Big Rip Offs

Household Debt Service Ratio is All time High

2005-06-20T07:44:00.000-07:00

It is "an estimate of the ratio of debt payments to after-tax income." 13.4% is the highest since the Fed kept the statistic beginning in 1980. I don't think that sounds too bad at all. But when you consider the savings rate trends:

...we made be in for some heavy pull back in consumer spending, and corresponding ripple to the economy. Consider what happens when the household debt service ratio naturally increases because of rising interest rates.

Saving money will become a new popular past time. Stay tuned.

Price Customization on the Net

2005-06-09T06:41:00.000-07:00

"...most of us are clueless about how much personal information is collected, let alone how it can be combined with other personal data to give businesses an edge." source.

I'll never forget a trip I made to Russia in the early nineties. We visited the newly minted commercial district in Moscow where merchants sold many things, mostly to tourists. Young men on the street were eager to make deals if only to trade a watch for a belt. (He pointed to my belt and showed me a variety of old KGB watches. I took the deal.) There were a few old style Soviet stores with minimalist shelves and gruff attendants; no prices were marked, you had to ask the attedant. Our Russian student hosts told us that if we saw something we liked in such stores, we were to tell them and they would independently enter the store and buy the item we desired. If you didn't speak flawless Russian, the merchants practiced price customization, a different price for foreigners and a different one for locals.

A recent study called "Open to Exploitation" has revealed that Russian stores aren't the only ones practicing price customization. Internet retailers have been quietly collecting information on our spending habits and sites visited to get a business edge. This article tells us: "The Internet empowers careful shoppers to conveniently compare prices and features across thousands of stores. But it also enables businesses to quietly collect detailed records about a customer's behavior and preferences and set prices accordingly." In case you are not aware, your internet habits are carefully watched through "cookies".

Customers' internet buying patterns are often predictable; people like to travel well worn paths. Despite the ease of comparison shopping on the internet, consumers still have "brand loyalty" to their favorite sites. Retailers know this and often raise the price of an item the more often you visit their site. A guilty party: Amazon.com. Reports tell us that Amazon charged different prices to those consumers on computers whose cookies had been erased, while the loyal customer paid more and more. Amazon.com brushes it aside as "random experimentation".

Just because something is sold on the internet does not mean it has the best price. The opposite could very well be true: Because it is sold on the internet, it has the price customized especially for you: the highest price you'll pay. Businesses are clever and its their job to squeeze the highest possible amount of money from you while your part in the game is to get the lowest possible price.

Maybe the Biggest Rip Off of All

2005-06-08T13:38:00.000-07:00

What is it that would vociferously steal most of our money, time, and efforts for most of our lives? It sucks our very life from us as we toil and toil at jobs we don't like. It thrives in our neighborhoods and at our social clubs. It rips us off on a daily basis? What is it?

Taxes? Good guess, maybe thats number 2.

It is our definition of sucess and our appetite for being "rich". It is our very own appetite for our version of financial success that rips us off of what give our lives meaning. What does it take to be rich? It varies by the individual and almost always depends on your peer or work environment. Take a look at what it takes for a NY investment banker to feel rich down to a small business owner in middle America.

Its fascinating to see what different people need to feel rich and what they believe they need to do to get there. We become mired in our thinking and believe we must follow convention or others to achieve our level of success. Bertrand Piccard, speaking of his recent globe circumnavigation had some advice recently on this: "...`The definition of success is if you try just one more time.'' Asked why he and his team succeeded when his competitors failed, Piccard said, ``We had the strategy of the wasps. Our competitors had the strategy of the bees.'' He explained that bees die as they try to enter through terrace windows as they attempt to enter through one pane of glass. They are stuck in their ways.
Wasps, on the other hand, adapt and learn to test each pane of glass until they find an opening."

Challenging our old way of thinking about leadership and success is step one. This week's Newsweek has an article on business innovators and new business thinking. "Many realize that today the best way to become a leader isn't to spend 20 years slogging upward at a corporate behemoth—it's to strike out and start your own gig, which you'll lead from day one." Hmmm, sounds like those slogging might be missing something.

Adjusting our appetites might be the best way to avoid the rip off. It doesn't take much for some people to feel "rich". Some of the happiest people I know are blue collar workers. Look at this survey in Britain that shows blue collar workers more satisfied than white collar workers. Adjusting spending habits, saving more, and consuming less might just be the road to happiness.

Contrarian Investing

2005-05-25T13:43:00.000-07:00

Sometimes I just love the contrarian side of things. Often, contrarian behavior is the result of envy or bitterness, but I like to think that it is also often the result of raging independence and deep analysis. In the investing world, contrarian themes often yield great returns. For example, when he was starting out, many high and mighty retailers would not give Sam Walton the time of day because of his lack of experience or big dollars. If someone would have taken a little contrary attitude with his pitches and business development ideas, they wouldn't be sorry today. There's danger in investing with the herd because the herd can turn into a stampede that artificially creates "bubbles" in values. For example, the tech bust of the late 90's. Groupthink can lead to a major investing rip off for the unwary. Here's an interesting account of contrarian investing.

Corporate Compliance Scams Small Businesses

2005-04-29T08:10:00.000-07:00

I received a form in the mail the other day regarding my small business corporation. It informed me that if I did not comply with their service, it could "result in personal liability of the Corporation's Shareholders, Directors and Officers for all Corporation debts and obligations without limit to amount." Wow, sounds scary and official, maybe I should send in the "requested" $100 to receive a "Certificate of Minutes of Board of Directors and Shareholders".

In Florida and in most states, there is a requirement that every corporation formed in that state file an annual report with the local secretary of state or other governing body. The consequences of failing to file this annual report with the fee will result in the involuntary dissolution of the corporation and then possible exposure to personal liability.

However, my flyer in the mail did not refer me to the annual report requirement, but rather the "requirement" that each corporation should keep proper records of their articles of incorp., bylaws and minutes. I would guess that most small business corporations do not keep formal records on their corp. So this means they are all exposed to personal liability? I don't think so. The corporation cannot be involuntarily dissolved simply because the record keeping is slack.

The only other way personal liability can flow through to an individual is through the common law concept of "piercing the corporate veil". Generally, courts have found in some rare instances that a corporation cannot sheild an individual from personal liability. These instances include fraud perpetrated by the individual or a deception in dealing with the person and the corporation. The overall liability protection of a corporation is broad.

The service offered to me by the flyer was for a pre-printed form, possibly with some of my corporation's information printed on it. The form's title is "Certificate of Minutes of Board of Directors and Shareholders" which would record, basically, any changes in the corporate structure (shareholders, directors or officers) for the year. The form would then be placed in my corporate records file.

Record keeping is a good idea to keep your corporation in order and provide a history of its changes. Usually, a corporation should have copies of

1. Its articles of incorporation.
2. Its bylaws, if any. They are not necessary.
3. Its minutes,
4. A list of names and addresses of directors and officers,
5. and a copy of the most recent annual report filed with the state.

However, shoddy record keeping is usually not fatal and can be remedied very easily for most small businesses. Its definitely not worth the $100, Compliance Filing, INc. is trying to scare out of you.

DIY and Save More Than You Think

2005-04-28T20:24:00.000-07:00

I was just talking to a friend tonight who built a dining room table for his wife. He told me for $80 he built a $500 dollar table. His savings was $420 dollars. Oh really?

The Fed and their suppression of interest rates tells consumers that spending is the easy thing to do, and is good for the growth of our nation's economy. Money is cheap, imports are aggressively priced, and shoveling money back into our economy is the patriotic thing to do. Spending and creating jobs is king.

I've had many professionals tell me that they are consummate consumers because of their economies of specialization. A lawyer makes $200 dollars an hour and a plumber makes $75 an hour so it makes supreme economic sense for a lawyer to hire a plumber to fix his leaky faucet. In other words, its ok to be a cog in the machine as long as you are the one on top.

But is spending disposable or available income to pay for others' labour or goods always the best for our financial well being?

Consider how taxes and time opportunity costs spin the tale of my table building friend. If he were to purchase the table, he would have to reach into his pocket and pull out $530 (cost plus 6% sales tax). My friend makes $48,000 dollars per year as an employee, or $4,000 a month. So the table would only set him back about 12% of his monthly income, right?

Not quite. Congress has strapped a load of rocks to my wage earning friend called payroll taxes. So off the top his wage comes 6.2% for Social Security and 1.45% for Medicare. To make our example as uncomplicated as possible (something the IRS does not do) lets not consider withholding but just concern ourselves with my friend's end of the year income tax liability. Assuming the standard deduction and assuming my friend contributed $2,000 to an IRA his end of the year liability would be $3,710. This amount is 7.73% of his total income of $48,000. So the amount of money in my friend's pocket after all sorts of taxes is $40,617.60. The annual amount is $3,384.80. The table would cost him nearly 15% of his take home pay for the month.

Another way to describe the effect of taxes is to say that my friend has to make $623 ($530/(1-.15)) at his job to pay for the $500 table.

Instead, he paid $80 out of pocket or $94 of his pay to build the table. If he spent ten hours building the table, he has saved $52.90 for each hour of his time. Based on a 40 hour work week with two week vacations, at work he brings home $20.31. So my friend, although not a table builder, is much more personally economically efficient (>50%) building his table than working at his "cog in the wheel" job.

The Fed wants us to spend, yet the IRS encourages DIY which discourages spending. Who should we follow?

A Hole in the Water

2005-04-22T08:33:00.000-07:00

This Friday morning I took the kayak down to the ocean near Sebastian Inlet. I did a little fishing while the sun rose. I was amazed at the number of fishing and pleasure boats flowing out of the inlet for a day's fishing on a weekday. Sebastian Inlet is no Ft. Lauderdale. It has a remoteness not consistent with the vision of the Florida coast with its condos and hotels.

There is no question that if you own a boat, you must really like boating or fishing, because boat ownership is not for the frugal. Here are some financial observations:

1. With rising costs of gas, I have heard some fishermen talk about spending near $150 to go fishing offshore. If you think your truck or van guzzles gas, just watch it run out of your boat. Five miles to the gallon in a motorboat would make most boat owners happy. Right away, for a day of fishing or boating on anything but the smallest of crafts, it is safe to say you are about $100 lighter. If a fisherman brings in ten pounds of fish fillets (a good day), thats $10 a pound paid for the privilege of catching them.

2. Get ready for a strong capital outlay to purchase a boat. Statistics from the National Marine Manufacturers Assoction show that the average unit cost for a boat with an outboard motor in 2003 was $13,244, almost double of what it was in 1997. The statistics also show that the participation in boating had a significant decline from 1997 to 2001 with a leveling into 2003. So demand goes down but prices go up. Something funny going on here. I would also guess, though the figures are not available that boating participation is rising; I was almost ran over this morning!

3. Don't forget about maintenance and storage. Most homeowner's associations will not allow a boat to be parked where it can be seen so marina storage is probably necessary. I've heard anywhere from $50 a month for a pad of dirt to rest your trailered boat to several hundred if you want it in the water ready to go.

Boating and boating expenses usually follow a convention I call "luxury soaking". The providers of services surrounding items which are mainly perceived to be luxury or pleasure items usually price their products and services with higher margins of profit. Among other reasons, this is because there is probably less moral constraint in soaking someone who is spending disposable income as opposed to buying groceries. This might explain the NMMA's statistics of boat prices and boating popularity. Also, the markets for pleasure items are more risky being based on whimsy. If you own a Lexus and you've ever had to go to the mechanic, I think you know what I mean.

So if you are going to own a boat, be prepared to get soaked, but hey, some people enjoy it!

Hotel: "We've Got You Where We Want You"

2005-04-21T04:45:00.000-07:00

For a recent vacation to the Bahamas, I used priceline to book a hotel. I made sure all of my family and friends knew about how little I was going to pay for a place on the beach. While I was researching the trip, I called the hotels directly and ask about specials but I could not find anything close to what I found at priceline. The price was nearly 30% lower from priceline than anywhere else.

Hotel consolidators, like priceline.com, negotiate advance purchase agreements with hotels. They buy in bulk and resell to consumers. Basically, they are brokers or middlemen connecting the producer to the consumer. Their business has exploded on the internet. They charge a modest fee in addition to the price that you are quoted or the price that you bid.

The hotel was fine and there were no unmet expectations regarding priceline's representation of quality or location. However, when it was time to pay the final bill, we got a few surprises. The hotel tacked on a maid service charge, a utility charge, and a special Bahamas hotel tax. By the time we added up the extra charges, the priceline price, and priceline's fee......you guessed it!......it was almost the same price as what I was quoted when I called the hotels directly! These charges were included in the direct quotes from the hotels themselves, but I didn't know enough to ask about them when I was shopping.

Priceline certainly did not tell me about the extra charges. It would not let me see the particular hotel I was bidding on; only after I purchased it, did I know exactly which one. If I had known the specific hotel, before I purchased it, I could have looked it up here, which is an excellent source to research any hidden fees a hotel might try to spring on you when you are their captive market at the front desk.

My guess is that the hotel industry is not satisfied with the changes in the hotel consolidator/internet delivery structure and they are inventing new non-negotiable charges and fees to make up for it. If you know where you are going, your best resource to expose hidden fees and charges are prior reviews of other consumers.

Annuity Fatuity

2005-04-20T06:01:00.000-07:00

Every newspaper I read seems to have "financial advisor" advertisements for free lunches where they will concisely explain how to invest and retire. But is it really a free lunch? Many times, the financial "advice" received at these free lunches are sales pitches for insurance products called annuities. There are many flavors of annuities but the main pitch and feature of them is that they are to provide a steady stream of income in retirement. I suppose people like the "guaranteed" nature of the income. Another popular sales pitch of annuities is that you can receive tax deferred status from them so that any of the gains you make on them are not taxed until a payout is received by the investor/annuitant.

A good place to look for general info on annuities is here.

I do not quite understand the popularity of annuities. There usually is no reason to purchase them, and the disadvantages can be significant.

1. Regular IRA's, Roth IRA's, or 401(k)'s all have the tax deferrment advantage. Financial advisors sometimes counsel or allow clients to purchase an annuity with their IRA or 401(k), but when this happens there is no additional benefit of tax deferrment.

2. If you change your mind and want to cash in an annuity be prepared to pay. And I mean pay. Surrender charges for annuities can be very steep, and you typically must hold an annuity for a significant amount of time before you can cash out without a penalty.

3. Trying to find an investment that will beat inflation is always a challenge. You have no better chance of beating inflation in an annuity than you do in any other investment such as bonds or mutual funds or stocks or real estate. In fact, annuities will take your money and invest their funds in these same investments and charge you administration fees to do it!

4. For estate planning purposes, annuities are not an advantage at all. The IRS takes the present value of the future stream of income payments from an annuity and makes that value a part of the gross estate. For estates the values of which are below the IRS applicable exclusion amount, there is not a great concern. But for those estates which may be greater in value than the applicable exclusion amount, the estate will have an imputed value for any annuity payments going to beneficiaries. For example, if a decedent has several annuities which payments are payable to beneficiaries for their life, the IRS has a formula which will calculate a value of those payments based on the life of the beneficiary. Such value is a part of the gross estate and taxable (if the value of the gross estate is above the applicable exclusion amount). So potentially, the estate could have taxes on, say, a $100,000 imputed value and have $0 present from the annuity assets to pay those taxes (because the cash from the annuity is a FUTURE stream of money). The estate would then have to sell or use other estate property to pay the taxes resulting from the annuities.

5. I've always thought it would be interesting to show up at the free lunches and ask a pointed question to the financial advisors about how much commission they receive from selling their annuity products. The fact is that commissions from annuities are some of the highest in the industry. Everyone needs to make a living, but keeping their compensation secret or misrepresenting their compensation, makes me think annuity salesman have a reason to hide it. Sales commissions don't come out of thin air, they are built into the price and structure of the annuity. In other words, the investor pays for them, and that directly cuts into your rate of return. Perhaps the popularity of annuities comes not from their excellence for planning and investment, but from the outstanding commissions being made from them.

There may be some situations where annuities would have some advantage. I cannot think of any, however, I would leave the door open for complex estate planning and investment strategies. The key word is "complex". Annuities are complex and probably not for the average investor or retiree. When investing in them, study thoroughly the prospectus and rely not on salesmen's representations.

Blockbuster Comes Like a Thief in the Night

2005-04-17T22:16:00.000-07:00

While you sleep, Blockbuster might be charging your credit card several times for you to purchase movies you recently rented. They have come under fire for their new highly self-acclaimed "No late fees" policy. Their trouble came from making deceiving representations about what it would cost you to keep a video past its due date.

In a volatile market environment with stiff competition from outfits like Netflix.com, Blockbuster devised a kinder, gentler, quieter way to separate you from your hard earned money. Doesn't "Extended Viewing" sound so much more positive than "Late Fees"? Which makes it all the more likely that you will ignore the fees they are drawing from your credit card account. And getting to the video story was such a hassle last month you figure you'll just keep the ones you have and purchase them through Blockbuster's no hassle purchase fees. Just don't gloss over the amount of the purchase fee which is probably twice what you would pay from any normal retail outlet.

This is one more example of why never to give any company the ability to post a recurring charge to your credit card. Each charge should be pursuant to a single agreement and purchase. Otherwise, the convenient status quo is for money to keep flowing from your account while you must take effort and inconvenience to fix it.