It's Expensive to be Poor

I read a pretty compelling story online today called "The High Cost of Poverty: Why the Poor Pay More", written by DeNeen Brown for the Washington Post. It raised some issues that you might never think of, sort of "hidden taxes" on being poor.

Having grown up in pretty modest means myself, I am pretty familiar with the amount of time you waste when you don't have much money or your own house. Poor people have to spend time at the laundromat waiting for clothes to wash and dry every week (I have done this) and time waiting for multiple public transportation connections to get to work every day (I have done this too). But the article points out that it is sometimes impossible for poor people to go to the big grocery stores where the middle class shop for discounted food. They have to buy their milk and butter from the local corner store, costing them significantly more.

The article also points to high rates charged by check cashing places as a cost of being poor, but I'm not as convinced that they are a necessity. For example, a man quoted in the story pays a fee to have the check cashing place pay a bill for him... it seems to me that fee (at least) is avoidable).

In any event, this article is an eye-opener (and includes a pretty memorable exchange between a man and the checkout person at a grocery store) that I think is worth a few minutes of your time. If you are in this situation- you're not alone. If you're not- be thankful for what you have.

A Year off Work, With Pay

I came across an interesting article in the New York Times (which I rarely read, since I prefer the WSJ) about a lawyer who is getting paid $80,000 to take a year off from work. Apparently the big NYC lawfirm Skadden is offering some of its workers a year off at 1/3 of their salary as a way to reduce costs and retain employees during the current economic downturn. Since this particular woman made $240,000 a year, her drastic paycut still leaves her with a pretty hefty salary so she decided to take the year off and tour around the world.

I don't blame her. I would take this deal if I could (though I am sure I wouldn't be able to travel and would only just be able to scrape by on 1/3 of my salary). I've worked with people at big lawfirms like this in the past and I know the kind of grueling schedules they put in. I put in these kinds of hours myself for certains stretches throughout the year and over time it tends to get to you. A break like this would be a most welcome relief.

But of course I am not getting this deal. And neither are you. But we can dream.

What would you do if you got this offer?

CEO Compensation

So we all know that CEOs are paid ridiculous amounts of money. I've often thought that if I spent a week or 2 as CEO of a major corporation, I'd be set for life. I would be able to pay cash for a pretty nice house and then only work to pay my basic bills every year. Not only would one paycheck be more than I make in a few years, but I'd also get the nice golden parachute to boot.

Our new president is very public about his disdain for CEO salaries, and as I read in today's Wall St. Journal, Sen. Claire McCaskill (D., Mo.) has now introduced a bill to limit CEO salary to no more than what the president earns: $400k a year. The next sentence was a classic and I applaud the authors of the story for putting it in there: "In 2007, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein earned that much in about two days."

Two days!

I gotta get me one of them jobs.

New Jersey Housing Prices Fall

I came across a pretty interesting blog recently- http://www.njrereport.com/. It publishes news stories and examples of New Jersey homes being offered well below previous purchase or asking prices (which it refers to as "comp killers" because when they sell for lower prices, they serve as comparisons ("comps") for other homes being sold nearby and therefore drive down prices in an area.) Perhaps the most interesting part of the site is the comments, so be sure to check out the discussions when you're reading posts.

I think the blog is written by a real estate broker in NJ who very correctly called a top in the NJ real estate market in 2005.

It's an interesting read if you're following the real estate market, or if you're in the market to buy a house in NJ (or the northeast in general).

So where am I in the process? I'm still on the sidelines for a first home. I got married in 2005, at or around the top of a real estate bubble in one of the most overpriced areas in the country. I realized it would have been impossible for me to responsibly buy a home at that time, even though people with significantly lower incomes and down payments were doing so all around me. It was very easy to look at the numbers and see that I couldn't afford jack at that time. I posted about this a few times in the past, and I'm still waiting for prices to fall further. The news has been getting more and more encouraging, but prices are still ridiculous. I'm hoping real estate price declines continue, I'm hoping nobody bails out the people who took on mortgages they couldn't afford, and I'm continuing to build my down payment savings in the meantime. I hope to buy sometime in the next couple of years. I'm not worried about "missing a bottom" because I know once real estate prices fall, they don't generally bounce right back up, they tend to stagnate for a while.

How am I going to know when the time is right to buy? First of all, I'm definitely not going to try to pick a bottom. What I am going to do is continue to update my calculations of what my wife and I can afford on one salary, and when something looks both affordable and attractive to me, I'm going to go for it. I'm not too worried because my rent is pretty cheap for the time being. Right now, prices in general are still pretty ridiculous. I either need to save a lot more money, or see prices come down a lot before I really focus on the home buying process.

The Taj Mahal Does Not Want Your US Dollars Anymore

Add Indian tourist sites to the list of places that won't accept dollars anymore. According to a recent ruling from the Indian Government, visitors will no longer be allowed to pay admission fees to places like the Taj Mahal in US Dollars. They must use Rupees instead. According to the BBC, "The ruling is aimed at safeguarding tourism revenues following the recent falls in the dollar."

The Taj Mahal joins the likes of model Gisele Bundchen and rapper Jay-Z as the latest object of public interest to snub the dollar.

Just tossing that out there.

By the way, im watching Bloomberg TV- Asian markets are open on Sunday nights in NYC. Did you know that the Pakistani government's 10-year bond is yielding 10.3% right now? I'm not sure how you could buy one of those and given the fact that the country is currently under emergency rule , I'm not sure you would want to buy one. How much do you trust a 10-year promise that Pakistan will pay you back? Actually, taking that a step further... why would you ever want to support such a government by loaning money to it?

Too Bad I'm Not A Sports Star

I wish I was a sports star instead of a financial analyst, but not for the reasons you might think.

Sure the money and the fame and not working in an office all day long would be great, but there's another thing that sports fame can get you- an audience with Warren Buffett, the Oracle of Omaha.

I recently read a Bloomberg piece saying that Buffett extended an invitation to chat with Yankees sensation Joba "The Heat" Chamberlain. Buffett has also met with Lebron James and Alex Rodriguez. So cheer up, those of you who don't have $650,000 to spend on a lunch with Buffett... there's another way to meet him and learn his investing secrets firsthand- practice, practice, practice.

Bottled Water is Really Tap Water

Apparently the news that Aquafina is going to start writing "P.W.S" on its bottles in order to indicate that the water in the bottle comes from a "public water source" (forbes.com) is big news to some people.

Um yes, they take in water from what amounts to a giant tap, filter it, and bottle it. You then pay a dollar or so a bottle. That's how much it costs to get a drink when you're out and about. I wouldn't care if they took the water from a dirty lake and then filtered it (as long as it is as pure as the stuff they have now), I still prefer it to soda. Yes I think it should be cheaper, especially at the movies where a bottle costs you about $2.50 in NYC, but it doesn't shock me. The alternative is unfiltered tap water, which i often get at restaurants anyway, but tastes pretty horrible sometimes. Have you tasted water out of some of these public water fountains lately?

Besides a little bit of syrup in every can, coke works the same way. Its mostly filtered (i assume) water. Would people be shocked to see a news story stating that coke is 95% public water? Sadly, they probably would.

What did you think Aquafina and Dasani were? Spring water?

Bill Gross of Pimco on The Markets

I guess he has been writing these for a while, but I've only recently started reading Bill Gross's monthly investment outlook at pimco.com.

In this month's post, Bill spoke about a few issues near and dear to my heart, the first one being the gap between rich and poor, which I have written about before. He rails against this gap, saying that he's firmly in Warren Buffett's camp and thinks it's a travesty for the richest people in America to be paying 15% tax rates on average, while the middle class (their secretaries and assistants) end up paying almost 30%. He says this is one of the prime reasons why there is such a huge gap between the rich and the poor, where 5% of the national income goes to .01% of the families in the US. You read that right, "point zero-one" or "one basis point" take in 5% of the national income.

That whole discussion was spurred by a recent issue that has gotten a lot of attention in the financial press. Basically, the rich managers of private equity funds, whose annual income is measured in hundred millions or billions, have their income treated as capital gains, so it gets taxed at the much lower 15% rate instead of the 35% rate us mortals pay. This New York Times article does a good job of summing up the issue.

I agree with Buffett and Gross. If you made $100 million last year, you should be paying $35 million in taxes, not $15 million. This leaves you with $65 million for yourself. Meanwhile, your secretary (lets assume she's an executive secretary) made $100 thousand last year, and paid her full $35 thousand share. This left her with $65 thousand for herself. Why should she be paying a higher rate than you? If anything, she should be the one paying the lower rate. In fact, it could potentially change her life to have $15k extra in her pocket every year. What's an extra $15 million to someone who already has a billion in the bank?

Gross also spoke about the markets some more, in particular, talking about increasing credit spreads. He basically repeated the theme that easy money is drying up for the LBO funds and PE folks who have been using it for buyouts. In particular, he pointed to a financing that's in the works right now that may not be going so well...

"Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week. That more than anything else may wake them, shake them, and tell them that their world has suddenly changed."

Well according to some press coverage I've been reading, it turns out the lenders haven't been able to accept ANY terms to lend money to Chrysler finance, and the banks and the companies involved are going to fund the buyout themselves.

For those of you who don't follow the credit markets very closely, I'll try to sum up what has been going on (in my opinion). Over the past few years, buyout funds have been able to borrow large sums of money at very low rates and use that money to acquire companies. The lower the price they paid on the borrowed funds, the more money they could make off of these companies they bought. Think of it this way: if you can borrow a million dollars at 3%, you are paying $30,000 a year in interest to use that million dollars. If you use the million to buy a business that returns you 12%, the business will be throwing you $120,000 a year. Subtract out your interest payments, and you're getting $90,000 a year in profit for yourself. Not bad! You'll easily be able to make your interest payments, and in fact you'll probably go out looking for more of these great deals. That's exactly what buyout funds have been trying to do, except they have been buying businesses for much more than $1 million.

The credit markets were giddy with all of these deals. Lenders were willing to charge lower and lower interest rates, somehow believing that there was not much risk involved, even with companies on the shaky end of the spectrum. Credit spreads (basically the additional amount lenders charge for people with shakier credit, just as banks charge people with lower credit scores higher mortgage interest rates because they are more risky) got very narrow. This meant that even a shaky business (one with a low credit rating) could get a loan and pay a rate not much higher than an extremely solid business (one with a high credit rating). There was a small "spread" between the interest rates they were charged. This is referred to as "tight credit spreads" or "narrow credit spreads."

What Gross is saying is that this is now changing. With subprime borrowers defaulting on their mortgages in large numbers, the market got sort of a slap in the face that said "wake up! you've been ignoring some risks here! you need to charge higher interest rates, especially for buyout firms that are using money to buy companies with low credit ratings because these loans are a lot riskier than you used to think! In addition, the credit rating agencies (Standard and Poor's and Moody's, primarily) have been asleep at the wheel too and they aren't giving low ratings to companies that deserve them!"

In the past few weeks, companies with low credit ratings have had to pay higher interest rates to borrow money than they have in the recent past. Things are getting back to normal, but as they make their way back there, there could be a whole lot of pain for the lenders.

Stocks Killed Today

The market reached all time highs today. Most people cite strong retail sales.

I got to work at 7:15 am this morning. I got home at 8:30 pm. One of those days when it feels like all the salary in the world isn't worth it.

Postscript: by "killed" I mean they did well or "killed it." :)

Does Marriage Make You Richer?

Of course getting married won't make you rich in itself, but if you are married, and you grew up in a household with married parents, you're more likely to be in the upper end of the income spectrum. So says an article in The Economist, entitled "The frayed knot" in which the author argues that

"There is a widening gulf between how the best- and least-educated Americans approach marriage and child-rearing. Among the elite (excluding film stars), the nuclear family is holding up quite well. Only 4% of the children of mothers with college degrees are born out of wedlock. And the divorce rate among college-educated women has plummeted. Of those who first tied the knot between 1975 and 1979, 29% were divorced within ten years. Among those who first married between 1990 and 1994, only 16.5% were.

At the bottom of the education scale, the picture is reversed. Among high-school dropouts, the divorce rate rose from 38% for those who first married in 1975-79 to 46% for those who first married in 1990-94. Among those with a high school diploma but no college, it rose from 35% to 38%. And these figures are only part of the story. Many mothers avoid divorce by never marrying in the first place. The out-of-wedlock birth rate among women who drop out of high school is 15%. Among African-Americans, it is a staggering 67%."

So basically what they're saying is that lower-educated, poorer people are less likely to a) be products of two parent homes and b) create their own two-parent homes. This cycle continues with their own children.

I think the environment a person grows up in has a huge impact on how their life turns out. Rich or poor, loving families tend to create happy, well-adjusted children. These children probably go on to get better jobs and on average become more wealthy (emotionally and financially) than people who are products of broken homes.

I've written before about the gap between the rich and the poor, and this article speaks to some of the same issues. It's more food for thought than anything else, because I'm truly at a loss to suggest any good solutions to what seem to be some pretty big social problems.

Identity Theft on Blogger!

I recently found another MoneyMan on blogger! Actually his blog is pretty good and by no means do I think any one person could own the rights to use the name "MoneyMan."

Anyway, he's a TV/radio personality and all I am is a regular old person. Check it out and let me know what you think.

HYIPS Are Scams

I recently got an innocent-looking comment on one of my posts, and I made the mistake of approving it without checking out the website the person's name linked to. Turns out it was a "how to be a millionaire" blog (yes, another millionaire) and the guy was hyping something I had never heard of before- HYIPs, or high-yield investment programs.

I don't even know where to begin with these. The people who hype stocks all day are at least operating within the bounds of the law. HYIPS are nothing more than fradulent ponzi schemes. There is a great writeup on HYIP scams over at Quatloos, the "cyber museum of scams and frauds."

Basically HYIPs say they will return something like 1% PER DAY on an investment. They tell you that you need to pool your money with other HYIP investors, and your returns will be amazing. Lured in by the promise of easy cash, you send funds to these jokers, they make off with it, and you're left with nothing.

There are so many scams out there, and this one shouldn't be too hard to detect. First of all, any "guaranteed return" above that offered by US Treasury bills (currently around a 5% annual yield) should be looked at with extreme skepticism. Second of all, a simple web search for "HYIP" instantly reveals that they are, in fact, scams. No matter how well people try to dress them up, just remember that these things are just Ponzi schemes.

Take it from someone who has worked for a few Wall Street/financial firms, dealt with very rich people, and lived to tell the tale: there is no "magic bullet." There is no secret investment that rich people have access to that allows them to make a ton of money with no risk. Rich people get rich by having high paying professional jobs, starting their own businesses, inheriting money, buying the right piece of land/stock at the right time, writing best-selling novels, winning the lottery, etc... all of the other ways you already know about. You aren't going to read about the magic solution online. You definitely aren't going to read about the secret on a blog.

The Investment Banker and the Fisherman

I recently read this story about the investment banker and the fisherman on aspirenow.com.

I am not worried about copyright violations because this is one of those "author unknown" stories, so I will just reprint it here.

"The American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, "only a little while."

The American then asked, "Why don't you stay out longer and catch more fish?"

The Mexican replied, "I have enough fish to support my family's immediate needs."

The American then asked, "But what do you do with the rest of your time?"

The Mexican fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife, Maria, and stroll into the village each evening where I sip wine and play guitar with my amigos. I have a full and busy life."

The American scoffed, "I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA, and eventually NYC where you will run your expanding enterprise."

The Mexican fisherman asked, "But, how long will this all take?"

To which the American replied, "fifteen to twenty years."

"But what then?"

The American laughed and said, "That's the best part. When the time is right, you would announce an IPO and sell your company stock to the public and become very rich. You would make millions."

"Millions . . . then what?"

The American said, "Then you would retire, move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.""

Working Long Hours

Due to a number of reasons, I had an extremely long, stressful week last week and will likely be having another one next week and possibly the week after.

This week involved waking up at 6am, getting to work around 7:30, working until 6:30, and getting home around 8 or so. One night I didn't get home until 11:30 due to a dinner I had to attend after work. We went to one of the fanciest restaurants in Manhattan with one of our business partners. The bill came out to over $400 a person (I did not have to pay). Unfortunately, at 2am that night I vomited up about $350 worth of the food, but that was probably a good thing.

And I was busy all day at work. I didn't have a chance to catch my breath, and I actually fell behind on a couple of things.

I don't love my work. I like the field I work in, but my current job is definitely not what I want to be doing for the rest of my life. I spent about 65 hours either working or commuting to work this week.

On the local NYC news last night, they were interviewing guys who worked outside. It has been bitter cold this week, with temperatures falling below 0 degrees farenheit. The reporter asked a construction worker "Are you working outside the whole day today?"

He replied "Yep! All day! I'll be out here seven hours!"

I can't imagine what it would be like to work seven hour days. I know a few people who work construction and they leave at the same time as me in the morning, but they are often home from work at 3:00 or 3:30 in the afternoon. This gives them a good 4 hours of extra free time EVERY DAY compared to what I get. This means they actually see daylight in the winter, when it is always dark before I leave work. It means, assuming they go to bed at 10 or 11 pm like I do, that they have seven or eight hours of free time every day, where I only end up with three or four. And during those three or four hours, I usually have some chores to take care of. So I really only get 2 hours to myself every day.

Of course, I am a lot more physically comfortable in a heated office all day, so that's one of the tradeoffs. I don't mean to say those guys have it easy. I worked in construction for a while. It is a tough job. The hours, though, are fantastic.

I don't plan on doing this my entire life. For one, I hope to move someday and cut down my commute to work. For another, I'm going to try to go someplace that offers a more flexible work schedule. For another, I am going to refuse to work the long hours.

For now though, I have a decent enough plan. I'm young, I can work , and hopefully I will be able to save up enough to put down a decent down payment on a house so my monthly payment isn't a noose around my neck.

Boring Financial Advice

I've been getting sick of a few pieces of advice I keep hearing. This advice has been repeated so often that it is starting to make me physically sick. You don't need to know anything to repeat this advice, yet people act like geniuses when they throw these little nuggets out there. Suze Orman, I'm talking to you. Two bit hack bloggers, I'm talking to you.

The magazines, websites and TV shows are bad, but I think bloggers are the biggest offenders.

Anyway, in no particular order, here are some of the boring pieces of hackneyed financial advice everybody and his mother thinks they are qualified to give out:

1) Be sure to contribute enough to your company's 401(k) plan so your company matches your contribution. If you don't, you're giving away free money.

OH MY GOD! I AM GOING TO DROP DEAD! WHAT GENIUS ADVICE! TAKE ADVANTAGE OF A MATCHING CONTRIBUTION? I THOUGHT I WAS SUPPOSED TO REFUSE THAT MONEY!

Please, financial people! For the love of all that is good, stop repeating this sentence!

2) Buy things that are on sale.

You mean... pay less for something than it normally costs?? You, my friend, are a personal finance maven. I will surely become A MILLIONAIRE now.

3) Don't buy X. X being some incredibly cheap thing that makes no difference in your budget, but the blogger multiplies X by some huge number and shows how it ends up costing you $2,000 OVER YOUR LIFETIME if it was invested at some high rate.

I found the perfect illustration of number 4 while looking at some different personal finance blogs last week. I pulled up this one blog at Getting-Green.blogspot.com. This site’s tagline is “Information for people who want to be millionaires.”

What a great premise for a site. Information for people who want to be millionaires. I figured there would be some great stuff there, but instead, I was met with this post (I kid you not), entitled Say No to Soda. In your quest to become a millionaire, the author suggests that you stop drinking soda because of how much its costs. The following is a direct quote from this post, with no emphasis added. For some reason his apostrophes show up as a bunch of gobbledygook symbols:

“How much is that pop costing you? Let’s say you get one twelve pack a week, plus buy another 4 soda’s from gas stations or vending machines. That’s about $8 a week on pop, or $416 a year, or $4160 every decade. It adds up to be a lot over time. Instead drink nice cold healthy and delicious water.”

I am sure if you could have asked Andrew Carnegie what contributed most to his great wealth, he would probably say it was the fact that he drank water instead of pop.

This is completely useless information! First of all, who buys 16 sodas a week?
Second of all, we already know how much soda costs. The price is often advertised on the shelf, printed on the box, it shows up at the cash register, and you can even see it on your credit card statement if you use your card to pay for it. Where is the information here?

People already know that they buy stuff that costs money. It is no big secret that not buying something lets you avoid paying for it. I can’t count the number of similar blog posts I’ve seen. “Don’t subscribe to magazines you don’t read, because you could save the subscription fees. Don’t buy that expensive new TV because you could save thousands of dollars.”

Are we really that stupid? Do we need to be told that not buying something will save us money?

I looked around the site to find some description of the author… maybe something that would qualify him to give advice to millionaires. A college degree, a million dollars, a successful business, rich parents… anything that would give him some credibility. However, there was nothing. Not even a brief biography. For all I know this could be a 12 year old kid who got pumped up after reading a copy of “The Automatic Millionaire” or something.

4) The budgeting post. Write down what you spend for a month, then make a budget.

You can see a good example of this budgeting advice in this post, entitled staying afloat financially in college. Sorry to pick on that one blogger but man, the stuff he is putting out is just sad.

If anyone out there is tempted to write an article or a blog post about anything in the list above, please do me a favor... don't.

Reader Reactions to My "Get This Man Out of Debt" Post

I received a ton of feedback on my previous post about a New Yorker article that profiled a man with a low paying job and a big chunk of debt, and it was humbling.

This is what I love about the Internet. It is an amazing forum for sharing ideas. A large group thinking about a problem has the potential to come up with so many more ideas than a single person like me ever could by myself. To everyone who responded: thank you.

I couldn't address each comment individually so I figured I would use this post to speak to some of them.

I really liked some of the additional ideas you had that could save that guy money. Someone said he should have a pay-as-you-go cellphone plan instead of a $60 a month plan. This would be a great idea. I got along without a cellphone at all while I was in grad school, so I know it can be done. Someone else suggested he bring cold cut sandwiches to work every day, another great idea. Another said he should get a $76 monthly unlimited metrocard instead of using the pay per ride cards. This would give him significant savings each month.

Others pointed out how expensive it is to live in NYC. I don't disagree with that at all, and it is one of the reasons I might not be here forever. It was something the article also made very clear.

Some people decided to personally attack me. I was very surprised to read about how I am a "rich snob" this morning as I was at work eating the peanut butter and jelly sandwich I brought with me. That's right. I bring my lunch with me to work. I am saving to buy a house to put my children in when I have them one day, so I can go without expensive lunches for the time being. I have been bringing my own lunches in everywhere I have worked and gone to school since the first grade.

Some people suggested I was the lucky recipient of a free ticket, being raised in the suburbs by rich parents and never facing the oppression of ghetto life. They said I could not know what it was like to be raised by immigrant parents.

The last point struck me the most. My parents are both immigrants, and they aren't wealthy immigrants. They were both farmers who came over here in their 20s with high school level education or below. Both got civil service jobs to raise their five kids. Money was tight and if anything, that taught me better financial habits than if I had been raised among free-spending rich folks.

The line of thinking that disturbed the most can be summed up in this comment I received:

"most of his other problems and mistakes seem to be, or have been, out of his control. I'll give two exampels. Firstly yes he got his girlfriend pregnant, but how do you know that he didn't take utmost precautions but the contraception failed? Hardly his fault if that happened, unless you're suggesting he abstain from sex and relationships just because he is poor?"

This really puzzles me. As far as I know, there is only one way for a guy to get a girl pregnant, and that way is always his fault. I could push this argument even further, but it would become wildly off topic.

I didn't talk about my plan to turn around his finances as a way of taking a cheap shot at this guy. I admire the fact that despite all of the poor choices he made and the situation he is in, he hasn't gone off the deep end. I admire the fact that he gets up early every day to make that long trip in to work. I used to ride the subways at that hour to get to a job that started at 6 am. My trip took an hour and a half so I had to leave my house at 4:30. You can encounter some dangerous situations at 4:30 am in different parts of NYC.

But I have to say, I'm not as sympathetic to him as the person who wrote that article seemed to be. The system is not entirely to blame for his situation. The system didn't drop out of high school. The system did not have sex with his girlfriend for him, and the system did not give him that debt. Those were things he chose to do.

What I do hope is that someone in or near his situation reads this and recognizes that they are headed down the wrong path too. In the best of all worlds, that person would read my (admittedly imperfect) plan, the comments from the readers, and use that information to change course.

I don't mean to imply that society should abandon this guy and that it is his sole responsibility to get himself out of poverty. It makes me sick to see the amount of money some people walk around with while others wallow. I have mentioned before how the gap between the rich and poor is getting to be extreme. It is definitely important to make donations to the poor, but it is even better if you can help someone further along the path to self-sufficiency.

Thanks again to everyone who read the post and gave some feedback. I will sign off with my final thought: it is not easy to become rich, but it is very easy to become poor.

Watch your wallet!

A Plan for Getting a Poor Man Back on His Feet

I recently came across a series of interesting pieces on the cost of living in NYC in New York Magazine. I don't normally read New York Magazine because its target audience is pretentious, holier-than-thou snobs, but it occasionally has some interesting articles.

The one that caught my attention was an article about a 31-year-old guy who lives in NYC and makes $338 a week as a security guard. I suggest you go and read this article before you read further.

OK, keep reading it.

OK, I'm going to assume you've read it now. Do you feel sorry for this guy? I sort of did. I'm not a cold hearted capitalist, so I do feel bad for him. The guy does not have things easy. But in a way, didn't he bring it on himself? I think we can learn a ton from the mistakes he made. What did he do wrong?

1) Dropped out of high school in his senior year, presumably to sell drugs

He tried this for a year or two, then moved out to the sticks and started working on a community college degree. I think this was a fantastic move. Get yourself completely away from the bad situation, live the hermit lifestyle for a while, concentrate on your studies, set yourself up for a good job... But then he made another huge mistake.

2) "Near the end of his freshman year, he learned that his girlfriend in the Bronx was pregnant with his baby. Soon, she and the baby and her two daughters from a previous marriage moved upstate to be with him."

I felt the need to quote that. He LEARNED that his girlfriend in the Bronx was pregnant with his baby. Why didn't they say "he took trips down into the city, and on one of those trips, he got a girl pregnant?" This was a choice he made.

3) He took on $4,500 worth of credit card debt and $6,600 of student loan debt

Another bad choice.

There were some other mistakes he made, but I won't get into them here because they were minor in the grand scheme of things. OK, so giant mistakes aside, how could this guy fix his problems (In theory. I don't know everything about him but I will make some educated guesses)?

The first thing he should do is to drastically cut back on his spending. He blew $20 at a movie that he slept through on payday. He could have bought 20 hot dogs with that kind of money. He needs to take a year or two and live like a monk. There is simply no other way. He has had his fun, but now its monk time. This means going to work, spending as little as humanly possible, and coming home to read a book from the library and go to sleep. No spoiling his kids (when he gets out of debt they will thank him for this), no movies, no extras, just the ascetic lifestyle.

By doing this, he should be able to save $50 every two weeks, conservatively, and pay that towards his credit card bill. He's not paying rent. He can probably knock the balance down by about $1,250 in a year that way.

Second, he needs to look for a higher paying job. I know for a fact that there are union doorman jobs in Manhattan that will pay him quite a bit more than he makes right now. Those jobs will give him benefits, vacation, tips around the holidays, and a pension. If not, he can take other civil service tests such as those for becoming a court officer, possibly a policeman, or some other similar kind of city job.

Third, he should open up a new credit card with a zero interest balance transfer option, assuming they will let him do this. He should transfer the balance over, but immediately cut up the card.

If he can't get a new credit card, he needs to call his credit card companies and ask for a break, whether it be in the interest rate he is being charged, the amount he owes, forgiving past fees/interest etc... He needs to be persistent, but not antagonistic when he does this. He needs to explain that he intends to pay it off. This $4,500 in credit card debt could really spiral out of control if he doesn't focus on containing it.

Fourth, he should try to get a second job, part time. No offense to this guy, but he only works 8 hours a day, and he can easily be doing 11 hour days like most professionals put in. He could get a job stocking shelves, bagging groceries, painting houses, or something similar for 8 hours on Saturdays (if that's his day off). This could bring him an additional $50 or more per week, or about $2,500 in a year. He should put it all towards his credit card debt as he makes it, or the temptation to spend it will be too great.

In a year and a half, if he focuses, he can pay off the credit card debt. By that time, assuming he has gotten a new job, he will be making enough to pay off the student loan in another 1-2 years. Three years from now, he could conceivably be debt free. If he does everything right, gets a real second job, and works even more than I assumed, he could be out of debt even faster.

I know you're thinking a life like that takes its toll. Speaking as someone who works 55-60 hours a week (which is more than the 48 hours a week he would be working under my plan), I can assure you it does take its toll. But you know what? When you're working for something, when you're making progress, and when your situation is improving, you feel like it is worth it.

So when he pays off his debt, what does he do then? He can do one of two things . Note I am assuming it takes him 5 years to get out of debt and he will be 36 years old at that point. This is the longest I think it should take him. I think he could do it in 3.5 years if he really applied himself.

The first thing he could do is to continue working at the "better" job that he has found, assuming it is stable and will provide for him and his kids.

If that job isn't enough, he can start taking night classes and get his degree, or learn a trade.

I know you might think my projections are overly optimistic, but this guy needs a plan, and this is the best plan I can think of, knowing what I know from having read the article.

I do not know if he has a drug problem that would impede his job performance. I do not know if he drinks. I do not know if he does anything else that would get in the way, but I hope he doesn't.

He actually has a lot more hope of escaping poverty than most poor people.

I would love to hear if anyone else has more thoughts on this plan, so please, I invite you to comment. Have you been in his situation? What would you have him do?

The US Income Tax Headache

According to an opinion piece in yesterday's Wall Street Journal:

Americans who earned more than $1 million in adjusted gross income paid $178
billion, or an average of $740,000 per filer, in income taxes in 2004. That's up
about one-third from 2002, the year before the Bush tax cuts in marginal
income-tax and dividend and capital gains rates. The wealthiest 1% of tax filers
paid a remarkable 35% of all individual income-tax payments that year.

It is no secret that the rich pay the vast proportion of the income taxes in the US, and I think this is a good thing. Our tax system is graduated in such a way that the more you make, the higher a percentage of your income you pay to the IRS. This in effect forces those who have been rewarded by our society with riches to subsidize services for (and yes, even handouts to) those who do not make as much money.

Is the system perfect? I think the answer to that question is "definitely not." but I it is at least closer to good than it is bad.

My biggest problem with the current system is the complexity involved. The rules, the forms, the deductions, the instructions, the carryovers... it makes my head spin every year.

Another problem with our system is the alternative minimum tax, which was put in place to catch rich people, but due to neglect over the course of the past few years, is ensnaring more and more middle class tax payers.

I have heard a lot of different proposals for changing our tax system over the years, and of all the ones I've heard, I think the flat tax is the way to go. The hours I have put into doing my taxes over the years could easily have been put to some more productive use. So could the money I spent the one time I had a tax advisor prepare them for me. Don't even get me started on that ripoff. They charged me PER FORM, and it took about 10 minutes for them to do. My bill ended up north of $200.

I would prefer a graduated flat tax where everybody who makes a certain income pays a certain rate. This way we would be able to keep the system fair, and tax the rich more than we tax the poor.

Yes, tax preparation firms like Jackson-Hewitt and H&R Block would be very upset if we instituted a flat tax, but I would be thrilled.

There are some downsides to the flat tax as well, which you can read about in the Wikipedia article, but I think the simplicity of the system would far outweigh the negatives.

The Gap Between Rich and Poor

According to a new survey put out by Bloomberg and the LA Times, Americans see the widening gap between rich and poor as a serious national concern. A few of the key observations:

-What the "poor people" think about the gap: according to the results of the poll, 84% of people earning less than $40,000 a year say the growing gap is a "serious problem", and over 50% say it is "very serious."

-What the "rich people" think about the gap: more than 60% of those who earn more than $100,000 a year said it was a serious problem.

-Bloomberg also added that "the portion of national income earned by the top 20 percent of households grew to 50.4 percent last year, up from 45.6 percent 20 years ago; the bottom 60 percent of U.S. households received 26 percent, down from 29.9 percent in 1985, according to the Census Bureau"

-The average pay of corporate CEOs rose to 369 times that of the average worker last year, compared with 131 times in 1993 and 36 times in 1976

You open up a can of worms when you discuss issues like this. On the one hand, I'm very much in favor of capitalism and free markets. On the other, I sometimes feel like there are people in the United States who are monopolizing the country's wealth and opportunity. These are the people who inherit their wealth and do not have to work for it.

Yes, I think one of the perks of making it big in the United States should be the ability to provide the very best situation for your kids. But I also think Warren Buffett's philosophy that he wants to leave his children "enough money that they can do anything, but not enough that they can do nothing" is a better approach than handing billions of dollars to someone who never really worked a day in their life.

I do think there should be a gap between rich and poor though. It gives people something to aspire to. It represents the American dream. Should it be as large as these numbers show?

I don't think so.