Archives For January 2011

OT Humor: In-Store Coupons

January 25, 2011

Today I received a coupon from a sporting goods store popular in my area called Academy. The coupon is good for $10 off a purchase of $50 or more. Cool. It was until I read the fine print, which included this list of excluded items:

• Nike Shox

• Under Armour

• Skechers Shape-ups

• Running Resistance

• Reebok EasyTone, RunTone, JumpTone, and TrainTone

• Merrell

• Asics

• Levi’s

• Columbia Apparel

• Callaway Golf

• Titleist

• Taylor Made

• Cleveland

• Nike Golf

• Some additional exclusions may apply.

Maybe it would have been easier to print what the coupon was good for

Facing Losses

January 21, 2011

My last post brought a passage from Meir Statman’s What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions* to mind regarding the housing market. The passage comes from Chapter 10 – We Want to Face No Losses:

Houses sell quickly in boom times at prices that exceed list prices. Yet in bust times, houses sit on the market for months and years at list prices higher than they could possibly fetch. Many sellers withdraw their houses from the market rather than sell them at prices lower than the prices they have set in their minds. Homeowners say the market is slow, we’ll just hold on and wait. In truth, it is homeowners who are slow. They are slow to reconcile themselves to the fact that today’s reasonable prices are lower than the prices they have set in their minds. Realtors often refuse to represent such reluctant homeowners, knowing that they are not likely to persuade them to reduce their prices and realize their losses.

I think what sets selling a house at a loss apart from selling stocks at a loss is that usually there’s a mortgage involved with a house. If you have a house with a $100,000 mortgage, it would be tough to sell it for $90,000 unless you had $10,000 cash to pay off the rest of the mortgage. My point being that I don’t think people have prices set in their minds but have a “balance sheet” set in their mind and know how much they need to sell their house for in order to make themselves whole.

Taking a house off the market because you can’t get what you want for it, is perfectly reasonable in my mind.

*Affiliate Link

A friend sent me the following email, asking for my opinion:

Here is the situation:

I have my house that I would like to sell but with the market for selling house the way it is right now it has been difficult to get the amount that I would like to get out of it, which is 75,000. Currently I am at a fixed rate of 8% interest and balance is 65,700. I am seeing interest at 2.99% – 4%.

What I am wanting to know is or would it be better to refinance for the lower interest to reduce my payments and hold off on the sale of the house until the market picks back up or should I just list my house and try and sell with maybe taking less so that I can get out of it.

The only real pressing reason to sell the house is to move to be closer to my husband’s kids and my daughter entering high school (2012-13).

Does this make sense? I think the real confusion for me is seeing the interest rates being so low and a possible loss on house. I think that my realtor said that I would have to pay closing on my house if I sell and I thought she said that it would be 3.5% but I am not sure.

Let me know if this is thoroughly confusing.

Here was my response:

I’m thinking you should sell now and get what you can get for it. Unless…

• You can rent it out while you wait for prices to rebound. This strategy is not without risks. Renters don’t take care of property and a bad renter could leave you with a mess and lots of additional costs. A good renter, on the other hand, could make keeping the house a good idea.

• You think you can sell it for the price you want ($75,000) in one or two years. Using $65,700 as the baseline, to get to $75,000 in one year implies a return of 14%. If you can’t sell for two years, the “return” drops to 7% and to 5% if you can’t sell for 3 years.

Refinancing, due to closing costs, is only a good idea if you intent to keep the house for at least 5 years (that’s the general recommendation). If you decide to rent it out, then refinancing may not be a bad idea. According to my numbers, if you refinance the balance (plus rolling in 3% closing costs) at 4% for 25-years, your payment would be $357 per month (not including PMI, which you will probably need since you are financing 90% of the value of the house).

If you go the sales route, you’ll need to get $72,500 for the house in order to get enough to pay off your existing loan. I came to that number by taking $72,500 and deducting 9.5% for sales commissions and closing costs.

I hope this helps you in your decision making. Good luck.

Thoughts? Are you facing a similar situation? What’s your game plan?

Here’s today’s Question of the Day:

How much did your health insurance premiums go up this year over last year?

Our premium went up 9.07% over last year. The trend over the last ten years was much higher, as you can see from this graphic:

I’m not sure what happened in 2008 to cause premiums to jump over 100%. I’m just thankful my wife’s company pays 80% of the premium. I don’t know how long that will continue but I’m thankful for it while we have it.

What about you? What kind of premium increases are you seeing?

Have you ever wondered how your employer calculates your federal income tax withholding on your paycheck? The calculation’s not that hard to figure out if you have the right information. You can use an online withholding calculator from the IRS (NOTE: the IRS calculator does not reflect 2011 changes) or you can run the numbers yourself, which I’m going to cover here.

To perform the calculation yourself, you’ll need the following information:

• W-4, which shows your exemptions. You might have to call your Human Resources Department to get this information. It’s not a bad idea to update your W-4 annually. Remember, the more exemptions you take, the less that will be withheld from your paycheck each period. Your goal should be to get the amount withheld as close to the amount that you will owe when your taxes are due.

• Your pay rate, frequency, 401(K) contribution amount, health insurance, dental insurance, flexible spending account contributions, and any other before-tax contributions.

IRS Publication 15 (mainly page 35 and the tables that follow).

The first step is to determine the value of your withholding allowances. You’ll first need to know the number of allowances you are claiming. Once you know that number, you’ll need to look at the chart on page 35 of Publcation 15 to find the value of each withholding allowance, based on your pay frequency.

So, if you are married, have four exemptions and you get paid semi-monthly (24 times a year), your allowances are worth $154.17 each or a total of $616.68.

Let’s say you make $6,000 per month ($3,000 per pay period). You contribute 10% to your 401(K), pay health insurance premiums of $300 per month, dental insurance premiums of $100 per month, and you contribute $100 per month to your flexible spending account. All of your pre-tax deductions amount to $1,100 per month or $550 per pay period.

Now to calculate your withholding per pay period, simply take your $3,000 in earnings and subtract your $616.68 in allowances and your $550 in pre-tax deductions, giving you a taxable amount of $1,833.32. You then look up the withholding amount, using Table 3(b) on page 36 of Publication 15, which looks like this:

You can see that we need to look at the second line down. Our taxable income is $1,833.32, so our withholding tax is $70.90 plus 15% of the amount over $1,038. The difference between $1,833.32 and $1,038 is $795.32. Our withholding tax on that $795.32 is $119.30 for a total withholding tax of $190.20.

The cool thing about being able to figure this out on your own is that you can run different scenarios to see how your 401(K) contribution amount affects your take-home pay. We’ll look at that next.

$8.25 per hour…

That’s the number I get when I divide $16,500 (the 2011 maximum allowable employee 401(K) contribution) by 2000 hours (40-hour work week, 50 weeks per year).

It seems like a lot. Granted, it does not include the tax savings on contribution. The actual dollar amount would be lower after taxes. Still, the amount is pretty high. That’s why this information should be provided to high school and college students. They need to see this information when deciding what career path to take.

These numbers also do not include the company match, which I think you should look at as icing on the cake and shouldn’t be considered in figuring your contributions.

Next, I’ll look at how much the maximum contribution could grow to over a career. Interesting stuff.

One of my facebook friends linked to this article this morning: Illinios Exit Fee. Illinios passed a new tax bill that will add an average of $1,400 in new taxes per family.

I’m not familiar with Illinois’ budget issues (maybe Stacey can help us out with this), so I don’t know if they are cutting expenses at the same time they are raising taxes or if they are just raising taxes. Illinois is under the impression that raising corporate taxes is going to bring in $7 billion in revenue. Things never seem to work out the way you think they will. As the article mentions, Wisconsin and other surrounding states are trying to entice Illinois businesses to relocate.

We shall see…