Your Macrowallet: What’s Going On?
So much conflicting news lately. Europe appears to be heading further down into the hole with slower growth, renewed chaos in Italy and Spain, and potentially another round of single currency crises. China’s growth appears to be slowing again, and there are concerns about graft and corruption within the Communist Party. Chinese growth targets have been dialed down in the provinces. The sequester, if it continues on into the year will resemble, in the words of a report on NPR “an avalanche growing in destructive power”. Indeed, the world economy appears to be having some issues, and it seems hard to believe the US economy, the market, and unemployment could buck the trend.
Or could it? American business and consumers, so intimately tied together, both seem more optimistic. American manufacturing expanded more rapidly than anticipated, housing construction is up, and consumers seem buoyed by the better employment, higher stock prices, and rising home values. As has happened again and again, might the American consumer and the American business community pull themselves up by their own bootstraps and then give the world a hand once they are on their feet?
In the near term the picture never looks clear. There are always reasons for doubt. Eventually, the fundamentals will emerge. China is destined to be the world’s largest economy by raw GDP numbers, but is also destined to have its growth slow and to have increasing difficulties bringing along its middle class and dealing with the issues of all rich countries. The Chinese Communist Party will have serious issues at some point and no one knows what will replace it. But is still going to be a large and important country taking its rightful place in the world. Europe will eventually emerge from its current malaise and one of the world’s most prosperous regions will return to growth. The US will continue to grow, and begin to change the nature of world politics with a renaissance in its energy production, consumption, and importation patterns.
What does all of this mean for the average person? With prudence, decent saving, and defensive-minded investing there is no need to do much more than smile, whistle a tune, and if it starts to rain put up an umbrella until it passes. Make thoughtful decisions but always see the future as a time of opportunity and act accordingly.
The Best Place to Put Your Emergency Savings is a ROTH IRA
As a part of my savings goals, I was trying to figure out the very best place to put the emergency savings fund that I have been building up. The options included:
1. Contributing more and more money to my Capital One 360 (formerly ING DIrect) account where I receive a very good interest rate considering the current climate.
2. Putting the cash in a money market mutual fund
3. Putting them in very conservative stocks
4. Putting them in very conservative bonds
With emergency savings, the essential characteristic is that one have fairly easy access to the cash, at least within the 30 days or so that it would take before a large credit card bill had to paid off. Also, protection of principal, or the initial amount of the money, is critical as well as you would not want your savings drying up because of some unanticipated market shock. That being said, however, the very idea of an emergency as that it should be rare and hopefully never happen. If that is indeed the case, then one should consider return on investment as a part of the equation as you would not want your cash just sitting there, slowly eroding over the years in some extremely low interest checking or savings account.
Each of these options had some strengths, Capital One 360 and the money market funds both provided somewhat less than terrible returns with pretty much complete safety and great liquidity. The stock and bond funds offered the potential to grow the investment and experience the magic of compounding returns, with strong liquidity, but at the risk of having bad timing with a market downturn when I would need access to the cash. This risk is not to be ignored, as of course the most likely time to have high unemployment and risk of job loss is during a recession when the market is in a downward spiral.
Ultimately, though, I have decided to put most of my emergency savings in a ROTH IRA that is conservatively invested in a mix of stocks and bonds. I still will keep at least 1.5 months worth of living expenses in my Capital One 360 account.
I think a ROTH IRA is best mostly because the distribution or withdrawal rules are much friendlier since you contribute to it after paying income taxes on your money. This means that there are no tax savings when you contribute but ehre is much greater flexibility on withdrawals. You can withdraw your full contribution amounts at any time you like. This means if you have contributed $15k over 5 years, and you need the money in the sixth year, you can withdraw up to the full amount of the original contribution, in this case the full $15k. You cannot withdraw any growth or earnings until age 59 1/2 or unless there is a qualifying distribution in a number of financial hardship scenarios. This may seem to be a downer but the most serious of all reasons why you would need to withdraw your retirement savings, like disability or medical issues, are all qualifying events. That means in those cases you can in fact withdraw the earnings as well.
The best part about this system is that you get the growth of stocks and bonds, with hopefully a good margin of safety even if the market is down. Interestingly, while it would obviously be a bad thing to have your portfolio lose value, this would mostly be value (hopefully) lost off of your gains, not your original contribution thus giving you some protection. More importantly, hopefully, you avoid these serious calamities of life, and along the way of saving for a rainy day you have actually gone ahead and saved a lot for your retirement as well. It is a very friendly rule that your earnings can stay in the account and not pay a penalty even if you withdraw the contribution. It is as though your contribution has spawned children and those children can go on and continue to compound without the parent.
As the saying goes, the greatest risk is not taking one, and simply leaving your money to sit in a low interest cash account is not a great move for your finances. That being said, your emergency fund needs to be safe and accessible. With a little bit of money in cash, and the majority of your emergency fund in a ROTH IRA, I believe the average person can have the best of both worlds.
Frequent Flier Miles and Hotel Loyalty Insanity
Across many of the travel blogs the last week there has been a lot of chatter over award chart devaluation. Of particular concern has been the increase in costs for redemptions at hotels, with all of the major programs upping their requirements over the last two weeks. Just about every blog, from Thepointsguy.com to ViewFromtheWing.com, to One Mile at A Time went guano over the whole affair.
But why? It’s no secret, especially to the savvy, that these kinds of mass devaluations and whole-sale slaughtering of awards charts are frequent and brutal. Over just the last two years, several of the major programs completely altered their redemption rates and systems, with British Airways moving from a standard award chart to a distance based system that makes long haul front cabin redemptions much more expensive.
So why the grief? Miles junkies have been basically playing three moves over the years:
1) Recognize that the airlines and hotels have a marginally generous award system designed to reward frequent business travelers/road warriors and thereby drive steady business
2) Realize that the average person can tap into these programs, through points earned creatively outside of frequent travel
3) Leverage the bank’s credit card signup bonus and various spending programs to obtain points and miles. Then, once acquired these miles are reverse engineered to deliver value on the award charts of marginal generosity.
The problem comes when the reverse engineering process takes too long, or those playing the game can’t execute their moves in time. Valuing miles as an alternative currency with access to thousands of dollars in value at high end resorts and first class tickets, they get viscerally upset when the value of this currency changes suddenly and inflation explodes overnight and without warning.
I mean no moral judgment here, I have played the game a bit myself and plan on at least paying attention to the opportunities in the future. That being said, one must recognize this game is stacked in the house’s favor and against the points junkie. The programs can devalue at any time. They can change the terms of earning the points, and require larger and larger minimum spending requirements that require more and more "creativity" to meet (witness the hysteria over the opportunity with the Bluebird prepaid card and the equivalent sorrow at its demise).
Some can probably always figure out a system and play the game well. Increasingly though, and speaking as a player myself, I wonder if the vast majority are as good at the game as they think. Do you really resist the temptation to foolishly lay out a few extra hundred bucks in spending to meet the signup bonuses? Do you really come out ahead after all of the yearly annual fees and the opportunity cost of not earning miles on the trips you do take? Would you really be better off with a flight in business class that lasts 8 hours or so and then is finished, over cash or some item of tangible long term value even if its "cent per mile" redemption rate is technically less?
Also remember what you are really doing is exchanging cash currency for mileage currency. Unless you can make your moves and turn miles into tickets with extreme haste to save money, this exchange is a poor choice. Even considering the declining value of the dollar over time, it makes almost no rational sense to divert your dollars into an odd fiat mileage currency of less substance than most banana republics.
Related Resources:
- Value of Frequent Flyer Miles Reconsidered
- Credit Card Points/Miles: How Can I Use My Miles?
- Personal Finance 101: Credit Cards, The Miles and Points Game
- The Three Best Hotel Credit Cards Reviewed
- Top 4 Sites on How to Use Your Miles and Points
- My 2012 Credit Card Signup Bonus Miles, Points, and Cash Back Results
- Christmas Shopping, App-o-rama, and Credit Card Signup Bonuses: A Perfect Team
- The Credit Cards in My Wallet
- Are Prepaid Credit Cards A Good Deal?
- Rethinking My Whole Credit Card Strategy for 2013
The Sequester Will Do Real Damage, Maybe It Will Force Real Solutions
The latest firestorm in Congress’ budgetary wars is the sequester, a series of across the board automatic spending cuts to Federal programs totaling $1.2 trillion over 10 years. The sequester will particularly affect military spending, and damage every state in the union.
This is a serious problem, and designed to impose European style austerity over the country. It is a plan no one wants, and no one thinks is a good solution. But, of course, in the upside down world of the United States in 2013, it is the plan we have all agreed upon two years ago. If the cuts are to go forward, the economy will suffer an $82 billion dollar cut this year, potentially costing the nation half the job growth it experienced over the past year. The total could be 1 million jobs.
Needless to say, the impact of this devastation is not entirely knowable. The markets have had time to prepare for it and should know its coming, yet Wall Street has been in fine spirits the past week or so. The US and world economy will not suffer a terrible, gut-wrenching, shock like a default on US bonds.
So maybe, that shock avoided, there is after all some silver lining in the clouds. Maybe the damage will be severe enough for folks to take notice and constituents see the reality of the posturing that has gone on of late. Maybe the true damage of austerity will be enough that the maniacal tax-cutting, budget-slashing trolls on the right will finally return to their caves. Maybe the damage done to essential domestic programs will force everyone to substantively address the real drivers of the debt like health care spending, and do it in an honest, effective and fair way. No more craziness about death panels and posturing over killing granny, instead we can look at real sensible solutions that won’t wreck the retirements of real people.
Maybe?
Rethinking My Whole Credit Card Strategy for 2013
As a part of my general attempt to get all of my spending under serious discipline this year (not that I had a major problem in overspending but I want to get truly lean and mean for this year), I recently began taking a look at my credit card strategy for 2013. Being away from the site for the past week or so was a big impetus to give a lot of my assumptions a second thought. Long ago I had put together a spreadsheet for my credit cards, and it included the benefits, yearly fees, and due dates for each of the cards. I noticed that I had a pretty high number for the total annual fees for all of my cards.
I justified this by saying that it was good value as I was using the annual fees to maximize my points and cash back bonuses. This seemed important to me as it looked like a way to upgrade my lifestyle a bit by leveraging my daily and monthly spending into free travel and free hotel stays. For an extreme example, I though the American Express Platinum card, even with its high $450 annual fee was worth it because it gave me points to a variety of airline programs, lounge access while traveling, and a $200 annual reimbursement for incidental airline expenses. Although not all cards had quite the same extreme example, they all seemed to make sense to me in various ways.
I know think very differently about all of this. First came my post on reconsidering the value of airline miles earned via credit card spend. Don’t get me wrong, airline miles are valuable little forms of currency, but if you are traveling in coach and have a strict time in which you are in need of the flight, the numbers don’t really add up on the superiority of miles over a good cash back credit card. The main reason for this is that redemption rates are higher during peak season and that you also have to forego any miles on the trip itself, effectively meaning that the trip is costing you even more miles than those used for redemption. Frequent flyer miles are mostly a good deal when earned through (duh) frequently flying rather than credit card spending.
So if this is true, then my whole strategy of paying annual fees for valuable travel rewards credit cards also needed a serious rethink. I could nearly buy myself a pretty nice plane ticket someplace with all of the annual fees I was paying. I thought it over for a few days and decided to make some phone calls to a bunch of my credit card companies and banks to downgrade to no-fee cards. Here’s what I ended up with:
Kept:
Chase Ink Bold Business Card:
I kept this card for its amazing 5x points earning power on cable and satellite TV, internet, and phone expenses. Each month I would say that I spend around $280 or so on these items, representing one of my largest spending categories in my budget. I also like that I can buy Starbucks gift cards, Amazon gift cards, and iTunes cards at OfficeMax or Office Depot where they also earn 5x points. I crunched the numbers and the additional points I earn on these categories easily offsets the $95 annual fee. Additionally, putting a lot of my monthly spending on this card allows me to avoid a service fee on my checking accounts without having to leave a bunch of money in the bank account earning little return. Finally, keeping at least one “premium” card open with Chase still gives me access to airline transfer partners. I think Chase has eclipsed American Express with their airline transfer partners since they have a strong relationship with United who does not charge crazy fuel surcharges like most of Amex’s partners.
Citibank Hilton Hhonors Reserve Card:
I actually called to cancel this card, but then reconsidered. The Gold status at Hilton is worth $95 in yearly fees to me, and I can earn an annual free weekend night certificate for putting $10,000 in spending on the card. Since this can be redeemed for a nice night out with the wife, and those 10,000 points would otherwise only be worth only $100 cash back, I think I come out ahead with this card. Even if Hilton did just dramatically devalue their award chart.
Bank of America Alaska Airlines Card:
I kept this card solely for the annual companion certificate where you can bring a companion along on any coach flight for only $110. Since my family likes to fly to Seattle and some of the cities on Alaska’s network, this is a very lucrative benefit for us. As long as this certificate is around I will keep this card.
And that’s it! Otherwise here is what I downgraded or converted my cards to:
Chase Sapphire Preferred to Chase Sapphire card:
The Sapphire earns the same 2x points on restaurants that the Preferred version of the card does. This was my biggest expense on the Preferred. It does not earn 2x on travel, but I plan on putting any travel related expenses on my Fidelity American Express Retirement Rewards which always earns 2x points that can be converted into money in my brokerage account.
American Express Starwood Preferred Guest card to the American Express Blue Cash card:
The Amex SPG is a nice card that effectively earns 1.25 points on all spending for a $65 annual fee. But those points tie me into the SPG program when I could instead shop around at different hotels or independent sites like AirBnB.com or VRBO.com. Instead of that I get cash back with the Blue Cash card and this card gives me 3x points at grocery stores, 2x points at gas stations and 2% at department stores. This is a lot more valuable to me with my current state of mind on credit cards. This cash back can be earned for a statement credit on my card, effectively allowing me to shop for travel or whatever I want and pay myself back through Amex’s method.
American Express Business Platinum Card to the American Express Business Blue card:
This wasn’t a card I was really dying to transfer to, but I generally don’t like to close accounts if I don’t have to since having more available credit improves my credit score. Amex also offered me 10,000 points after first purchase and the Blue Business card earns 1 point on all spending and a 30% bonus each year on all points earned, effectively making the return 1.3 points. Not too shabby for my business expenses.
I also outright cancelled a bunch of cards I could not trade down to cash back cards. This includes the Hawaiian Airlines card from Bank of America, the Citi American Airlines American Express card (I kept the Visa version), the Chase United Explorer Card, and Chase British Airways Visa. The Chase cards I did shift credit lines over to my Freedom and Sapphire account to keep the same credit line available, which is healthy for keeping a high credit score.
So, there you have it, a re-engineered credit card points strategy that will primarily give me solid cash back earning with no annual fees, while maintaining some flexibility with earning points that can be redeemed for travel.
Related Resources:
- Credit Card Points/Miles: How Can I Use My Miles?
- My 2012 Credit Card Signup Bonus Miles, Points, and Cash Back Results
- The Best Credit Cards for Travelers
- The Credit Cards in My Wallet
- Personal Finance 101: Credit Cards, The Miles and Points Game
- Christmas Shopping, App-o-rama, and Credit Card Signup Bonuses: A Perfect Team
- Value of Frequent Flyer Miles Reconsidered
- The Three Best Hotel Credit Cards Reviewed
- Personal Finance 101: How Does a Credit Card Work
- Are Prepaid Credit Cards A Good Deal?
Investing After a Long Delay
As the two loyal readers of this blog may be aware, I have not posted in over a week! Ah! But fear not loyal reader, I am back now.
I spent most of the last week very busy at my job and my primary source of employment. Yes, not so much fun I know, but it was my evaluation week and I wanted to make sure that I did the best that I could possibly could (mission accomplished I hope). Since I am of course a prudent financial person, I knew that the best financial action I could take was to do well on this evaluation.
In my time sort of away, I have had a number of thoughts come to mind and the break was invigorating in many ways. I would like to announce a somewhat significant change in the format of this site, as I plan on focusing more and more on investment strategy and stock analysis. It is my hope that this will serve as a fun exploration over time, help folks better understand my analytical approach, and discover new knowledge with me.
I have to say that after reading a bit on investing strategy I have come to the definitive conclusion that I am a fundamental analyst, focusing primarily on the stock as a business enterprise. Also, I hope to take a long view, as investing is properly done with a long horizon allowing for smart decisions, patience, and the (eventual) sanity of the market to emerge.
However, since this is a journey I hope to share my investing journey with my readers over time, and update my thoughts as they evolve over time. For now, though, I must say that I, like so many before me, am incredibly impressed by the common sense of Benjamin Graham and Warren Buffett. Having just finished The Intelligent Investor, I can definitively say that he explains his evaluation model so simply and powerfully that there can be little doubt about its potential. The Buffett corollary to the Ben Graham principle, though, is to focus mostly on truly great businesses, as they are much better than nickel and dimeing through small little transactions of undervalued stocks (famously described by Buffett as “cigar butts”).
I am currently working on a spreadsheet and a model that I hope will help my readers to better process their investments. For many, I realize trying to pick individual stocks is a fool’s errand, as it is difficult to beat the index average (an index is of course where you simply buy the market or take the field, and enjoy the inevitable rise that American business always enjoys over time). So I hope that most of you will heed this advice, be careful, and think critically. Nonetheless, opportunity abounds and I hope you enjoy the journey of analyzing individual stocks and businesses with me.
No related posts.
How to Use Turbotax
Since tax season is upon us (and dare I say for most tax refund season!), I though it would be helpful to do a quick series on how to use Turbotax.com and all of its features. Certainly there are other ways to file and a few cheaper alternatives. This is especially true if you have a relatively simple return with few exemptions, deductions, or credits (more on the difference between these in a follow-up post to come). For extremely complex returns, or for high net worth individuals, it is definitely best to see an accountant. For most folks though, I think Turbotax hits the sweet spot of functionality and robustness. Even the Treasury Secretary Tim Geithner famously (mis)used Turbotax which got him in a bit of hot water at his confirmation hearing. Still, despite the Treasury Secretary’s problems, I have been using it for years. Here are a few simple steps to take in order to use Turbotax with power and ease:
1. Keep Good Records.
During January and February your mailbox will be flooded with W-2 income statements and all kinds of other tax items from banks, investment accounts, mortgages, and student loans. My system when I get one of these is just to throw them in a big envelope or file folder. I don’t bother to think about them or sort them until I sit down to do my taxes. Nowadays it is important to also double check all of your online accounts, especially if you do not use the account during much of the year. If you opt for paperless billing (as I do on most of my accounts), you may have also opted in for paperless tax records as well. This means you have to find the document or tax statement page of your online account and make sure you have the information. The most common thing to miss with this could be relatively small amounts of interest or dividend earnings in the form of 1099-DIV or 1099-INT. It is very important not to miss income that is taxable.
More lucratively for you, of course make sure you also keep good records of all the tax deductions, exemptions, and credits you are claiming. Records that may qualify you for the $2500 child tax credit, for charitable donations, and for mortgage interest and local property taxes are important not to miss as they could equal money in your pocket. Remember, though, that if you are a wage earner it is likely that the government already has more than enough of your money already so you want to make sure to list all of these tax benefits and keep track of them in order to get the largest return possible. Turbotax can’t peer into your soul and know what you deserve (although it tries its best through its Q&A format), so be sure to keep the paperwork together!
2. Go to Turbotax.com and pick the best package for you.
Turbotax has a pricing system that scales up based on the complexity of your returns. The simplest is slightly misleading in that it is only free for the Federal return, you will have to pay if you file your state return through the software program, as I imagine most would like to do.
Most folks can simply use the deluxe option unless you have some sort of business income either from a rental property or a small business. I used the Home and Business option this year because of this blog and my tutoring business that I run. I have probably used all versions of the program over the years and have found them all to be broadly similar and effective.
Do note that many credit card portals offer points multiplier bonuses when clicking through their portal to turbotax.com. Check out your frequent flyer shopping portals and credit card shopping portals to make sure you don’t leave points on the table as using turbotax can run up to around $100.
3. Get involved in the program
Turbotax uses a Q&A format to guide you through your return. If something confuses you don’t be afraid to ask their online service, but also trust yourself. If you have your documents in order and you answer the questions honestly there is no reason you should make a mistake. For more advanced tax preparers you can skip the Q&A and go right to entering the numbers. I have now used this process mostly, but for a long time I went through every question they asked. Both systems work well. This is what their site looks like “inside”.
There are similar pages asking for all of your deductions, exemptions, and credits; as well as for business income if you use that.
4. Walk through the steps and file
Once you are done answering all the questions Turbotax will transfer the information to your state returns. Sometimes your state will have a few follow up questions, often to confirm your identity. Once done with these, click to e-file and Turbotax sends your return on its way! You can elect to have the refund (hopefully) directly deposited into your checking or savings account when it’s ready, or have a check mailed to you. Turbotax also elects to have you pay for their service by using a credit card or having the money taken out of your refund. I always use a credit card for greater cash back earnings.
Have you used Turbotax? What has your experience been like?
Rethinking Paying Off Mortgage Early
So I feel like one of my intellectual strengths might be my ability to always reconsider my thoughts and opinions. I often times play a “devil’s advocate” game with myself and try to make a compelling argument for the opposite course of action from whatever it was I thought I was going to pursue originally. I guess it is a glorified version of “sleeping on it”, but I just like to make sure I have truly thought everything through. I believe it has broadly served me more or less well in life. It may not be such a great trait for a blogger, however, especially one purporting to speak from some sort of pulpit of wisdom.
Still, it would be equally foolish not to share my rethinking of the matter with you.
Here it goes:
Contrary to what I wrote two days ago, mortgage debt is not such a big deal for two reasons. First, it has a relatively low interest rate, especially considering the rather long period for repayment of the loan. Also, it is structured so that one is paying off the interest on the front end. This is helpful because it greatly reduces the cost of the enterprise and could be as much as 25%-30% less or so if you are in a decently high tax bracket. Simply put, you get a pretty significant discount on your housing costs during the early years of the loan. This money could be saved or invested in other productive ways which are hard to calculate but real. Therefore, you could overtime actually make more money this way than you could in the savings achieved by paying off less interest.
More obvious and more importantly, the cash required to accelerate the payment of the mortgage is not being used for better purposes. A good vanilla index fund should likely be able to beat the 4.25% and 4.85% on an annualized basis that I am currently paying on my mortgages for my primary and rental property.
This is even more pronounced if I were to put the money in a pre-tax basis retirement account like a 401(k) or a 403(b). As I have explained in earlier posts, since these investments come off the top of your income it is best to think of them as having an automatic return of sorts for the initial year you invest them equal to the rate of your top tax bracket. I think most folks would take a 20-30% return in a given year.
Finally, of course, is the hard to quantify value of liquidity and security. It is easy to access cash saved and relatively hard to tap into the value of one’s property (and you will pay additional interest if you do decide to do that).
So, at the end of the day I have come to the conclusion that 30 year mortgages at the present historically low interest rates are simply an amazing deal. We should perhaps do a slight little grin every time we pay the bill each month.
To Mortgage Payoff and Beyond!
It goes without saying that the biggest expense for most folks is housing, and in particular their sometimes giant mortgage. While generally a blessing, 30 year loans at relatively low interest rates with qualification standards broadly open to most are a great thing, mortgages nonetheless chew up a lot of cash available for consumption and often times require permanently higher incomes which lock folks into conservative job and career choices.
I have been fortunate in that I am a member of a two income earning household and that our salaries have grown modestly since we acquired our home four years ago. Moreover, I have learned a lot about how to keep other expenses down and use various credit card signup schemes to pay for larger ticket items like vacations and electronics. I hope to share these strategies with all of you. We also significantly reduced our standard mortgage payment via a refinancing that has made it even more affordable.
So, I have no set out the goal of trying to eliminate our mortgage all together and own both our investment property and our primary residence free and clear.
Here is how my plan will go and then I will share the benefits of doing this:
My first goal is to payoff the mortgage on the investment property because it is currently only barely above water and, due to both my and my wife’s income being relatively high, we do not get a lot of tax deductions on this property even when fairly aggressively trying to lower our taxable income by contributing to retirement accounts. The current payment on this property is $867.00 before taxes. I believe I can safely contribute an extra $450 a month to this property, especially considering yearly rental increases at the market rate. According to this great calculator at http://www.ajdesigner.com/mortgage.php, I should be able to have paid off the property in 13 years by May of 2026, saving me about $67,000 in interest.
Similarly, I think I may be able to manage an additional $1200 a month to our primary residence. I have been putting about that much money into a cash savings account to build up our emergency reserve. However, I think that we probably have a margin of safety established with that emergency reserve already and I can safely divert some of that savings to this goal of eliminating the mortgage. With this plan, January of 2027 will be our last full payment to this mortgage. According to the online calculator this will save us $177,565.00 in interest over the life of the loan. Adding the two numbers up gives us an amount $244,565.00 in savings.
More importantly, though, will likely be the freedom that will come from having accomplished this goal of outright home ownership by the year 2026 when my wife and I will both be in our early to mid 40s. It will not be exactly a ton of fun, I will have to keep my cars longer, watch my pennies, and continue to play the travel rewards credit card signup game for vacations; but we can have a lot of flexibility for the rest of our lives with these payments eliminated.
Related Resources:
- Run a Financial Tuneup in 8 Steps
- How Does a Home Refinance Work?
- Christmas Shopping, App-o-rama, and Credit Card Signup Bonuses: A Perfect Team
- Your MacroWallet: US Housing Market Recovery Shaping Up
- Personal Finance 101 Series: Insurance
- Personal Finance 101: Credit and Credit Cards
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Airline Economics Reflect Increasing Inequity
Gary over at Viewfromthewing.com and Scott at Hackmytrip.com have an interesting little discussion going over whether or not coach passengers are subsidizing the extravagance of flyers in business class and first class. Essentially Scott argues that ancillary fees charged to coach flyers are tipping the airlines into profitability and the ability to invest in their product. These investments in product improvement are generally targeted at nicer planes and amenities that premium flyers get to enjoy. Ergo, coach flyers pay for the improvements for the elite.
Gary, explains the business practices of airlines and how Scott’s analysis is more or less misguided as it doesn’t fundamentally examine the airline business. His explanation explains why all of the pricing is a rational way to get the most revenue out of each passenger and essentially be all things to all people. Coach flyers are most motivated by low fares and prefer a la carte pricing for all of the ancillary benefits, as it ensures the lowest possible price point for their travels and gives them control over each dollar. Flyers in the front of the plane have a different agenda and a different series of rational decisions which explains the investment airlines make in amenities and luxuries in order to provide them a simple, elegant, “all-in” service and pricing model.
Each author is, naturally, correct int heir own way and I am sympathetic to both. What is really going though, I think, is that airline economics reflect the increasing inequity in society and the world. The US and much of the world have never been so unequal with rising GINI coefficients. There are few other endeavors in modern life where this smacks you in the face so much, and where the various strata of the modern economy are sharing a tin tube to the same destination. A corporation, investment bank, financier, or lucrative consulting company has a different economic agenda and the airlines must meet their needs at the front of the plane. Airlines must also, of course, meet the needs of a cost conscious middle and working class, and this is reflected in their coach pricing and setup.
This may seem like I am agreeing more with Gary and I suppose I am to an extent. Still, I think the larger picture may point in Scott’s direction. Our economy, regulatory system, taxation system, and budget policy have increasingly focused on maximizing the gains for the top earners while keeping the middle class in a protracted struggle to keep their heads above water and make incremental gains. While I don’t believe that economics is a zero sum game, certain policy decisions must help one set of actors or another, there are real winners and losers. Over time, politics and economic philosophy have tilted towards the rich, wealthy, and powerful at the expense of the rest. This is true in the US and perhaps even more true in the developing world, perhaps explaining the even more blinged out nature of air travel on Asian and Middle Eastern airlines.
So if you want to understand the broader economy, maybe it is best to take a walk through the cabin.
Related Resources: