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The "Zero Interest" Game

Blueprint for Financial Prosperity is the latest blogger to get in on the "Zero Interest" credit card game. The basics of the game are that you open credit accounts that advertise zero interest on balance transfers for a given period of time (usually 6-12 months). That money is then placed in a high yield account (usually Emigrant Direct or HSBC) to make "free money".

But is the money really free? Basically, you're opening several credit cards, immediately maxing them out, and then closing them after paying off the balance with a transfer to another card. To say that potential borrowers would be scared to death of this pattern on your credit report is an understatement. It also can whack your credit score. Stop Buying Crap tracked his FICO score while running this scam and his score dropped by 140 points. 140 points can mean thousands of dollars in interest on car and home loans.

Don't think you'll need a loan in the near future? Well, your credit score could be FUBARed for some time based on past utilization. What if you wreck your car? You may need a loan before you think you do.

Not only can you wreck your FICO score, but what if you miss a payment or get a due date screwed up? What if your new card doesn't do the transfer by the day you need them to? What if you miss a payment somewhere else and the card company yanks the free interest? What if you use the card to make a purchase (purchases generally don't count for zero interest and all payments go to balance transfers first)? All of these would lead to 25% interest being paid since the date you transferred the balance.

It seems like a lot of risk for a couple of hundred bucks in "free money". Plus, you'll pay tax on the interest you do earn, so that lowers the take by another 30% (including state taxes). No, thanks.

Am I on the Right Track?

A lot of people ask themselves that question every day. For retirement plans, it's an extremely confusing question for anyone, much less someone at the beginning of their careers (like me). I decided to test two web calculators to see if they were any more confident than I was in my own predictions (which say my retirement kitty will crap out in 20 years using current projections).

I used the "Where am I heading?" calculator from Alliance Bernstein to estimate how much I will have to live on in my retirement given constant savings rate. Right now, I am putting away 7% of my salary to a 401(k), which gets me to 10% of my salary including company match.

Alliance Bernstein estimates a 2% cost of living adjustment in retirement and estimates future inflation using a series of 10,000 simulations to pick the most likely rate over the rest of your working career (40 years in my case).

The calculator estimates that I will be able to replace my current salary (the results are calculated in today's dollars) and have an 85% chance that my money will outlive me. This assumes I retire at age 65 and live for another 30 years. If I can up my contributions by one percent per year, it will mean an extra $4,000 in income per year.

Next, I used the online Social Security calculator from the Social Security Administration. While I assume in my own calculations that Social Security will not be available when I retire, it is a useful tool for those that are closer to retirement. If I take Social Security at age 67 (when I will be eligible), I will receive $19,116 annually in today's dollars as my SSA benefit. If I hold off until age 70 to take benefits, I will receive $23,712 annually in today's dollars. Like I said, this will be found money for me if SSA benefits are available in retirement.

I am okay with these calculations. Like I said, my own shows I am in a little more trouble, but I expect (possibly foolishly) to increase not only my income but also my contribution percentage faster than my current calculations show. Plus, my wife is a teacher and will have generous benefits of her own in retirement (I ignored her salary in all this). Overall, I think we're okay (it doesn't keep me up at night), but I think we could do better. Later, I will discuss the model that I currently use to calculate my retirement.

Look! The Rare Humorous Tax Post!

Well, it's not so rare on Roth & Co. Tax Updates, but anyone that has to deal with §263A will appreciate this post. For people that aren't tax geeks, I would pass up the link, as you probably won't get the jokes anyway (though you may learn what to claim as business deductions for your illegal income).

I don't know whether to be impressed or saddened

Last week, I called lawmakers that hired tax professionals while sitting on the primary tax writing committees a big part of the problem. Well, the TaxProf blog has a story on a 2008 Presidential candidate that has read the entire Tax Code, Tax Regulations, and the BNA Portfolios (a major source of interpretation of the Tax Code) cover to cover.

Now, I am certainly not endorsing Mr. Cox, I just wanted to point out a politician who actually knows something about taxation (and has to be a masochist).

Kids and Money

One of the most important ideas a parent should convey to their children is how to handle money. I may disagree later with my generation coming of age and our inability to handle our finances, but I think that many of us were hurt by not being taught to be fiscally responsible. The average college student graduates with $2,500 in credit card debt, which may not seem like a lot but can pile up with other costs of starting out in life begin to pile up. The average household has piled up $9,000 in credit card debt and doesn’t seem to be stopping.

Credit card companies are working harder to extend credit to youngsters to try and get them hooked early on easy credit. An estimated 11% of teenagers have credit cards, some of them as young as 13 (minority laws apparently don’t stop credit card issuers). That is why we have to start educating children on money early, and that has to start at home.

It has to start at home because schools are falling down on this one. Only 12 states currently require any sort of personal finance course to graduate. The MSNBC story states 12 more are considering requirements, but with the pressures of state budgets and No Child Left Behind’s focus on only reading and math, there will not likely be a whole lot of push for these classes. The percentage of high school seniors that had taken a personal finance class dropped from 2004 to 2005.

There is also anectodal evidence that personal finance classes for teens don’t work. In a recent survey of financial literacy of high school students, students who had taken a class actually fared worse than those who did not.

Parents also need to know that learning doesn’t stop at the school doors. Your kids will watch what you do and pick up your habits (heck, my two year old already does things that amaze us just by watching my wife and I). If you’re poor with money, it’s likely your kids will be as well. To truly teach your kids, you need to clean up your own finances.

MSNBC has nine ways to help you teach your kids about personal finances. Some will work in the real word and some won't. You need to pick and choose what does work.

• Don’t teach, just talk
• Get them a piggybank – or a spending account
• Give them a goal
• Monitor their use of plastic
• Have a “Family Money” night
• Tone down the consumerism
• Use extracurricular activities
• Turn them into investors and donors
• Make them work for it

An AMT Primer

Yes, yes, I know. You just filed your taxes and you don't want to hear another dang word about it. Well, too bad. I do this for a living, so I have to hear about it all the time. There is something that you should pay attention to in the tax/political world. It's the battle over the AMT, and it could hit your pocketbook.

Congress is currently negotiating on the latest round of tax cuts. Well, it's really about extending the tax cuts that Congress passed during President Bush's first term. The House wants to extend the Capital Gains and Dividend cuts that expire in 2008 for two more years fearing a Democratic takeover of one of the houses in 2006. The Senate, which has to be more pragmatic to get 60 votes, wants to extend the higher AMT exemption that expires this year.

What does this mean to you? The AMT is a separate taxing system (yes, I know there's a philosophical debate about whether or not it's truly a parallel system, but cut me some slack) that kicks in after the AMT threshold is reached. For 2005, the exemption was $58,000 for married filers and $40,250 for single filers. The exemption reverts to its pre-2001 levels this year of $45,000 and $33,750 respectively. If you make more than the exemption amount, you have to figure your Alternative Minimum Tax.

The AMT was enacted in the 60s as a response to testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. The small problem was that Congress in its infinite wisdom didn't bother to index the exemption for inflation, so it's roughly at the same spot it was in 1970. Enter the Bush tax cuts.

AMT disallows many of the deductions that are allowed on your 1040, including state income taxes, medical expenses, and home equity mortgage interest deductions. It also disallows personal exemptions, the ones you get for free for you and the kids. Now, when Congress passed the tax cuts they upped the AMT exemption so that people would not be caught by it. Because of the nature of the AMT, if they simply cut taxes and left the AMT alone a lot of the tax cut would be lost because of the AMT.

What does this mean to you? Well, if the AMT exemption isn't raised, the number of AMT filers will explode from 3.6 million in 2005 to 29 million in 2010 per the Tax Foundation. Who is at risk? Mainly those with large families or large itemized deductions since many of the deductions are disallowed for AMT purposes. The IRS released an AMT Assistant for 2005, but that won't help your planning for 2006. The only real way to see if you are at risk is to do the math yourself. However, taking 10 minutes to do the math now will let you know if you need to up your withholding for the rest of the year so that you don't have a nasty surprise come next April.

If you have a large family (say, more than 2 kids) or have a lot of itemized deductions outside of your home mortgage deduction (but including your home equity loan interest), and make more than the AMT exemption threshold, take a gander through the IRS' AMT section and whip out a calculator. Then find out if you need to adjust your withholding or if you are okay. It's painful, but a lot less so than finding out come April 2007.

Apple's Profit Beats Estimates

One of my initial posts was wondering if the high-flying stock of Apple was a bit too high. At that time, Apple was trading at about 80, or at about a P/E of 54. Since then, Apple came down about 20% to trade below 60 (per charts at Yahoo! Finance).

Last night, Apple reported profits that beat analyst estimates, sending the stock up nearly 3.5% (as of 12:30 EDT). Apple now trades at a more reasonable P/E of 36. More reasonable being relative for a company that's growing as fast as Apple is currently.

My problem is still the same as three months ago. I don't believe Apple will stay on top of the world forever. The switch to Intel chips (and the resulting success in installing Windows) has been plugged as the savior for the Mac line, but I don't agree. Pundits have been saying that education and business will flock to the Mac now that people can boot into Windows or OS X. Imagine being at your workstation and having to reboot the computer to use a Windows-specific application (and most business applications are). I wouldn't want to be in tech support for the first month of a Mac rollout.

The iPod just keeps selling! TV shows and movies are showing up in iTunes! Big deal. Apple loses money on everything that is purchased at iTunes, its a loss leader for the iPod. The iPod is currently the leader in the market, but at some point it will go the way of the Walkman. Remember when Sony was the dominant consumer electronics company?

Now, I'm not just bashing Apple to bash them. Had I won the argument, I'd have an iBook in our house right now (and Parallels gives me the way to win next time). I will likely be getting an iPod rather than one of the competitors when I do pony for an MP3 player. I use iTunes as my primary library organizer on my computer. I use and love Apple products, but I'd never buy the stock.

Can those of modest means afford a financial advisor?

This week's article on the CS Monitor Work/Money section says that "even those of modest means can afford a financial planner". However, the article spends the vast majority of its real estate describing why people of modest means can't get an advisor.

Financial planners help people build wealth and guide them toward financial milestones such as retirement, vacation homes, or funding children's educations. But they don't work free of charge. Some, like the one who worked with Rohall, charge an hourly rate for their advice. Many more charge a commission on the products they sell, so they want clients with assets to invest in order to generate fees.

As I've discussed before, I am a big believer in avoiding the people represented by the bolded part at the bottom. There are clear conflicts of interest between the advisor and the client. Don't think it happens? Free Money Finance has a post today on an advisor advising a client to cash out all the equity in his home and putting it into some sort of variable life insurance policy three years from retirement so he could generate commissions. Amazing.

Back on topic, it is difficult, but not impossible, to find a decent financial planner even if you are of modest means. Fee-only advisors generally take on those with fewer assets because they are not paid based upon commissions. The CS Monitor article basically says you either have to find a planner with a charitable streak or have family connections. Maybe if you were, say, a newly minted doctor you could find one, but otherwise you are SOL. I disagree. If you want someone to review a budget or get your 401(k) on track, you should be able to find someone easily. If you are looking to have someone manage your money for you, you probably will be out of luck without a large kitty. But that doesn't mean you can't afford a financial advisor of any sort.

Two More Resources for Small Businesses Now Available

The IRS has released two more resources for small businesses that are free for the taking.

New Publication 1066C, A Virtual Small Business Tax Workshop DVD (with English, Spanish and Mandarin Chinese subtitles) and Publication 1518, 2006 Tax Calendar for Small Businesses and Self-Employed, are now available.

The DVD is an innovative educational product designed to help small business owners and the self-employed understand and meet their federal tax obligations. The 10 lesson workshop consists of interactive video presentations of tax subjects and a text-only Help lesson with links to the latest information on IRS.gov.

The wall calendar features information on general business taxes, IRS and SSA customer assistance, electronic filing and paying options, retirement plans, business publications and forms, common tax filing dates and federal legal holidays.

Order these products and others online or call the IRS distribution center, (800) 829-3676.

As always, I suggest taking advantage of free tax advice from the IRS.