Slope Of Hope with Tim Knight

Pay OFF That Mortgage! (by Market Sniper)

The other evening on Slope, we got into a discussion about the merits and possible ways to pay off ones home earlier than "as agreed." I thought I would do a post on this topic and go into greater detail as to the merits and some ideas for getting that done. I maintain, the average person can pay off his personal residence in less than 10 years without having to eat just beans and rice.

This post is solely about your personal residence. Where you live. Rental real estate is another area and this post does not necessarily apply to any rental properties you may have. It also is directed towards the individual that does not contemplate a move in the near or intermediate future as other factors then enter the picture.

First of all, recognize the FACT that your personal residence is NOT an asset! It is always a liability, even if it is owned free and clear of any liens or mortgages. It is ONLY an asset when you sell it and cash the escrow check. Why is that? On your personal balance sheet, any equity shows as an asset, right? Well, by my definition, to be an asset, it cannot have negative cash flow. Even a free and clear home has negative cash flow. You must pay property taxes and you should have at a very minimum, liability insurance. Fire insurance is optional once your home is mortgage free. If you cannot sleep at night without fire insurance, by all means, you will need that as well. The only possible exception to this would be if you are renting out rooms to tenants in your home.

Your home is your shelter and as soon as possible, you do not want any "bank partners" on your home. Most do not realize that if you have a 30 year amortized loan and you make each montly payment, as agreed, you will end up paying over three times the original loan balance (depending on interest rate) and it will take you approximately 23.5 years to pay that loan down by 50%! So, how can this pay-off be accelerated? There are a number of strategies.

1. When you get a 30 year fixed loan (or you have one now), get a complete print out of each month, all 360 of them, for how much of each monthly payment is interest and how much is principle. Your real estate agent should be able to get this for you. If not, I believe there are internet resources to get this information. Take that mythical $1,000 per month payment. First month say $982.00 is interest and $18 is principle. The next month, $18.04 is principle. What you do, that first month, is to take the next month's principle and add it to that first month's payment. Go to the 360th payment and strike it off! You just made that payment at the end of the loan! In other words, $18.04 today has saved you a $1,000 payment at the end of the loan! What, in effect, you have done is to create a 15 year graduated payment loan that you are in control of the payments! Many look at a 15 year amortized loan and the level payments are too high for their, then, budget. Hopefully, over time, your income will also increase.

2. Talk to your lender. See if they have a program that will allow you to make payments on the 1st and the 15th of each month, each time for 50% of the monthly payment and they then calculate principal reduction upon receipt of those payments. Some lenders can do this, most will not but it does NOT hurt to ask. Since interest is earned over each payment time period, anything you can do to reduce principle upon which interest is calculated is to your benefit. Word of caution: do NOT enroll in any mortgage reduction plan from a third party. They are charging you for something you can do without their help! Basically, such programs just adds a 13th payment per anum is all.

After doing this, then we come to a fork in the road. We need to further accelerate the pay off. There are only two ways to accomplish this. You must increase your cash flow and use that extra cash flow to pay down your mortgage and/or you must decrease your expenses and use that saving realized to pay down your mortgage.

Some starter ideas to increase your cash flow. 

1. Have any spare time? Get a temporary part-time job. Even if it is only delivering newspapers in the early morning. Weekend work, etc.

2. Sell unneeded possessions. We are all "collectors" and we all have "stuff" we do not use or need. Sell them. You can even start a small home-based business doing this if your so inclined. Become expert in one field, for example, porcelain.  You know what is good "stuff" and what is junk and you know what the market is in your field of expertise. Go to higher end area garage sales, estate sales, etc. Buy low and sell higher. You know what you are looking at and most sellers do not have a clue.

3. Let your creative juices flow. You may be very surprised what you can come up with when you really think about it. All extra generated cash goes towards principle loan reduction.

Some starter ideas for decreasing your expenses.

This is the area where many people balk at taking action. Most do not want to really differentiate between needs and wants. Make a game out it. You will be richly rewarded. Your free and clear home can be almost just around the corner.

1. Have an RV? How often do you use it? Would it not be cheaper to rent one for those few time you do? If so, get rid of the RV.

2. Own a car you owe money on? Lease or purchase. Think about this carefully. You need reliable transportation that is comfortable. A vehicle's purpose is to get you from point A to point B. Why would you owe any money on something that decreases in value every day you own/use it?

3. Everyone should own a "business." Have a hobby? It is no longer a hobby, it is a business. Check with your tax adviser/CPA on this. He should be able to guide you in this area as to tax consequences. If he is unwilling or unable to do this, fire him immediately and find one who will. You are missing out on important tax savings if you are NOT doing this. Tax savings is cash and goes toward principle reduction!

4. Examine every bill you have. Your phone bill. Is there a cheaper program? Do you have voice mail box? Those things cost $20+ per month. Go get an answering machine! Your gas bill. Most utilities have free programs to better weatherize your home and get that gas bill down!

5. Go out to dinner once a week? Take that down to once a month. Get some friends together and form a "dinner club." Once a week, each will, in turn, throw a dinner party! Much cheaper than a restaurant and a lot more fun!

6. Clip coupons. You can even find them on the net. Why pay total retail for the things you need? Buy in bulk for saving whenever possible. Ever asked a retailer for a discount? Try it! Times are tough! You would be surprised! Especially, if you are carrying cash! They should give you at least a small discount for using cash over a card. Costs them when you use your card! Ask for it! Worse thing that could happen is you might hear no and that does not cost a dime!

7. Start buying good condition used instead of new whenever possible and practical. Often, used will last longer than the same item bought new!

8. The use of "windfalls" which could be inheritance, job bonuses and even a tax refund. Pay down that loan!

9. The possibilities are ENDLESS! You might make a habit out of asking yourself "do I really NEED this that I am buying or do I just WANT it?" before you pull out your wallet.

Some final thoughts.

First, let's slay the dragon of "I will lose my write off of the interest if I pay my house off." Let us take a hypothetical. You own your home free and clear of a mortgage and I owe on my home. I pay $10,000 a year to the bank in interest. You pay nothing and both of us start the year with $10,000 in the bank and we are both in the 40% tax bracket. At the end of that year, I write off $10,000 effecting a $4,000 tax savings and I have NOTHING left in the bank. You write a check to the IRS for $4,000 more in tax than I had to pay. You have $6,000 left in the bank. Who is better off?

One great burden has been lifted from you if you take action now and continue to take action. Your life can change dramatically once you are debt free! All kinds of other possibilities will be open to you. Look at it as a "game." See just how fast you can get it paid off! In this game, you can ONLY win!

Get that house paid off? Throw a good old fashioned mortgage burning party! Be sure to invite all your neighbors to the bbq! Every month then, your neighbors will look at your home while THEY are writing out a check to the bank and think...that SOB!! Be sure to invite me as well. If your too far away, lift a tall cool one in my direction on the West Coast!

Yours in the constant search of the edge. In trading and in life. Market Sniper

Read This Before Paying Your Taxes

{Preamble: I am going to be driving for many hours, heading home, so I wanted to put this post up for prime-time viewing. I'll be back in the saddle late tonight with a comment-cleaner. Godspeed.........}

I urge you to read the latest by Matt Taibbi in Rolling Stone. Read the whole article about how two wives of rich Wall Street executives got over $220 million in risk-free, non-recourse "loans" from you and me - - the hapless, pathetic taxpayers - - to do with whatever they please. It's this kind of bullsh*t that has funded this entire rally. And I will celebrate with my fellow Slopers when this entire charade collapses in a burning heap.

When I write my checks to the IRS and the State of California, I will keep in mind the truth........

+ The money is going to completely go to waste;

+ The governments being funded are not going to survive; 

+ Social Security and Medicare are a cruel joke; I'll never benefit from these programs one iota;

+ No government has ever done me one bit of good; the millions I've given these clowns has gone one direction - away from me - and I will never benefit. It's just cash that's been thrown away. Yeah, yeah, taxes are what you pay to live in a society. I'd be happy to pay a flat, universal, 10% tax to provide the required services. That's all it would take to keep a well-run country humming.

People pay taxes today for one reason and one reason only: because they fear the government and its power to punish. So the relationship is entirely adversarial. Were it not for that, no one would pay.

So I'm sure you'll enjoy throwing your cash away every bit as much as I do. Read the article. Please! It'll piss you off, but at least it's the truth. To ignore such information is a willful act of ignorance.

As for Obama and his change you could believe it - - what a crock of crap. He's a wimp, pure and simple. Limpy, wimpy, and with respect to backbone, far too skimpy.

My hope for the future of this once-great nation of ours.......pray for rain.

The Rich Get Richer

Gubmint Knows Best

My lifelong relationship with government has been a simple one: I have paid them ("them" being the US Government, the State of California, the County of Santa Clara, and the City of Palo Alto) millions of dollars in taxes and fees and have given up a certain amount of civil liberties, and in exchange I have received.........almost nothing.

Yes, I get to drive on roads, and I suppose on an per-user basis that's probably worth a couple of thousand dollars to me. And I enjoy clean drinking water, which I'd be willing to pay for anyway. And I live in a society governed, to varying degrees, by the rule of law. But, on the whole, I'd say I've received about ten cents of value for every dollar (and I'm in a generous mood).

I bring this up because of an article I just read about how the government's newest food safety law also provides for the banning of school bake sales. Now, it doesn't ban them outright, but it provides for that kind of power.

Commenting on the new law, Michelle Obama (whose official role is.........what?) declared, regarding child nutrition, "we can't just leave it up to the parents."

Of course not. I mean, I'm a father, and smarter than the average bear, but God knows I need Michelle Obama to figure out what my kids eat.

I've always viewed political parties as being along a continuum. On one extreme, Communism, the view is that people are hapless morons and need a paternalistic government to shepherd them from cradle to grave in a life devoid of meaning or self-actualization. On the other extreme is Libertarianism, which leaves it to individuals to figure their own lives out, and if they can't fend for themselves - - well, tough tacos.

I used to be a pretty hard-core Libertarian until I realized that a lot of people actually are hapless morons and need adult supervision, so my views have mellowed somewhat over the years.

All the same, this kind of pronouncement from Michelle "her arms are so toned!" Obama is the kind of thing which makes me inch back to my Libertarian leanings. Stay out of my kitchen, Obama mama. My family can handle things on its own without your help.

Your Tax Dollars Hard at Work

A Good Labor Day Read

As I've mentioned in the past, most folks tend to move from liberal to conservative as they get older. Contrarian that I am, I'm doing this all backwards, because I would make the most avid libertarian embarrassed with my reactionary politics from my teenage years, whereas the bailout from the financial crisis has caused the inner lefty within me to start creeping out.

Anyway, I read this terrific piece yesterday, and I urge you to do the same. Here's a tidbit:

Instead, we are talking about people who are already fantastically rich.  And who, despite this, are absolutely hell-bent on getting richer, even if that means depriving hundreds of millions of people in the American middle class of their middle classness, and in many cases, ultimately of their lives.  How do we explain people like this?  Are they not essentially sociopathic?  Are they not made of essentially the same stuff as those who can kill without guilt or remorse?  Especially when you consider that even the greediest among us reach a limit beyond which one can effectively make use of the next dollar and the one beyond that, so that pushing others into poverty is no longer even for purposes of your own benefit, but instead for some kind of sick sport?  Aren't these the characters whose essential sickness preachers and philosophers and shrinks have been trying to sort out for millennia? 

Tax-Free Multi-Billionaire

I imagine some of you saw this article from the New York Times yesterday. It's about how our Congress allowed 2010 to start without any inheritance tax in place. Simply stated, anyone who dies this year gets a free ride, including the multil-billionaire pictured below, whose children and grandchildren won't pay a cent in estate taxes. If he had died just a few months earlier, his estate would have paid billions to the Feds.

Whatever your view on the estate tax is, at least know this: the amount of money every reader of this blog will pay in their entire lifetimes, cumulatively, will not approach what this one man's estate would have paid to the same government if Congress had their act together. I imagine they'll try to make a show of it and get a tax to apply retroactively, but as the article states, that'll probably fail too. Nice goin', fellas.

The Rich Tax

I have been following with great "interest" (heh. heh-heh.) the developing legislation to tax so-called carried interest at a higher tax rate. There's a good article on the passage of this bill in the house on Friday.

Let me start by saying that the political swing from the left to the right, which began in 2007, will go on for another 10-15 years. There are many changes we'll see, but there are a couple of changes you can, as my mama used to say, put in the Bible - - (1) higher and higher taxes for everything under the sun as governments stave off death by starvation; (2) an increasingly anti-rich, anti-business, pro-union environment. Bank on it.

One might think that I, as a former small businessman and a hedge fund manager myself now, would be very much against the change in carried interest taxation, but I'm not. For one thing, the whole notion of "carried interest" is a complete obfuscation. The tax is relevant to many industries, including venture capital, real estate, and hedge fund managers, but my main beef is with hedge fund managers.

The idea that the richest of the rich get a special Rich Man's Tax Rate of 15% is plutocracy at its worst. Let us once again consider the utterly ignorant average American. Let's stop him in the street for a moment.

SOH: "Excuse me, sir, may I ask you a couple of questions?"

Man On The Street: "You......you're from Slope of Hope!?! Of course!"

SOH: "Do you know what a hedge fund manager is?"

MOTS: "I guess so. They manage money for rich people."

SOH: "Yes, that's right. Do you know how much the most successful hedge fund managers made last year, during the Great Recession?"

MOTS: "I dunno. Millions, I guess."

SOH: "Oh, lots more. The top five all made way more than a billion dollars for themselves, just in that one year, each. The top guy made $4 billion personally in 2009 alone. Amazing, huh?"

MOTS: "Damn! Yeah, that's incredible!"

SOH: "Of course, these guys have to pay taxes. And you know what? Because of what they do, they have to pay a special tax rate!"

MOTS: "That's good. The country could really use the money. I'm just a regular working guy, and I pay almost 40%. These guys must really have an incredible rate."

SOH: "They sure do! 15%"

MOTS: "{multiple expletives redacted}"

I do believe that those, for instance, in the world of venture capital are entitled to special capital gains treatment, but it sounds like the very broad brush of higher taxation is going to paint both deserving and undeserving alike.

But all the bleating I'm hearing from the world of private investment about how this will kill jobs is complete rubbish. People who run hedge funds don't create jobs, except for a handful of administrative positions. They run money. Period. They're professional gamblers, and those that are good at it are richly rewarded. There's no reason under the sun that the income they draw from their efforts should be taxed any more beneficially than the income other people draw from their efforts. It's the same damned thing.

Let's hope the Senate doesn't succumb to the pressures of the treacly lobbyists from private equity-land and water things down any more than they are already. Hedge fund managers avoided billions upon billions of dollars of taxes they should have paid during the past decade. If there were any justice, they actually would have a special 70% tax for the next ten years, but let's at least pretend to be a little fair and have them join the rest of the working world. God knows Big Jim Simons can spare the cash.

Your Tax Dollars at Work

  

Great Moments in Tax Preparation

I'm going to be out for much of the afternoon. In the meantime, here are a few choice snapshots from TurboTax as I was preparing my personal taxes for submission.

Here's an odd one.....

I'm afraid I don't qualify for this one.....

Here's one specially made for stock market bears:

And finally, the winner of what must surely be the World's Most Ignored Part of the Tax Code.....