Our budget deficit woes will end up making tax increases inevitable. We are far too deep in debt to grow our way out of the problem. In addition, our deficit has become too large for spending cuts alone to fix the problem. The day of reckoning is approaching faster than anyone had imagined before the financial crisis hit.Simply put, higher income taxes are a drag on economic growth. They take money away from private investors and put it in the hands of government. We know from history that governments are poor allocators of capital. Government operates at a much lower level of productivity than the private sector. Government expenditures, unlike private businesses, have a flat to negative multiplier effect on the economy. The historical data was outlined in This Time It’s Different by Reinhart and Rogoff. In comparison, the private sector generally has a positive multiplier effet on the economy. That is, each new dollar invested by businesses and investors will boost economic growth. Government expenditures, on the other hand, drain money out of the economy. Tax increases often follow financial crises. This is because a financial crisis leads to bailouts of multiple companies, usually banks. Governments tend to borrow a big portion of this money, thus raising the budget deficit. In addition to bailouts, government expenditures also rise from economic stimulus programs. This is because a bad recession almost always follows a financial crisis. At the same time, tax revenues drop after a financial crisis because individuals and businesses are making less money; thus, having less taxable income. This is why banking and financial crises result in a downward spiral. In the end, deficits have to be dealt with. Governments try to fix budget problems through inflation, reduced spending, and tax increases. Tax increases often fail because they lead to slower economic growth or could possibly trigger another recession. The result of the tax hike is even lower profits for businesses and less income for individuals. Therefore, the intended tax increases can generate less tax revenue for the government. In some situations, this only makes the problem worse.
Markets correct themselves over time. After periods in which too much supply was dumped on the market, depressed prices lead to an increase in demand. This has been reflected from the fact that foreign buyers are buying properties with cash in the most distressed markets. And population growth has help absorb the excess inventory. Real estate is now in line with historical prices in many localities. This will help create a bottom in the market going forward.In most US markets, the excess inventory has slowly been getting soaked up over the last five years. If you were a homeowner during this span, you realize how painful it has been. On a more positive note, buying a home is very affordable. In the most distressed areas, it’s considerably cheaper than renting. This situation usually only occurs in distressed markets and the opportunity will not last forever. This good news does not imply that housing will immediately rebound and prices will start going up. They likely will go up in price over a long period of time. And real estate is a good long term inflation hedge. However, we are still in a period of deleveraging. This means that many consumers have too much debt and are slowly paying it down. This will be a drag on our economy for a while yet. Deleveraging is a process that takes years to complete. Deleveraging is the main reason why it takes such a long time to recover from a major financial crisis. The one thing that can speed up the deleveraging process is liquidation. Bankruptcies and foreclosures can clean up a person’s balance sheet quickly. Obviously, there is a huge drawback to this. If too many people liquidate at the same time, bankers and creditors will also suffer and perhaps go bankrupt. This creates a downward spiral and leads to financial crises and panics. Although liquidation gets us through the debt problems more quickly, the pain is much sharper. Record low interest rates make buying a home a great bargain for new homeowners. This is a big part of why buying is so much cheaper than renting in many markets. Low interest rates aren’t likely to last forever. They could be around for a while as it’s impossible to predict when they will rise. The Federal Reserve has announced that they will keep interest rates low through 2014. When inflation inevitably rises, they will have no choice but to raise them. Inflation will likely rise once we get to the end of the deleveraging cycle.
Design is a huge factor in determining how successful your workday is. It determines how much you are able to get done as well as how effective you are at reaching your goals. Working smart is obviously much better than working hard.In a world of information overload, we are always multi-tasking and have too many things that are considered a high priority. The problem with this is that we can only handle a couple of high priority things at any given time. If you have more than a couple of projects that are considered high priority, then you cannot be effective at successfully achieving all of them. If your priority list is very long, you should kill a few projects or temporarily narrow down your list. In large corporations, workers are generally given too many projects. Each project is classified as being extremely important. An employee seldom says no even when he or she understands that it’s impossible to complete everything to his or her best ability. In this case, there are generally two choices. First, you can complete every project with none of them being great products. Or, you can do a great job on one or two of them with the rest either not getting done at all or finishing late. Your manager will try to squeeze every drop of productivity out of you, but there’s always a limit. Let’s say that you have two projects that are critical to your success. Anything else is either irrelevant or is just an action step toward achieving that goal. Large projects should be broken down into steps and milestones. This helps keep you on track. And successfully meeting objectives will help motivate you to go ahead and complete the next step. Your workspace should give you comfort and should not make you feel like you’re going to prison everyday. Cubicles are a productivity drain and are not human friendly. If you can design your workspace to have a degree of inspiration, the quality of your work would improve. Perhaps there’s a couple of tasks you generally find boring because they are redundant or require very little thought. In addition, you procrastinate on them because of this. You can take your laptop to a coffee shop and finish the task there. This will help because being at the coffee shop makes the experience more pleasant. Once you get a grasp on how to prioritize effectively, you need to allocate distraction free time to get it done. This can be really difficult. We have cell phones going off, email messages popping up, and people walking in the door assuming we’re working in a public place. The real issue lies with the fact that a single distraction will interrupt our flow. During a critical focus time, a single interruption can completely throw us off. Then, we have to spend at least 5 minutes or longer just to get back to where we were. Having said that, you need to figure out a way to get yourself some distraction-free time. For many people, this can be early in the morning. For example, if you get to work at 6 a.m., there are few, if any, other workers in the office. No one is there to distract you. When everyone else comes trickling in, between 8 and 9, you will already have 2 hours of productive work done. Compare this with the fact that most employees only deliver about 2 hours of quality work per day. This is because of things like distractions and meetings. Your coworkers simply can’t get as much done because they are only working during the day when meetings and other distractions are prevalent. By the time they arrive to work, you will have already equaled or surpassed what your coworkers will do for the entire day. The difference being a matter of discipline and workflow design.
The real estate market in Las Vegas continues its extended slump. S & P has reported yet another 8.5% drop in prices, this time covering a period that spans form October 2010 to October 2011. The Vegas area also has an unemployment rate of 12.5% with tons of underwater mortgages.
On a more positive note, those who have a mortgage owned by Fannie Mae or Freddie Mac may be able to refinance even with an underwater mortgage. You may not get the principal reduced, but you may be able to reduce your monthly payments considerably. See our video below.
Because the current market prices haven’t been seen since the 1990’s, home prices are now cheap from a valuation standpoint. Prices are now in sync with people’s incomes. Record low interest rates allow you to get into a home for a very low monthly payment. Because of low prices and cheap borrowing costs, buying has become attractive. It’s also important to note that this is one of those rare periods in which renting is more expensive.
Going forward, the economy appears to be merely muddling along. There is no strong recovery in sight for the Las Vegas economy. Vegas is still far too dependent on gaming and tourism. It will take years for new businesses to ultimately absorb the excess capacity of workers and grow the economy.
We’re simply not going back to 2007. Other state and local governments are struggling financially also. Many of them will attempt to boost revenues through more lotteries and gaming. This makes them a direct competitor to Las Vegas casinos. We have already seen that gambling revenue is an increasingly smaller share of casino profits. Casinos are forced to offer more in the way of shows, shopping, and dining to keep luring people to travel to Las Vegas.
In the long run, the Las Vegas economy needs diversification. The era of being dependent on a single thing are long over. On a positive note, Nevada is a very business friendly state. Barring any drastic change to the state’s tax system, Nevada should be able to attract many new businesses to the area.
The maximum amount on earnings subject to Social Security taxes has increased to $110,000 for 2011.
For business use of your vehicle, your deduction is 51 cents per mile for driving done before July, 1, 2011. You deduction is 55.5 cents per file for the mileage driven from July 1 until the end of the year.
For medical purposes and moving expenses, you mileage deduction is 19 cents per mile for miles driven before July 1, 2011. From July 1 until the end of the year, the standard mileage deduction is 23.5 cents per mile.
For all mileage for charitable purposes, your deduction is 14 cents per mile for the entire year.
Reporting Capital Gains & Losses
You must now use form 8949 to report your capital gains and losses. You totals will then get reported on Schedule D.
Alternative Minimum Tax (AMT)
Alternative minimum tax has increased to $48,450 for single individuals, $74,450 for married filing joint, and $37,225 for married filing separate.
The deductible amount for each personal exemption has increased to $3,700 for 2011 returns.
Federal Income Tax Deadline
The deadline to file your 2011 tax return is April, 17, 2012. This is due to the 15th being a Saturday and 16th being a District of Columbia holiday.
Medicare taxes have increased for high income earners. For an individual making over $200,000, he or she is required to pay an additional 0.9% tax for any wages earned over that amount. For married couples, the extra tax will be due for wages over $250,000.
Credits for energy efficient home improvements has dropped for 2011. The credit is now 10% of the item’s cost with a maximum of $500 (was 30% with a maximum of $1,500). In addition, you must be careful because there are lower limits on individual items.
The American Opportunity Credit has been extended until the end of 2012. This credit offers undergraduates tax credits up to $2,500 of the first $4,000 of education expenses. You may be able to receive 40% of this credit even if you have no tax liability. The credit is phased out for individuals making over $80,000 or married couples making over $160,000.
If you are underwater with your mortgage (doesn’t matter how much), you may be able to qualify for a refi. This is for loans that are owned by Fannie Mae or Freddie Mac. Even if you make a payment to your bank. The loan had to have been put in place before June 1, 2009. You must also be current on your payments.
If your bank still services your loan, it may NOT own it. In fact, banks often collect the payments and service the loans long after they sell the loan to Fannie Mae, Freddie Mac, or another investor. Don’t assume the company in which you make your payments to owns your loan. In addition, you’re better off not calling your bank directly because the customer service rep may be clueless about whether or not your loan is still in the original lender’s portfolio. Not to mention the fact that you’ll be on hold for a long time. This is why you need to look into who actually owns your loan to see if you can qualify. You can do this by checking the Fannie Mae and Freddie Mac websites.
Here are the links to the Fannie & Freddie websites:
Once you have done that, you can go on to the next step. If your loan is indeed owned by Freddie or Fannie, you can look at what your refinance options are. That is, you can calculate how much it would cost to do the refi and how much money you would save each month. If your loan is small (under $100k), you may not stand to save a whole lot as the fixed costs of refinancing would not make it worth it. The higher the loan balance, the more money you can potentially save.
HARP II could result in less foreclosures in distressed real estate markets such as Las Vegas. This will keep housing inventories lower in the short run as homeowners will be able to make lower monthly payments, which will keep them in their homes longer.
This doesn’t mean that the market will turn around in the near future, however. There are many foreclosures in the pipeline as many conventional loans will not qualify for refinancing. This program is set to begin in March and will have some impact on the market.
Although it won’t be a miracle cure, it will have an impact on keeping the shadow inventory lower for a period of time. Many of the homeowners that were on borderline as to whether or not they would walk away from their home will now lean towards staying in the home. This will be good news for the most distressed markets.
“When everyone thinks alike, everyone is likely to be wrong.”
— Humphrey Neil
Simply put, the best investors are contrary thinkers. It pays to be contrary. Investing with the trend only gets you caught up in financial manias and bubbles. Human nature is what causes us to replicate the thoughts and actions of others. Despite the achievements in technology, human psychology has remained constant. Because of this, we still have the boom and bust cycle which is no different today than what it has been throughout history.
It makes little sense to copy what everyone else is doing when it comes to investing. If everybody is chasing a single asset class, that asset class has to be overvalued. When everyone was buying dot com stocks, other assets, including precious medals and other commodities, were ignored. This demonstrates that the best time to buy something is when nobody is talking about it.
Over time, these cycles repeat. A bull market begins when savvy investors begin buying an asset that is unloved and has been forgotten about. The first stage of a bull market flies under the radar and gets little to no media attention. As that asset class gets more traction and eventually shows a track record of rising prices, it attracts more investors and more media attention.
Eventually, a third stage unfolds. The real mania begins once that asset price has passed it’s fair value yet investors keep pouring money into it. You see magazine covers showing it off and it’s on CNBC all day. When that happens, it is a bubble and you should lay off of it. The day of reckoning will eventually come and the price of that asset will usually drop by 70% or more.
If you’re like most people, reflect back at your own history with mutual funds. As the saying goes, mutual funds do really well until you put your own money into them. This is true among the best performing mutual funds. This is because a mutual fund’s assets are in that third stage when you buy it. Otherwise, it would not have had the track record of being a top performer.
A mutual fund that has a great ten-year track record most likely holds assets that were undervalued when the fund manager first bought them. Over time, they kept rising in price until they were overvalued. At that point, those funds are featured in every magazine, on every financial website, and other media sources. If you choose to buy that fund, you either think it can continue going up while holding the same assets. Or, you think the fund manager is savvy enough to sell one set of assets and invest in another while getting the timing right. History suggest this is highly unlikely.
One of the most frustrating things is knowing when a bubble has peaked. When you get to a point at which prices seemingly couldn’t go any higher, they double. This is usually how it goes. Meanwhile, you hear from family and friends who claim they are making tons of money. And you realize you’re wasting your breath by explaining that a bubble is about to burst. At the same time, you don’t have 100% trust in your own judgment and are tempted to jump in yourself. Prices never get so high to the point at which they can’t go higher. On the same token, no boom ever eludes a bust.
For instance, consider gold prices. Many of the talking heads in the media are declaring the end of the bull market for gold. How can they be so certain? In previous bull markets, gold prices dropped 30-50% at certain points. After that, the bull market resumed and then doubled or tripled in value. In real estate, many people were calling for a bubble as early as 2002. In many localities, prices more than doubled from there.
If only it were that easy to buy low and sell high. It’s such a simple concept yet so few can pull it off.
When it comes to filing income taxes, you often see all the advertisements that claim that you can get your tax refund instantly or within 24 hours. This really isn’t true. In fact, the IRS will not release an income tax refund until at least 10 days after it has accepted it electronically. These fast refunds are, in fact, not refunds at all. They are temporary, high interest loans made by a financial institution. Once the IRS releases the refund, the financial institution gets paid back. Many people who get refund anticipation loan products don’t realize they are getting a loan.
Is this a scam? Well, that depends on what your definition of a scam is. This is similar in structure to a payday loan. They are temporary loans that don’t seem to cost very much. However, when you annualize the cost of borrowing, they are a complete rip-off. Payday loans and automobile title loans are illegal in some states because they make no financial sense whatsoever. To someone who is getting a refund of $3,000, an extra $200 for filing a tax return seems like it’s chump change. The real problem is that the people getting these loans are those who can least afford them.
Most people who get these loans are people who are married with children or are a head of household. Because they struggle financially the entire year on a small income, their tax refund is the largest amount of money they will see for the whole year. Generally, those who are not used to having that much money at once manage that money poorly. Once they obtain that refund check, it’s usually gone fast.
Much of this money comes from earned income credit (EIC). EIC is a refundable credit that is intended to aid low income earners with dependents. This is structured badly. Instead of allowing people to get this money as a single lump sum, it should be structured that this money gets paid out in installments throughout the year. There is an advanced earned income tax credit program in place that enables this, but very few taxpayers get it because they want that large refund check every year. That being said, requiring the installment payments would accomplish a couple of things. First, those getting EIC would not get the high interest loans.
Second, more of the EIC money would be used for the program’s intended purpose. Most people who get a large tax credit from EIC will spend the money on a new car, vacation, or other non-essential item. The intended purpose for this program was to help low wage earners put food on the table and pay rent. By dividing EIC payments into installments, a bigger portion of that money would be used for what the program was created for, leaving less money for non-essentials and banks.
There are multiple ways in which you can raise your income. The most often pursued route is trying to get new customers. Most people think this is the only answer. First of all, it isn’t. Secondly, it’s one of the more difficult ways of raising your income. Getting new customers generally has substantial costs whether it’s money paid in advertising or time spent networking. Although you should always put effort into getting new clients, there are other options that are easier for increasing profits.
One of these is increasing the average transaction value. This partly involves raising prices. Many business owners are hesitant to do so. However, you need to look at the value of the product or service in which you are providing. Also, look for items that complement the product the customer is buying. For example, McDonald’s raises the average transaction value by supersizing. That is, asking customers if they want to get a larger soda and more fries. Look for creative ways to do this with your business.
Over time, you should develop a system for selling back-end products. These are products that aren’t your main product or service. They may be complements to main products. Or, they could be a product or service you introduced that are fairly similar to your other products. You were able to produce this product using the expertise you developed with selling your main product. Many of your best clients will be willing to buy back-end products from you.
Another technique involves increasing the frequency of customer purchases. The easiest customer to get is the one you already have. It has become a popular cliche. Yet, it has always been true. With this strategy, you can offer more promotions and discounts to your existing customer base.
You should also be active in generating referrals from your best customers. Generally, the top 20% of your customers generate 80% of your revenue. This does not just come from them buying directly from you. It also comes from them happily telling their friends and acquaintances about your business. To take full advantage of this, make sure your customers understand the benefits of your services. If you’re a tax professional, show your customer how he/she is saving money on taxes. These techniques should be leveraged simply because they are much less costly than the expense of getting new customers.
Liquidity is one of the most important factors when deciding on how to manage your financial assets. Tough economic times are usually temporary. During times like these, you should err on the side of caution and have plenty of liquid and non-volatile assets. This does not mean you need to turn into a gold bug. However, when deciding to pay down your mortgage, think twice. Should you need access to that money within 5 years, you should find a more liquid investment for your capital instead and keep making the minimum monthly payments.
The equity in your home is not liquid. This means that you simply cannot withdraw and use it anytime as if it were money in the bank. You must plan for the unexpected. You should always maintain some liquidity because there will inevitably be times in which you need cash fast.
There was a time where people believed that equity was almost equal to cash. In a healthy market, you would indeed be able to refinance or sell quickly to extract your equity. This is not the case anymore. It is much harder to quality for a refinance even if you have positive equity. Your credit must be very good and you need to prove your income has been steady for the last few years. In the current environment, you cannot assume that all of your home equity is readily accessible.
When the economic environment is good, people seldom need cash. And cash is much easier to borrow. This is especially the case when asset prices are rising. When the economy is contracting or at stall speed, it is a different story. Lending will often seize up and the capacity you had to borrow will also be gone. Most people take this for granted during the good times.
The harder times generally present the best opportunities. The real catch is that they are difficult to take advantage of. For example, real estate is a great buy in many regions today. At the same time, how many people can afford it right now? How many people are lendable especially for investment purposes? So, despite the enormous opportunities that exist, they are out of reach for many. The statement that bear markets present great opportunities for investors is only a half truth. This is only true to either a new investor or an investor that is buying that asset class with no prior holdings of it. This also assumes that you both have the ability to recognize the opportunity and the means to be able to afford it.
A cynic usually says that a bank will only lend you money when you can prove you don’t need it. This has been quite true at times.