I have been neglecting some of the supporting pages on this blog, so I spent some time tonight freshening them up:
Everybody says up, right? While I can’t predict the future, I thought it would be interesting to see what the historical tax rates were for different income groups. Here is some data taken from the Congressional Budget Office about historical federal tax rates as a percentage of “comprehensive household income”, defined as pretax cash income plus income from other sources like rental income and dividends. Note that this isn’t the same as your marginal income tax rate, which is the tax rate on your last dollar earned; This is a percentage of all your income.
As a reference, here are the quintiles for annual household income as defined by the US Census Bureau in 2005:
1st Quintile: $0 – $18,500
2nd Quintile: $18,500 – $34,738
3rd Quintile: $34,738 – $55,331 (Median: $46,326)
4th Quintile: $55,331 – $88,030
5th Quintile: Over $88,030
Looking at the chart, it seems that the top quintile has paid about the same amount overall, while the overall effective federal income tax rate has actually fallen for the rest.
Now, what about social insurance payroll taxes that go towards Social Security and Medicare? These have been going up over time for just about everybody:
I even added a linear trendline, which although completely unscientific, suggests that if such a trend continues the effective percentage will increase approximately 1% every 20 years.
Whew! I’ve slept in seven different beds so far in the last two weeks, not including airport lounges. How about some updates?
The Big Move. Sadly, we no longer in Oregon. We are leaving a great city, great food (tachos and microbrews!) and even greater friends. Luckily, we managed to secure a very generous relocation package from our employer, complete with full-service movers that packed almost everything for us, from the dishes to the furniture. The bad news is that we had a lot less incentive to properly shed ourselves of all our clutter, and instead it’s coming with us. 🙁 I’m keeping our exact location vague for privacy reasons, but I’ve hinted before that it has a high cost-of-living and is near the Pacific Ocean.
New Digs. We are actually going to be staying in a relative’s extra rooms for now. We have been living out of suitcases for a while now and it has actually been nice, so the plan is to keep living as such for as long as we can. If we don’t find any acceptable houses to buy, we will then start to look for another house to rent. Our biggest problem currently is trying to convince our relatives to accept money from us!
New Jobs. Soon after we arrive we will be starting our new jobs. Again I won’t name our employers, as sharing detailed financial information anonymously online is one thing, but sharing them with co-workers is another. I will reveal that we will now both be making six-figure incomes, and they are in categories listed in my six-figure salary survey results. Accordingly, you will be seeing a boost in our monthly net worth changes.
I’m 29 years old now. I know the number shouldn’t matter, but I’m sort of happy that all these things have happened before I turned 30. We are not millionaires or anything spectacular, but we are settling down somewhere for the long haul, surrounded by family, gainfully employed, and moving forward. What more could one ask for?
You go on at $50,000 trip touring the world by private jet. One of my oldest (and obviously, most successful and busy) friends is actually doing this next year, the deposits have already been sent in.
Join National Geographic on an unforgettable expedition, traveling in ease and comfort by private jet. While circling the globe, explore the world’s most treasured and legendary natural and cultural wonders. Visit Peru, Easter Island, Samoa, the Great Barrier Reef, Cambodia, Tibet, India, Tanzania, Egypt, and Morocco on this once-in-a-lifetime adventure.
* Meet with National Geographic Explorers-in-Residence Meave or Louise Leakey in Tanzania and Dr. Zahi Hawass at G?za.
* Explore 12 UNESCO World Heritage sites, including Machu Picchu, Angkor Wat, the Taj Mahal, and the Pyramids of G?za.
* Discover Easter Island’s giant moai statues and famously lost culture with resident archaeologist Edmundo Edwards.
* Delve into the natural world on game drives in the Serengeti Plain and while snorkeling in the Great Barrier Reef.
This is me being jealous green with envy. 
Think you spend too much on pet products? Read this post about pampered pets at The Digerati Life first, and then make your decision. Got neuticles?
JLP at AllFinancialMatters discusses when you should start taking Social Security benefits. I think Social Security will be around when I retire, but I think it could very likely be restricted to those with little or no savings.
GetRichSlowly mentioned a post on Jalopnik talking about the best cheap beater car for non-car folks. This caught my eye because now my new idle fantasy is to buy a $1,000 car and learn how to drive a manual transmission.
All this talk about converting free Membership Rewards points into cold hard cash got me to thinking – how much do you net after fees, and which stores have the gift cards or certificates with the highest resale value? My initial guess was that stores that everyone shops at (Wal-mart, Home Depot, etc.) would be the easiest to resell, while the higher-end boutique shops might be tougher due to a smaller customer base and less bidding frenzies.
I decided to test this hypothesis by looking at eBay’s archives. Here was my not-statistically-sound-but-let’s-just-try-it methodology – I took 10 recently completed auctions for each store’s gift cards, taking a variety of gift card values and different sellers. I would then take 5% off the average ending bid to estimate eBay auction fees and then calculate the net resale percentage (ignoring shipping since at most it would be a stamp):
Results
Instead of doing every store under the sun, I tried to take a small sample of different types of stores. Even with only 10 data points per store, the cards often sold in a tight price range, with the relative standard deviation of this small sample size being about 2%. The results are on the right.
As one might have guessed, Amazon.com has the highest resale value, as you can easily spend it online, and they sell everything from groceries to bedding to electronics. Big Box stores Target and Home Depot followed closely behind. Surprisingly, even with a limited presence and fancier products Crate and Barrel also did quite well. My theory behind this is that people tend to spend a lot of money there, so people can buy a bunch of gift cards online, combine them, and still save a large amount – 12% off of $1,000 is $120 saved.
The worst performing out of this limited sampling was Gap. Pottery Barn, Banana Republic, and Old Navy also hovered about the 80% range. Some specialty stores had very few completed auctions, so I skipped them.
Which are good bets for each Rewards program?
Not every points systems offers gift cards to the same stores. Here are my favorite conversions (all 10,000 points = $100 Gift Card):
Starwood Starpoints » Amazon.com Gift Cert.
Citibank ThankYou Points » Target Gift Cards
AmEx Membership Rewards » Crate and Barrel/Home Depot Gift Cards
You can find $100 bonus offers all three of these points programs here.
Keep in mind though, that this is assuming that you aren’t going to convert to other things like hotel or airline rewards. Free flights can also be sold for cash, especially if you have enough to redeem for a business or first class ticket. This can be worth 3-7 cents per mile depending on the route and if you sell directly or through a broker. More on this somewhat tricky practice next.
If you run a business, even if only on the side, you still want to maximize the interest earned on your idle cash. Technically, if you’re a sole proprietor you can simply use a consumer high-interest savings account as there is no legal distinction between you and the business, but for accounting reasons it may be a good idea to separate the two. If you have an LLC or corporation, keeping your personal and business transactions separate is even more important.
While looking for a business-specific savings account, my criteria was a little different than before. I don’t mind rate-chasing a bit with personal accounts, but given the careful accounting records I need to keep, I wanted an institution I could stay with for a long time. Therefore, I was looking for (1) a consistently good rate even if not necessarily always the best, and (2) a place with good customer service.
After doing my research, I ended up opening a Fidelity Account for Businesses at Fidelity Investments several months ago, and it has been working well for me so far. Although you can buy everything from individual stocks to junk bonds with the account, I just keep use my core money market fund (FDRXX). It is actually a very flexible account, with the following features:
An new option has recently appeared – the Capital One 360 for Business Savings Account, which also looks to be a competitive product:
In a nutshell, the Capital One 360 account is leaner and more simple, but it is harder to access your money. I like being able to keep most of my cash at Fidelity since I can write checks directly from that account instead of waiting for a transfer. I am also getting spoiled at Fidelity since whenever I call I get a courteous and knowledgeable human almost immediately! But I think either one would be a good addition for people currently using a business checking account paying little or no interest.
If I’m missing a great alternative, please let me know in the comments.
[Rates are updated as of 1/13/2010, and are much lower than when this article was originally written.]
At the end of each of my posts, there is the option to subscribe to future comments. It’s not checked by default, but it provides an way to easily follow the conversation. Today, for some reason, some people who were already subscribed to certain posts received updates to unrelated discussions. Since I can’t actually see anyone’s e-mail addresses, I am posting here to apologize. It was not intentional. The whole process is automated, and I believe this event was caused by a bunch of comments being approved all at once after Memorial Day. For those familiar with WordPress, I am using this SubscribeToComments plugin. Please let me know if you have continued issues.
Some random bits:
I got off my virtual tush and participated in some Carnivals this week:
The Carnival of Personal Finance was run by We’re In Debt. It’s organized nicely by topic, and my post on my current bank setup was an Editor’s pick. Woohoo!
The first part of my Zecco broker review was also included in the Festival of Stocks, hosted by the Stock Market Prognosticator.
I’m back from Sin City and I am exhausted. Let’s see what kind of money-related and non-incriminating stories I can tell 🙂
Not quite whales, but… we did stay in the Player’s Room Suite at New York New York.
It’s the ultimate players retreat…our Players Rooms promise to please with a marble entry, two queen-size beds, a whirlpool tub, chaise lounge and magazine table, two TVs, and a bathroom with enticing marble counter tops and enclosed shower and tub. Take advantage of these 700-800 square foot rooms’ winning layouts when visiting with family and friends!
Of course, there were six of us. The sleeper sofa was perfect so we didn’t have to break out the sleeping bags we brought.
I played Blackjack and won over $300 overall. We visited almost every casino on the strip and played a little here and there. I stuck with whatever table was cheapest, either $5 or $10 minimum bets. My actual bets probably averaged $15. I usually do my best to find the table which offer the rules with the best odds, and try to play basic strategy with a smattering of very crude (and probably useless) card-counting. I know that my $300 was a result of luck and not skill, but it was fun as well.
Poker is definitely the new hot thing, with packed tournaments everywhere. I considered entering a $50 buy-in Hold ‘Em tournament, but decided against making a fool out of myself.
My wife also won a big jackpot on the slot machines! She mashed the button and won 1000… pennies. Yep, she played the penny slots. I’m happy for her, but she wasn’t too amused when I said that I just lost that much in one hand while listening to her tell me about her jackpot. 😕
ATM fees were insane. Although I thankfully didn’t need to hit the ATMs, I did check out the fee schedule. Regular ATM withdrawals were $4 inside casinos. Better yet, they also have a feature that I think charges your credit card instead of doing a cash advance. I feel this is because the cash advance limits are usually much lower than the overall purchase limits. The price for this convenience? $12 on a $100 withdrawal.
No coupon runs. The only coupons we used were to get free drinks when we couldn’t track down a cocktail waitress. I’m pretty sure I drank at least five of the worst $1 frozen margaritas ever while down there. Guinness from a bottle on the other hand, is actually pretty tasty. I didn’t hit any celebrity chef temples or non-free shows, although some in our party did get some discount tickets to Ka and Mystere. Garduno’s in the Palms is a good New Mexican restaurant.
Anyways, this should be the end of Vegas talk for a while… Now back to your regularly scheduled programming.
I’m writing this while at the airport on the way to Las Vegas, so please bear with me. The analogies might be a bit of a stretch, but here are some ways I think gambling is a lot like investing… Debate as you like.
Costs matter. If you believe that the stock markets are very efficient, like I do, then the market is already priced with all the information publicly available. Any market moves are in response to fresh news like unexpected earnings report results, which are unpredictable unless you have insider information. Thus, the best you can do is try to match the market. Any costs like expense ratios, fees paid to financial advisors, extra taxes from turnover, or commissions, simply cut into your returns.
Take the house edge in gambling games. Obviously, the best way to keep your money is to simply not gamble. (Or maybe play the nickel slots slowly, tip well, and end up getting drinks for $1 each…) If you do gamble, then you have the chance to win money, but also a chance to lose money in the short run. But over the long run, your chances of winning get very very slim due to that house edge. All you have to do is look around Vegas to see this.
The house edge is like your investment costs. With investing, you try to pick your own stocks or go with actively managed funds which try to beat the market, usually with a significantly higher cost. Over the short run, they might beat the market handily. But over the long run, the odds of your fund beating a similarly allocated lower-cost index fund are very very small. (Not impossible by any means, but small.)
Most people don’t really understand costs. What’s the most profitable game per square foot in Vegas? Slots. What’s the most common game in Vegas? Slots. You see a bank of slots under a sign that says “up to 99% payout!” You know what that means? One of those machines is set to a 99% payout, and the rest are at 80%.
Why does everyone play slots? Lots of reasons, but one big reason is that they are really simple. You don’t need to learn any rules. You mash a button repeatedly. That’s it. But the odds are the worst by far. In fact, you don’t even know the odds. I hate playing the slots (again, except as a tool for getting cheap beers).
Personally, this makes me worry a lot about the self-directed nature of many people’s 401k/403b/TSP plans. Do they really know that they are investing in? The 401k industry seems to rely on the fact that most people just go with the default choice given to them. Few people question their investment choices. I don’t have the article on me right now, but something like 80% of 401(k) holders have no idea what expenses they are being charged on their retirement accounts.
People see patterns where there are none. One brilliant invention of casinos is adding the marquee display to roulette that displays the last 10 numbers hit. If a person sees 6 reds come up in a row, they might think “Oh, it’s due for a black” or “Red’s on a streak”. In fact, it remains an equal chance for red or black. One of my hobbies is listening to people’s wacky betting systems at tables. If there were any such patterns, you can bet people would exploit it greatly for profit.
Of course, Vegas is just entertainment. But losing 1% or more of potential return every year by paying excess costs is huge. Now that I have spouted all this analytical reasoning, wish me luck in Vegas! 😉
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