your contract and cancel your service for reasons of financial hardship. If you need to stop paying immediately, cancel the credit card being charged and get a new one.

Take your savings and set up an automatic transfer to your investment account. You can achieve big goals by making small changes consistently over time, which is the cornerstone of successful financial planning.

And although our brains aren't wired to realize it, frequency matters even more than height.



from http://www.emarotta.com/article.php?ID=362

Women Have Unique Financial Needs (2009-11-02)

by David John Marotta

Retirement planning is even more crucial for women than for men. Although most women are married, 85% outlive their husbands and are alone during their last years. Financial planning must address the unique issues facing older women who probably worked fewer years and earned less money than their spouses.

Sophie Tucker, whose early claim to fame was the song "The Last of the Red Hot Mamas," said at age 69, "From birth to age 18, a girl needs good parents. From 18 to 35 she needs good looks. From 35 to 55, she needs a good personality. From 55 on, she needs good cash. I'm saving my money."

Sadly, many older women lack good cash. Five of eight women rely on a husband's work records to receive their Social Security benefits. And for almost three of eight, those benefits represent 90% of their total income. Of those seniors who live in poverty, more than half are women.

Planning to have good cash must begin long before retirement. Many frugal and hardworking parents sacrifice to give their children the comforts that money can buy. In the process, however, they rob their children of character-building lessons they can only learn through personal experience.

This psychology is especially true for daughters, who are often protected from the discipline of handling money. Our daughters can only gain experience if we give them real responsibility. In other words, they need a safe way to learn the lessons of irresponsibility. As early as possible daughters should be given the slice of the family's budget that most directly affects them. By the time they are teenagers, they could be handling much of their own money.

A teenage budget offers financial training wheels. Only if teenage daughters are given money for clothes can they learn the tradeoffs between expensive outfits and other spending choices. Remember, not having sufficient money for everything you want provides a financial lesson that cannot be learned any other way. By giving your daughter enough money for all her wants, you're actually depriving her of future financial satisfaction and stability.

Be sure to include your daughter in family discussions about charitable contributions too. As children take charge of their own money, they can also learn generosity by choosing the organizations they want to support.

Parents are apt to require their sons to take a first job and protect their daughters from the working world. But by age 14 daughters should be working and funding their Roth IRA accounts. If you want to help, offer to match whatever your daughter earns so she can put your contribution into her Roth and still have spending money.

Every seven years a woman waits to start funding her retirement halves the amount of money she can save. Helping your daughter add $2,000 annually to her Roth IRA for the years between age 14 and 19 actually is a better choice than starting her at age 20 and funding her account for the rest of her life.

From age 18 to 35, Sophie says women need good looks. What they really need is a fiscally responsible husband. Often women leave the workplace completely to raise a family. Yet because women generally live longer and earn less, they cannot leave their retirement planning to later in life. A loving husband makes sure his wife's retirement isn't sacrificed to his career and the children's needs.

My advice to all women: Make your retirement a priority. You may be more concerned for your family's needs than for your own safety. Just as you must do in an airplane emergency, put on your own oxygen mask first so you'll be able to help those around you.

Fund your retirement even if you don't work. Unemployed spouses can still fund their retirement through traditional or Roth IRA accounts or simply by savings in a taxable portfolio.

Don't guess at the amounts you should be saving. Know what goal you are trying to achieve.

In addition to inflation and interest, retirement planning needs to take into account taxes, capital gains and the different ways to save: taxable, tax deferred and Roth. Retirement planning also involves projections of accumulating assets for 40 years and spending during a retirement nearly as long. You can't compute how much you should be saving on the back of a napkin.

Know what percentage of your retirement goal your current assets can grow and cover, so you can determine if you are ahead or behind schedule. It also helps to calculate if you are pacing yourself correctly. And then you can decide how much you need to be saving each month toward your retirement.

Pay yourself first. Your savings should be automatic. You won't miss what you don't see.

Automating your contribution to an employer-defined contribution plan is easy. If you aren't employed, you can still automate a taxable savings plan. Most brokers offer a link between your investment account and your checking account and also an automatic transfer between the two. It's a painless way to move money each month into your retirement or savings account.

Save and invest as little as $100 a month for 46 years earning 10%, and you can retire with a million dollars. And $500 a month grows to an astounding $5 million. Those gains can only happen if you start saving while you are young. If you are beginning later in life, you will have to save and invest more each month.

From age 35 to 55, Sophie says a woman needs a good personality. By that time in her life, Sophie was running her own company. At this point many women have finished raising young children and have time for business ventures. Serendipity in the business world often arises from our reputation for kindness. Sophie showed kindness even to strangers as a part of the Jewish practice of "tzedakah."

Best translated as "righteousness" or "justice," tzedakah goes beyond charity. It is the responsibility to reach out to others, giving of our time and money. According to the great philosopher Maimonides, the highest form of tzedakah is providing a person work so he or she can remain independent and self-supporting. Thus age 35 to 55 is a perfect time for women to turn their success into significance by starting a business.

From 55 on, Sophie continued to use her economic independence to help and empower others. She founded the Sophie Tucker Foundation, which contributed to a host of worthy causes.

Sophie Tucker continued working until weeks before her death at age 82. "The secret to longevity," she said, "is to keep breathing." Today's women are likely to keep breathing a lot longer. We recommend that women anticipate a retirement well into their 90s. Dying young isn't a good plan.

Preparing for retirement is more than putting money in an account. You must work periodically through mathematical assumptions and projections to ensure you will meet your retirement goals. Annual financial physicals ensure that your portfolio will remain as strong and healthy as you want to be.

Financial success is only one of the three components of a successful retirement. Having a healthy diet and staying active physically is equally important. And maintaining a good relationship with engaging and meaningful work is the most critical of all.

Sophie's gusto for enjoying a full life provided several generations with an example of a strong independent woman. Women at every age should be saving and investing at least 15% of the lifestyle they want in retirement. For every seven years they delay saving and investing, they cut that lifestyle in half.

Any plan older than two years is out of date. As your savings change, their projected value will cover a different percentage of your retirement goal. While market returns fluctuate and your standard of living increases, you may need to adjust your monthly savings. And your investments should grow gradually more conservative as you approach retirement age.

Financial independence opens doors for success and significance later in life. As Sophie Tucker reminds us, "I've been rich and I've been poor--and believe me, rich is better."



from http://www.emarotta.com/article.php?ID=361

Portfolio Recommendation Beats S&P 500 by 9.4% (2009-10-26)

by David John Marotta

Exactly a year ago I encouraged you to avoid another lost decade in the markets. I recommended a specific balanced portfolio that today is beating the S&P 500 by 9.4%.

At the end of September, the S&P 500 was down 6.9% after one of the most volatile 12 months in the market's history. Even over the past 10 years it lost money with an annualized return of -0.15%. So although buy-and-hold investors are relieved the markets have recovered much of their losses from lows in early March, all is not dividends and capital gains.

To add to their distress, many buy-and-hold investors did not even receive the market return. They purchased closet index funds with overly inflated expense ratios. Excessive fees sapped value from their investments while the underlying strategy proved fruitless.

Many active investors fared far worse. In their scramble to avoid bloodshed, they sold near the lows. They didn't get back into the markets until the recovery passed the point at which they had exited. Timing the markets this past year was nearly impossible. The drop was precipitous, but the recovery was equally steep. Those who rebalanced at the low took money out of safe investments and bought into equities just when the outlook was the bleakest. These fortunate contrarians boosted their returns significantly.

So did those people who simply diversified into the blended portfolio I recommended a year ago. That portfolio experienced a 2.48% gain over the past year in contrast to the S&P 500's 6.91% loss. It beat the S&P 500 by an impressive 9.39%.

We generally do not recommend S&P 500 index funds. The S&P 500 is a capitalization-weighted index. It tends to buy more of a stock when it goes up and hold less of a stock when it becomes more reasonably priced.

If the S&P were a financial advisor it would say, "Let's buy mostly large-cap growth stocks in the industry that did well last year with a high price per earnings ratio." The result would be a very aggressive and volatile portfolio that does better at the end of a bull market than at the beginning. And it does miserably at preserving capital during a bear market--exactly what happened over the last decade.

So if you are invested primarily in funds that mimic the S&P 500, a lost decade should be no surprise. If we use market history to run hundreds of Monte Carlo simulations on a portfolio invested in an S&P 500 index fund, projections indicate returns at or below zero about 6% to 7% of the time. This scenario is an astonishingly accurate snapshot of trends in the past 100 years in which six 10-year periods showed no gains. These periods were the 10 years ending in 1914, 1921, 1932, 1938, 1974 and 1977.

If you were invested in the Vanguard 500 Index, your 10-year average return through the end of last month was -0.23%. The official rate of inflation during the past decade averaged 3.0%, but in reality it was probably at least 5%. If you were invested in an S&P 500 fund, your decade-long progress toward your retirement goals has stalled significantly.

But if you were a savvy investor, you did not lose this past decade. If you committed to a balanced portfolio, you experienced both higher returns and lower volatility.

Even a balanced portfolio of just six different common funds could have boosted your 10-year average return to 6.21%. And it would have lowered your volatility from a standard deviation of 16.25% to only 14.83%, a 6.36% better annual return with 1.42% less volatility.

The portfolio I recommended didn't cherry-pick investments that have done the best recently. Rather it chose widely used funds from each major asset class.

My comparison portfolio allocates 20% to fixed income in the Vanguard Total Bond Index (VBMFX). Of the remainder, it designates 31% to U.S. stocks with 21% in the Vanguard 500 Index (VFINX) and 10% in the Vanguard Small Cap Index (NAESX). Another 31% goes to foreign stocks with 21% in Vanguard Total International Stock (VGTSX) and 10% in the Vanguard Emerging Market Index (VEIEX). The final 18% is invested in hard asset stocks in the T. Rowe Price New Era Fund (PRNEX).

The funds just described have been popular for over 10 years. They have not made their gains from active trading. And they have low expense ratios. These are not necessarily the ideal funds to select today. Nor is this the flawless asset allocation. These are simply reasonable funds in each asset class.

Both in theory and practice, a balanced portfolio has proven to be a far superior way to meet your financial goals. In Monte Carlo simulations, balanced portfolios earn money over a decade, even the bottom 5% of random returns. The exact portfolio construction is less critical than including asset categories with a low correlation to the S&P 500. A well-balanced portfolio should result in good returns with lower volatility. Returns will still vary widely because the markets are inherently capricious, but the worst cases should be considerably better.

Of the six holdings listed here, the best return over the past 12 months was the Vanguard Emerging Market Index (VEIEX), up 17.38%. This holding dropped the most a year ago but recovered even faster.

Downward pressure on the U.S. dollar has continued in recent months. So we are still strongly advocating portfolios that hold a significant percentage of assets denominated in other currencies. These assets include foreign and emerging stocks, foreign bonds and hard asset stocks.

Holding on to an undiversified portfolio will, on average, keep on providing inferior returns with higher volatility. Don't continue to wait in vain for a poorly balanced portfolio to satisfy your investment requirements. You can't afford to miss another year or another decade.

 

from http://www.emarotta.com/article.php?ID=360

Credit Card Karate: The Moves to Block Spending (2009-10-19)

by David John Marotta

The availability of easy credit does not encourage financial virtue. Five minutes of credit card indiscretion literally can undo a life of financial responsibility, just like flirting at a bar with an available stranger can threaten marital fidelity.

You are trying to stick to your budget and live well within your means. You want to be a supersaver, someone who amasses real wealth by living simply and investing the remainder. To achieve these goals, you have to set rules in advance for how you will handle credit. If you don't, credit cards could undo all your hard work and planning.

A life of credit card debt is like the worst slavery imaginable. Failing to pay just a few hundred dollars a month will cause your debt to spiral out of control. At the end of just three years you could owe about $9,600, the average family's credit card debt.

Credit cards rates of 18% or even more are typical when you fail to pay. It used to be called usury and was illegal. But nowadays it is described as financial services and has become a highly respectable career.

If you don't stop buying that $200 worth of junk on credit, your debt will only worsen. After 24 years, you could be over a million dollars in debt for just $58,000 worth of merchandise. But if you switch that engine from reverse to forward, you could retire as a millionaire simply by saving and investing what you aren't paying on your credit card.

Consider the two sides to using credit. On the one hand, credit cards provide you with convenience, protection and help you maintain your budget. On the other hand, they can be a seductive siren's song leading you to financial ruin.

A few visualization techniques can help you avoid the wanton use of credit cards. Studies show that when people pay with a credit card, they are willing to spend twice as much money as when they use cash. Other research indicates that the biggest savings are enjoyed when people refuse to make small everyday unnecessary purchases. Put these two studies together, and by simply using a credit card you risk doubling your spending and cutting your savings in half. Thus credit card debt can sink families even faster than saving and investing can help them grow rich.

In the first visualization, imagine that everything you buy with a credit card costs twice as much as the number on the price tag. Only if an item costs twice as much will you be as hesitant to purchase it as if you had to pay cash.

To use the second technique, remove the decimal place on the price when you use your credit card. The younger you are, the more failing to save early will cost you when you retire. For example, at age 20, the $8.50 lunch you charge will cost you $850 in your retirement at age 63. If that isn't incentive enough, add another zero. It will cost you $8,500 in your retirement by age 85.

The years after college and before children are a great time in your life to save. You may not have another time to save aggressively until the kids graduate from college. You lose time and squander your resources if your credit card spending dampens aggressive savings. Every seven years you wait to fund your Roth IRA, you cut your retirement standard of living in half.

There's a greater advantage to contributing $2,000 annually for the seven years after college then beginning during the eight year and continuing for the rest of your life. With normal market returns, after seven years of $2,000 annual contributions, your investments will be appreciating at a rate of more than $2,000 a year, without any additional contributions.

Reining in your spending anytime is better than concluding that credit card debt is inevitable. Wait seven years from now and you cut your retirement lifestyle in half again. So visualize cutting your retirement in half or your credit card.

If you don't think you have any problems with your use of credit cards, but you haven't been saving and fully funding your 401(k) and Roth IRA, you do have a problem. If so, put the credit card back in your wallet and start saving.

Using a credit card properly is important. Not abusing a credit card is essential. Unless both partners in a marriage agree on how they handle credit, the cards aren't worth the plastic they are printed on. Either spouse should have veto power regarding the use of credit.

Each partner needs this respect because both parties can be liable for the underlying debt. So if you are part of a couple who are always paying fees or interest, you are better off running your budget with cash and envelopes.

There is no shame in alcoholism, only in being a drunk. Similarly, there is no shame in having credit troubles, only in continuing to be spendthrift. Financial troubles sink a great number of marriages, nearly all of them because they fail to admit that for them an open credit line is an empty credit line. Alcoholics struggle similarly with an open bottle.

Thus the only shame around credit problems is an unwillingness to accept help. Many people use credit cards intelligently for nondiscretionary purchases such as bills, utilities, groceries and gasoline. But smaller impulse items, such as eating out or spending on books, music, electronics or clothes, can quickly wreak havoc on their spending plans.

If one type of purchase causes you trouble, stop using credit cards in that area. If one person has difficulty, the other should be willing to bear the burden of paying the bills. Cash accounting means you can't spend too much. It is the perfect exercise of sobriety for your spending habits.

One of my favorite movies is "The Karate Kid" starring Pat Morita as Mr. Miyagi. Miyagi trains his young apprentice Daniel by having him wax his cars, sand his floors and paint a fence. Only after several days of backbreaking work does Daniel realize that his body has learned the defensive moves of karate through the muscle memory of "Wax on, wax off."

You can't learn the critical lessons of finance with the electric waxing machine of plastic credit. By refusing to use credit, you have the visual feedback of money going from your paycheck to a budget envelope and then leaving your wallet in exchange for something you really need.

Most people don't learn these lessons from their parents. And even if your elders handled money well, you still have to learn the lessons for yourself. Having a parent who excels in karate doesn't mean you can crane kick.

So if your spouse vetoes the use of credit, you can either get mad like Daniel did at Mr. Miyagi or you can get busy learning financial karate.

 

from http://www.emarotta.com/article.php?ID=359

Using a Credit Card Properly (2009-10-12)

by David John Marotta

Getting the right credit card for the right reasons is half the battle. Using it correctly is the other half.

When the perfect card arrives in the mail, sign it, activate it and pull the sticker off the front. But before you put it in your wallet and start using it, deny the credit card company the permission to market to you.

Dial the 24-hour customer service number on the back of the card. Tell the representative you want the maximum amount of privacy on your account. The credit cards companies have multiple lists in their system. You may find it challenging to turn off each possible marketing opportunity.

Specify that you want no phone calls, statement inserts or junk mail. That means no phone calls from third parties, no selling your information, no sweepstakes offers and no offers of credit protection.

Most importantly, make clear you do not want any access checks. These checks look innocent, but micro print on the back explains that by cashing the check you are accepting the company's offer to bill subscription charges directly to your credit card.

When you think you have listed every marketing possibility, be sure to ask, "Is there anything else I can turn off?"

None of these offers help you build real wealth, which is why they have to advertise them. You won't miss anything. We've all made the mistake of wasting too much time on a deceptively easy offer that subsequently was very difficult to rescind. Your time is worth more than sifting through the ashes of advertising looking for valuables. Do yourself a favor and repeat the process just described for all of your other credit cards too.

If you have already taken my advice, put all your purchases on your ideal card. If you spend $50,000 and earn 2%, you will receive an extra $1,000 to save and invest. It's worthwhile using a card that pays you.

Debit cards can be dangerous. Every time you use one, you reveal how to access your entire bank account and drain it dry. Hackers are targeting merchants who have debit card personal identification numbers (PINs) as the weak link in their security system. Your bank's computer system may be secure, but the computer in the gas kiosk where you just paid is not. Even using your debit card like a credit card leaves your entire account exposed.

The most you can lose with a credit card is $50, which you can simply contest and refuse to pay. The most you can lose with a debit card is $500 if you wait more than two days to report the fraud. Your liability is unlimited if you wait more than 60 days. And while you are waiting for the money to be replaced, supporting your lifestyle is up to you.

Additionally, debit transactions are routinely approved even you have insufficient funds. The bank processes the $5 charge and tacks on a $35 overdraft fee. It would take $1,750 in spending on your dream credit card earning 2% cash back to pay for one overdraft fee.

Pay the bill as soon as it arrives in the mail. Don't wait until the last minute. You never want to risk paying interest or late charges. Paying electronically via electronic transfer, Bill Pay or by using your debit card is the quickest and easiest method. Because these are bank-to-bank electronic connections, this payment method is secure. You will save both time and money.

If for some reason you are late paying the bill, pay it as soon as you can, and then call customer service. Explain the reason for the late payment, and ask for the interest and late charges to be waived. If you have been a good customer, they may agree but usually only once in a 12-month period.

If paying either interest or late payments becomes a pattern, put the credit cards in a drawer and opt for a debit or cash system. Both people in a marriage should agree on the use of credit, with either partner having veto power about using credit.

Watch out for a few other special situations. Some merchants require a minimum purchase to use your credit card, which violates Visa and MasterCard agreements.

Vendors are also prohibited from adding on a credit card surcharge, but they can offer a cash discount. Although this may seem like not much of a distinction, it means that if merchants have an advertised price, they are not allowed to charge over that price just because you are using a credit card.

If you believe a specific merchant has violated these rules, call either 1-800-VISA-911 or 1-800-MASTERCARD. Merchants need to keep the credit card companies satisfied, which is leverage you can use in a dispute. Having charged a purchase on your credit card can help if you believe a specific merchant has treated you unfairly.

Try to resolve the dispute directly with the merchant if you can. Most merchants are reasonable, but if they are obstinate, the question isn't "Can they do that?" The only question is "Will you let them get away with it?"

Every one of us has felt cheated by being promised more than we actually received. But you may not realize that leverage and the law are on your side if you are willing to take the time to dispute the charge. Wrongdoing thrives when good people do nothing. You can do something.

You can refuse to pay for any charge on your card during a dispute. I've only take the time to fight regarding a few charges on my credit card. It requires lawyer-like patience and an eye for details. Documentation, especially of the portion in dispute, is critical. So is following the rules, which includes putting everything in writing as well as keeping copies for your own records.

Remember that your credit card's financial institution wants to keep you as a customer. Issuing a charge back is easy for them to do pending the resolution of a conflict.

The merchant's bank similarly wants to keep the merchant as a customer, but only if their business practices don't generate time-consuming disputes. They only make money from a seamless volume of transactions.

The final step in using your credit card properly is to record your spending information. Part of wealth management is spending money deliberately. You need a way to keep track of your expenditures.

For couples in financial trouble, establishing and following a budget eliminates fights about the first dollar spent. It frees them to focus on those categories where they went over budget.

Capturing how you spend doesn't even have to take the form of a budget. It can just be a tool to see what you have done, decide together what you would like to do and adjust how you will spend your money going forward. Think of a spending plan as simply the process of adjusting how you spend to best reflect what you value. Nothing is better for a relationship than talking together about what you hold dear and your hopes and dreams for the future.

Simplify whatever method you use by capturing your spending electronically. For every vendor on our credit card statement, we download our information into QuickBooks. But other interfaces such as mint.com or an Excel spreadsheet can work just as well.

Credit cards can provide convenience, protection and a little extra savings. But you must pay promptly and take the time to negotiate a fair resolution if your payment is not received or you don't get what you've paid for.

 

from http://www.emarotta.com/article.php?ID=358

Make Sure Your Credit Card Has Smart Features (2009-10-05)

by David John Marotta

Credit cards can be a blessing or a curse. Used correctly, they are both convenient and safe and can help you stick to your budget. But the dark side of heedless use can lead to financial ruin. Rather than rejecting credit cards altogether, however, choose the right card for the right reasons.

You are trying to be faithful to your budget and live well within your means. You want to become a supersaver, someone who amasses real wealth by living simply and investing the remainder. Now you have to set rules for how you will handle credit. If you don't, credit cards could undo all your hard work and planning.

Credit card companies know that people have an irrational loyalty to their first card. That's why they market college students so heavily. You may feel attached to your current credit card, but believe me, the credit card company feels no such allegiance to you.

Because both spouses must live with the consequences, each should have the right to veto any use of credit. Using credit successfully should begin with your choice of card.

Your sole criterion for picking a credit card is to maximize the financial benefit to your family, assuming you use the credit card correctly. You will be paying off the entire balance every month, so certain features, such as the interest rate, are not a concern. Nor do we care about how the company can change the interest rate if you fail to pay.

But to be in this enviable situation, you need significant taxable savings and investments in order to weather a financial emergency. Lacking such discipline, you may want a different type of card.

Credit cards companies create a host of gimmicks to entice you. Usually these come-ons are themed around a hobby or an interest. I'm certain you are proud of your alma mater and rooting for your favorite sports team. The credit card companies are counting on it. You can even have a photo of your children or grandchildren on the front of the card and change it every six months. Don't succumb.

Selecting the right card is worth about 2% of your credit card purchases. So if you spend $25,000 a year using the card, it means an extra $500 in your wallet. You can buy a lot of sports paraphernalia and photographs of your family for $500. Besides, the credit card companies don't really care about your sports team. They sell a matching card for your arch rivals too!

So forget about how the card looks and focus on the rewards program. Airline miles are the oldest and most common. Unfortunately, they are some of the worst reward programs. Over 75% of airline miles expire unused.

Card companies have also learned to provide themes for the rewards. Although it makes great marketing sense for companies to appeal to an affinity group using an exclusive offer, don't fall for such an appeal. Which would you rather have, reward points that can be spent anywhere or rewards that can only apply to one specific interest?

They may have some appealing offer, but you will be able to get it on eBay for a fraction of what you will miss by not using another card. Cash awards can be used to buy anything.

Get the cash. You could be earning game time with the World of Warcraft Visa. Or a donation could be allocated to the Make-A-Wish-Foundation for each of your purchases. But these may not be the greatest decisions after a year. With cash, you are in control. Get the money, and then decide if you want to buy the game time or make a contribution and take the tax deduction.

Most cards have a rewards program worth between one and three pennies per dollar spent. Oddly enough, themed rewards tend to be toward the low end and cash rewards are apt to be higher. Even the popular cards that fund 529 plans don't pay as much as a cash rebate. So get the cash rebate and then fund a 529 plan yourself, which can also net you a state tax deduction.

I've been using the Platinum Discover card, one of the first cards that offered a cash-back bonus. It used to be 2%. Now it is 1% with a 5% cash-back bonus on certain items you sign up for every three months. Even then it has maximum amounts.

During the process of researching this article, I've learned about several flat 2% unlimited cash-back options, one with Schwab Bank. Because we use Schwab as a custodian for our assets, it makes everything easy. The cash rebate is deposited directly into our investment account. That makes it 2% additional savings instead of 2% additional spending.

Usually I don't mention specific products, but my experience should help illustrate two principles. First, the best choice changes regularly. And second, you should be looking for at least 2% cash back on your purchases. Some savvy consumers literally use a deck of credit cards to take advantage of special offers. One card gets 5% back at Wal-Mart. Another gets 5% back on gasoline purchases. I'm interested in simplicity. Let me know if you find a deal better than an unlimited 2% back on all purchases.

Needless to say, your credit cards should have no annual fee. And the company should allow you at least 20 days to pay your bill before interest accrues. You should never be paying interest.

Another very helpful feature is the ability to download your purchase information electronically. Importing this data into your budget can save you time. Electronic interfaces exist for QuickBooks, mint.com or a simple spreadsheet format. Most people find keeping track of a budget too much hassle, but the right credit card can simplify the process.

Probably one of the greatest time-saving devices is being able to put all your purchases on a credit card, receive 2% cash back and then roll all those purchases into your budget once a month. With QuickBooks, so long as you have purchased from the vendor before, the software remembers how you coded past purchases and automatically assigns a category.

Some credit cards offer to extend the warranty for items you have bought using it. This may be called a warranty manager feature. Usually it doubles the free repair period for up to one year for eligible purchases. I never recommend an extended warranty, but getting a free year for no extra charge can be very worthwhile.

Finally, many credit cards are offering a feature called ShopSafe that allows you to shop online and generate a onetime-use credit card number for Internet purchases. If you worry about your credit card number being compromised on the Internet, this service will give you some additional peace of mind.

Starting with the right credit card for the right reasons will make using it properly that much easier.

 

from http://www.emarotta.com/article.php?ID=357

The Whip Cracks Both Ways (2009-09-28)

by David John Marotta

Inherently volatile, the average daily fluctuation of the stock market is about 0.76%. If this movement were always up, the market would appreciate to more than six times its value in a year. If all the movement were down, you would have less than 15 cents for every dollar you invested at the beginning of the year.

Most of this fluctuation is like the beating of a hummingbird's wings--lots of movement but no progress. Every year after matching all the up days and down days, you are left with about seven days that represent the entire year's investment gain or loss. Thus daily movements are 97% noise and 3% direction.

Volatility, therefore, is a matter of perspective. Are you watching the hummingbird or its wings?

I've charted the movement of the S&P 500 total return since 1950 from eight different perspectives in what I call a "whip chart." Each measure of risk and return is analogous to a different part of the whip.

Out at the very end of the whip is a bit of thread called the cracker, or popper. As all the momentum of the heavier whip flows into this light thread, it curls back on itself. The snapping sound comes from the cracker accelerating beyond the speed of sound, creating a tiny vacuum and sonic boom as the air rushes back in.

We can compare the cracker to the six-month activity in the market. On average the six-month movement is up 6.4%, equivalent to a 13.2% annualized return. For the sake of just measuring speed, we convert all the market movements into how far they would have moved at that speed over a year.

On an annualized basis, six-month returns deviate wildly, about 23.7%. The standard deviation (SD) measures volatility statistically, or how much room it takes for the cracker to snap. Approximately 68% of returns will curl around within 1 SD (±23.7%), 95% will fall within 2 SD (±47.4%) and 99.7% will fall within 3 SD (±71.1%). Stock market returns are by nature capricious and exceed the statistical norms for returns that fall outside of three deviations.

In fact, the past six-month period was more than 3 SD above average, earning 40.5% (97.5% annualized). And the six months preceding that were below 3 SD, losing 41.8% (66.2% annualized). Because six-month returns are compounded, when annualized the positive side multiplies and the negative side is diminished. Therefore the 3 SD isn't exactly ±71.1%. The 3 SD return is compounded as +89.2% to -55.6%.

Unlikely ups and downs like these are sometimes labeled "black swan" events. Or they may be described by the number of SDs they fall within. For example, because these two recent events are slightly more than 3 SD, they are called "four-sigma" events.

Four-sigma events should occur less than 0.3% if market returns conformed to a Gaussian bell curve, but they do not. The markets are inherently volatile. Market returns are better described by a branch of mathematics known as power laws. Instead of a neat statistical bell curve, these formulas are used to describe fractals where the same patterns can sometimes be wildly larger or smaller than the one you are looking at. Having just experienced two four-sigma events, these are not simply academic musings.

Every time the cracker pops, and the news is talking about how good or bad the markets are doing, should signal you to rebalance your portfolio. Having just finished a four-sigma positive market run, now is an excellent time to take some money off the table. The cracker snapped up, and if you rebalanced at the bottom your asset allocation now tilts more toward stocks. By rebalancing your portfolio you will reset your portfolio to an allocation ready for the next move of the whip.

Annualized returns are slightly better behaved, more like the "fall," a bit of unbraided leather at the end of the whip. Annual returns within one sigma range from +29.2 to -5.2%. The two-sigma range is +46.4% to -22.4%. And the three-sigma range is +63.6% to -39.5%.

The leather fall attaches to the braided thong with a fall hitch. And a knot called a keeper holds the braided thong to the handle. Just as each of these parts of a whip experience smaller movements, so the SD continues to diminish for returns over a year and a half (fall hitch), 3 years (thong), 5 years (keeper) and 10 years (handle).

The handle of a whip, our 10-year horizon, is much more manageable. The one-sigma range for an annualized 10-year return is +16.2% to +6.33%. The two-sigma range is +21.1% to +1.40%. Not until a three-sigma event can a decade-long return for the S&P 500 turn negative. The three-sigma range is +26.1% to -3.5%. The past 10-year return has been -0.8%

The 10-year return (the handle) swings more than a 20-year return (the arm), which moves more than a 40-year return (the shoulder). Volatility begins to lessen as you move further and further away from the end of the whip. From the perspective of a whipping cracker, volatility is extreme, snapping faster than the speed of sound. But if you are a fly sitting on the shoulder of the person wielding the whip, you haven't moved.

At every stage of the whip, the average trend is more than 11% positive. Picture the person holding the whip as riding an escalator that is slowly but constantly ascending. Despite the whip cracking up and down, the general trend is upward.

Rebalancing frequently recognizes and takes advantage of the volatility of this trend. Staying invested during market gyrations takes advantage of the escalator.

 

from http://www.emarotta.com/article.php?ID=356

Time to Rebalance Your Portfolio Again (2009-09-21)

by David John Marotta

The S&P 500 over the past six months is up over 40%. You have had smooth sailing and are beginning to feel comfortable again. Don't. It's time to tack once more and rebalance your accounts.

Studies show that rebalancing your portfolio can boost your returns by as much as 1.6% annually. This rebalancing bonus is measurable but by no means guaranteed. It works best in choppy volatile markets with asset classes that don't move in sync with one another.

It is always a contrarian move, expecting the wind to change. But when it does, rebalancing can fill your sails again. However if the market continues moving in the same direction, there can be a rebalancing penalty. The past year has been a little of both.

During the 12 months ending August 31, 2009, the S&P lost 41.28% for the first 6 months and then gained 40.52% for the last 6 months to end down 18.25%. Remember that when the market loses 41%, it must earn more than that to return to its starting value. During that same time, the Barclays Aggregate Bond Index appreciated 7.70%. Averaging these two returns together gives a return of down 5.28%.

Imagine your portfolio as a catamaran with twin hulls. One pontoon is invested in the S&P 500 and the other in the bond index.

At the end of February at the bottom of the markets, your sailboat was down 19.00% and one pontoon was riding way out of the water. You have 64% invested in bonds and only 36% left in stocks. Without rebalancing, your portfolio has grown more conservative just when a more aggressive stance would be advantageous. By the end of the year your portfolio is only 5.28% underwater, and the imbalance is less pronounced at 57/43.

During the first six months, the markets were dropping precipitously and the stock pontoon was getting lighter by the day. Rebalancing means moving some funds from the relatively heavier bond side to the lighter stock side now riding high out of the water. As long as the stock side continues to lighten, moving more money in hurts returns. Rebalancing also seemed like madness, at least until the end of February when the markets bottomed.

Then after February, the markets began to rise and the bond side became comparatively lighter. Rebalancing in rising markets means you can begin to take some of those profits back off the table. Continually taking money out of equities while they get heavier again dampens returns slightly.

Yet because the markets changed course at least once at the end of February, rebalancing tended to improve returns. Doing so every month boosted them by a meager 0.15%. Had there been more reversals as a mix of positive and negative months, this rebalancing bonus would have been higher.

Monthly rebalancing isn't usually the best strategy. It is better to let the trend continue for a while and rebalance less frequently when the market is making new highs or lows.

If you were brilliant and rebalanced your portfolio after six months just once at the end of February, you only lost 1.08%. This move would have resulted in a 4.20% bonus over the negative 5.28% return of a buy-and-hold strategy.

The worst strategy would have been getting out of the markets near the bottom to cut your losses, the equivalent of dropping your sails and turning into the wind. Getting out of the markets at the end of February would have resulted in locking in a 15.98% loss. Even getting out at the end of November would have meant an 8.98% loss.

Rebalancing requires discipline. You set a target asset allocation for your investments and then periodically buy and sell different investments to stay focused on your objective. Without rebalancing, those categories that do well may continue to grow as a percentage of your portfolio until they significantly underperform the markets. The ones that do the best often bubble and finally burst. Rebalancing avoids this needless anguish.

Portfolio construction begins with the most basic allocation between investments that offer a greater chance of appreciation (stocks) and those that provide portfolio stability (bonds). Decisions made at this level are the most critical in determining the course of your portfolio.

Even if you are creating a very aggressive portfolio, including some fixed-income investments actually increases returns. This strategy can keep your portfolio from capsizing. Stable investments provide some cash on the sidelines to buy stocks after a market correction, which both boosts as well as evens out your investment returns. Thanks to the effect of compounding, smoother returns produce better returns.

Periodic rebalancing is the simplest and most common method. Waiting for an asset category to exceed some threshold and then bringing the allocation back within some tolerances seems to produce slightly better returns and lower volatility. Although different ways of rebalancing can produce somewhat variable results, committing to a regular rebalancing plan is more important than the method you use.

Portfolios naturally grow out of balance as the wind and waves buffet your investments. Doing nothing risks keeling too much as one pontoon grows inordinately heavy and the other light. This hands-off stance risks capsizing an otherwise brilliant investment strategy. So given everything that has occurred in the markets, now is a good time to rebalance your portfolio.



from http://www.emarotta.com/article.php?ID=355

The Case Against Centralized Health Care (2009-09-14)

by David John Marotta

Many Americans think centralized planning could fix U.S. health care. They believe industry greed and profits are at the root of the problems. And they believe that altruistic commonsense reforms would result in lower costs, better management, less waste and universal coverage. They are dangerously wrong.

Imagine you are appointed the czar of a nationalized health-care plan and given absolute authority. You, being you, are idealistic and unselfish. Your only goal is to solve this political conundrum and have history laud you as a great servant of the people. Instead, you are doomed to be remembered as one of the worst of America's leaders.

Simply by taking on the job you are accepting responsibility for 17% of the country's gross domestic product. You must make decisions for the widely divergent ideals and values of every person living in the United States.

One of your first edicts might be to make health insurance mandatory. But a mandate forces your subjects to buy a specific set of services they may not want. It requires them to do so by law with full penalties for not complying.

Those conscripted to buy health-care insurance will do so but with great resentment. Nearly all of them will pay more than the benefit they receive. They will be poorer for having submitted. That's how insurance works.

Additionally, compliance won't be 100%. The more comprehensive the coverage you demand, the greater incentive you give to insubordination. Many will revolt. They will avoid agencies that might ask to see their papers. You will need to punish some harshly or the insurrection will spread. You jail a few rebels for health insurance evasion to deter resistance.

Inconceivably, some low-income families won't register for coverage even though it's free. They won't or can't fill out the required paperwork. Other renegades will evade notice until they have a serious illness. When they are caught needing coverage, you will have to decide if you will show mercy.

The inconsistency of harshly punishing those who refused coverage they did not need and then coddling those who presume the state's leniency will provoke a cynical rallying cry against your regime.

Nicholas the Bloody is off to a bad start, and you haven't even defined what insurance meets your mandate. A token million-dollar deductible is the lightest burden of tribute but hardly worth levying. Your palace will be surrounded by torches and pitchforks, each allied with a different disease or treatment. The rallying cries will be deafening. Sycophants will mob you.

Those who suffer from a disease are obvious poster children. But specialists too will seek to affirm their disciplines. Manufacturers will sell testing equipment. Pharmaceutical companies will prescribe regimens. Being included will be worth millions. Court intrigue and petty politics will surround each decision from the throne.

You will have to determine whether the peasants suffering with mental illness or substance abuse are most worthy of care. And once you ascertain your priorities, you cannot permit any exceptions. Essential resources cannot be diverted. Those whose illness isn't included will simply have to pay into the system for others to benefit.

Advocates of abortion, nutritional counseling, dentistry, orthodontics, chiropractic, psychotherapy, the manufacturer of Viagra--each is asking for your blessing.

Tens of thousands can be served for only pennies a day. And as your dynasty tries to insure all of public life, the realm of your control spreads to all aspects of life. The serfs lose their freedom to support the rising prices. Discontent spreads.

But as health czar you are all-powerful and will not tolerate skyrocketing prices. So you order price controls. Instead of psychotherapists being free to charge $150 per hour, for example, you cap their pay at $69. But short of coercion, how will you maintain such an ironclad grip on prices?

You could make people pay out of pocket for costs over $69. But if such stingy reimbursement solved the problem, why not simply set it at $29? Limiting reimbursement only means you have failed to provide sufficient coverage. You can't let coverage escape to the highest bidder. Therefore you must make it illegal to pay more than the reimbursement rate of $69 an hour.

Of course, sovereigns can no more change supply and demand than they can alter gravity. Demand at $150 an hour kept every counselor employed. When you cap their pay, two things happen. First, more patients are willing to pay $69 than $150 an hour, especially when the $69 is fully covered by their insurance. Demand soars.

Second, fewer people than before are willing to work as a counselor at $69 an hour. So the supply of effective therapists dwindles sharply. Fewer professionals are trying to service more patients. You institute rationing. You decide who gets counseling and who does not. Some are denied even if they are willing to pay 10 times the insurance reimbursement. Your draconian authoritarianism is seen as evil, heartless tyranny.

Fortunately, economic gravity meets you halfway. The free market also works to determine the quality of service affordable at $69 an hour. Green cards are given to foreign-born counselors. Video links provide counselor-in-a-box services in India to handle the demand at a reduced quality and cost. A black market develops in cash for counseling.

Although you can't control the black market, you do have complete control over the costs of coverage. The insurance companies can only charge more for insurance on the elderly if you allow it. You will have to decide if you will authorize actuarial underwriting. If you permit health-care insurance to be sold based on the actual cost for a demographic group, what criteria will you use?

It is often said that requiring young healthy people to get health insurance will lower the costs for the rest of us, but only if we don't allow actuarial underwriting. If those who are young and healthy pay based on their youth and health, then including them in the pool won't change the costs for the elderly. Only if you gouge the young and healthy can you reduce costs for those who are older and more infirm.

Once again the AARP and other lobbies whose support props up your regime will be subsidized, this time at the expense of overcharging the young and healthy who have less discretionary income.

After the criterion of age, will you charge more for those who are promiscuous? Smokers? Obese? Addicted to drugs? In their childbearing years?

To whatever extent you don't allow actuarial underwriting, the market will self-select, endangering some insurance companies or coverage. Forcing insurance companies to underwrite everyone in a geographic region at the same price punishes those with healthy lifestyles. This technique of requiring level premiums within a given geographic area causes a host of side effects, especially in the case where physically moving their residence could save a young healthy family thousands of dollars.

My series on the economics of health care has garnered some very negative responses. Simply allowing people as much free choice as possible is characterized as evil. Moral outrage has justified despotic edicts masquerading as good intentions. Such divine anointing has no place in a free America.

"Of all tyrannies a tyranny sincerely exercised for the good of its victim may be the most oppressive," wrote C.S. Lewis. "Those who torment us for our own good will torment us without end for they do so with the approval of their own conscience."

Only with free-market capitalism do individuals have the liberty to manage their own affairs free from the barricades and threats of the state. No decision is forced. In contrast, every law regarding health care that Congress passes will cordon off possible exchanges of value that would benefit both parties. Good intentions may delude you to equate collectivism with ethical outcomes. But sometimes simply wielding centralized power and forcing people against their desires is in itself immoral. We don't need a repressive health-care regime in America. We need to govern less.<hr>See also:<ol><li><a href="http://www.emarotta.com/article.php?ID=351">Health Care: Avoiding a Civil War over Health Care</a>

<li><a href="http://www.emarotta.com/article.php?ID=352">Health Care: More Profitable Health Care Is the Solution</a>

<li><a href="http://www.emarotta.com/article.php?ID=353">Health Care: A Compromise to Achieve Universal Coverage</a>

<li><a href="http://www.emarotta.com/article.php?ID=354">Health Care: The Case Against Centralized Health Care</a></ol>



from http://www.emarotta.com/article.php?ID=354

A Compromise to Achieve Universal Coverage (2009-09-07)

by David John Marotta

Many people support the ideal of universal health care insurance coverage. The utopian heart beats strong and steady. But once the incision is made, there is no turning back. And without a clear understanding of economics, our experimental treatment may kill Uncle Sam.

The knee-jerk reaction of liberals to the rubber hammer of health care is the simplistic mantra "Everyone should be covered" or "The government should pay for everyone." Whether 46 million are uninsured or just one individual, anything less than universal coverage is simply unacceptable to them.

Conservatives, in contrast, whittle the number down. About 6.4 million people are on Medicaid or SCHIP (State Children's Health Insurance Program) but tell the census taker they are uninsured. Another 4.3 million are eligible and would be automatically enrolled after visiting a clinic or emergency room. Both groups are protected from risk and do not need more coverage.

Another 9.3 million are not American citizens. The law currently covers them for emergency care while they are in the United States. Debate is ongoing whether they should qualify for full medical insurance even if they are undocumented and pay no taxes.

Another 10.1 million have incomes more than triple the federal poverty level. Even people at the poverty level live better than the average American did in 1960 and more comfortably than 90% of the world today. For a family of four, three times the poverty level is $66,150.

About 5 million are healthy adults with no dependent children between 18 and 34. They have ruled out health insurance coverage as too expensive. The current proposals limit how much insurers can set their premiums based on age. The limit is two times, which discriminates against younger adults. Nothing makes sense about charging a 19-year-old half as much as a 91-year-old. Well-intentioned statism steals from struggling young people and lines the coffers of the wealthy AARP lobby.

So we are left with 10.6 million uninsured U.S. citizens with children who live three times below the poverty level—for example, a family of four earning less than $66,150 a year.

These are the heart-wrenching stories. Imagine a young middle-class family without health insurance whose child suddenly needs tens or even hundreds of thousands of dollars of medical care. They can't qualify for assistance, but their son or daughter's future depends on getting expensive treatments immediately. That's the poster child for universal coverage.

The compromise for conservatives is to agree as a society that we can afford to make catastrophic coverage mandatory. Americans are generally compassionate and will try to pay after the fact. But if America's generosity insulates people from this risk, they won't feel the need to buy insurance. So in fairness everyone must be required to buy coverage ahead of time.

The compromise for liberals is to agree that we are not going to provide an entitlement program for the first aspirin purchased. We are building a safety net, not a hammock.

Insurance only makes sense for extremely expensive and unlikely scenarios. It is never advisable for everyday events.

Here is the perfect analogy: compare insurance that tries to cover the first dollar of health care to the idea of grocery store insurance.

Imagine the average family of four spends $100 a week on groceries, $25 per person. Now think about implementing universal grocery insurance for everyone.

There is no way weekly premiums would be less than $25 per person. They would have to cover the cost of insurance administration and reimbursement. At checkout you would be obliged to show your card and have your insurance numbers recorded. Each item would need to be coded to qualify for reimbursement. Shaving cream would be disallowed. Organic vegetables would only be reimbursed at the generic rate. A dietician would have to certify the tuna is for human, not feline consumption.

Coverage for a week's worth of groceries would quickly rise from $100 to $200 a week. Then $300. Then $500. Soon many people couldn't afford grocery coverage and would drop out of the system. They would have to grow their own vegetables and raise chickens. Those who paid in cash would subsidize the collection costs of those with insurance.

Pressure would increase to lower grocery costs. The government would implement price controls. But you can't reduce costs simply by refusing to pay. Shortages and rationing would ensue.

Those who regularly ate steak would be denied. Families who normally made do with hamburger would start eating the maximum reimbursable amount of filet mignon. Vegetarians would get the meat anyway and trade it for organic food on the black market. Parents of children with allergies would demand expensive gluten-free options. Grocery fraud would be rampant.

Grocery stores would no longer be able to price items. "It depends," clerks would answer. "Ask your insurance company." Shoppers wouldn't care as long as lobster was covered once a quarter.

Older women who ate sparingly would subsidize teenage boys. The obese would take advantage of items that were unlimited allowances. All of the restraint imposed by economic forces would be lost.

Clearly, insurance never works for frequent events with moderate costs. But unfortunately it typifies the style of government-imposed health insurance on the industry. Hundreds of regular expenses are required by law. Each one comes with a nominal copayment that fails to deter its use.

Insurance should be used to limit catastrophic risk, not to pool everyday expenses. Affordable medical insurance should have a high deductible. Then out-of-pocket expenses below the deductible would provide sufficient negative feedback to prevent skyrocketing insurance costs. We have just such an economic trial right now that appears very promising.

If you support universal coverage, consider Health Savings Accounts (HSAs). Thus far, the results of HSAs are surprising and may actually be a miracle cure for America's health-care crisis.

As long as funds are saved and spent on qualified medical expenses, all contributions, capital gains and withdrawals related to an HSA remain untaxed. And HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, HSAs are coupled with a High Deductible Health Plan (HDHP), a minimum of $1,150 for individuals and $2,300 for families. Once the deductible is met, HSA-eligible HDHP plans cover 100% of most medical expenses.

Of course, these deductibles are significant. The minimum deductible for a family is $2,300; the maximum is $11,600. That's a lot of money for a struggling family, but it isn't crippling. People hemorrhaging hundreds of thousands of dollars won't mind losing a few pints of blood instead. They will consider themselves blessed.

Utopian liberals are willing to sacrifice the negative feedback of the first dollar coming out of pocket to fund that dollar for the truly needy. This is madness. Don't break the system for the 80% of Americans who can afford to self-insure the deductible.

Utopians also suggest that automatically paying for routine health maintenance reduces the costs of health care. But annual checkups still cost more than they save. And if they are cost effective, let the insurance companies offer discounts on the cost of the HDHP if patients pay out of pocket for annual checkups. The less government tries to make those decisions, the better.

The good news is that HSA-eligible HDHP premiums are considerably less expensive than the cost of a traditional medical insurance plan. If you want universal coverage, demand Health Savings Accounts with high deductibles. Let's agree we can solve the problem without a grand government takeover of health care.



from http://www.emarotta.com/article.php?ID=353