AskDong

The bulk of my income (98%) comes from my job, however like many other personal bloggers I’m actively concerned with growing my other income streams. Earlier in the year I detailed some methods of making money. These income streams are primarily:

• Rental Properties - I have just one right now, my old condo. (.5%/-6%)
• Interest and Dividends (4%)
• Peer to Peer lending via Prosper (13%)
• And pulling the rear in dollar terms, Blogging (30%)

The number in parentheses is my return on investment for the year. This is the first year I have income from each of these sources. Without question, making money off dividends and interest has been by far the “easiest”, but is also the most difficult one to earn out-sized returns (at least for me).

Rental Property
I reported two number as my return, both are calculated as function of the money I put down (the down payment). The lower number, -6%, reflects that on cash flow basis I’ve lost money. I don’t generate any income on this property as I have to augment the rent I receive to cover the mortgage payment, condo fee, and taxes. The higher number, .5%, reflects increased equity.  Given that a portion of what I’m paying towards the mortgage is applied to the principal, I am in effect also paying myself.  That should count for somethig, though I doubt seasoned real estate professionals would ever count it.

Interest and Dividends
I’ve earned the most money in dollar terms via interest and dividends and expect this will continue to be case in 2008. My 4% return is reflective dividends and interest paid as a function of the amount invested. It does not reflect higher (or lower) stock prices.  I am expecting a dip in dividends and interest in the coming year given the lower interest rates, and the tough economic climate especially as related to banking stocks. Bank stocks are some the best paying stocks out there, but some like Washington Mutual have already cut their dividends. They are amongst the hardest hit companies by the ever expanding housing and subprime crisis. I would expect a dividend cut from many a bank.

Prosper
I haven’t put much money into prosper, only a few thousand, and have been lucky to have had no defaults as of yet. The 13% return is reflective of the total I’ve put into prosper, not just what I’ve deployed which is only 2/3rds of that amount. While it’s still early, I think I’ve been able to keep my default rate fairly low by both being selective on the borrowers I’ve lent to and actually reading each profile in detail.  Even though I’ve been lucky with defaults, I should anticipate that a few of might lons may not pan out, and pre-emptively earmark amount as an expected loss which would reduce my rate of return.  The biggest problem for me is how I approve loans, it’s hard for me to scale as I don’t want to dedicate all my free time bidding on loans.

Blogging
This is the income source I’m most interested in growing.  Not because I think I can earn the most money - the fact I’ve been able to cover my costs has already made me happy. I expect dividends and rental properties will be my primary sources of alternative income later in life.  Blogging however is the one I have the most fun doing, and earning more by it really gives me a great sense of satisfaction. It’s primarily my hobby, and secondly an income earning venture.  That said I’ve made a great return on capital (though not labor) as I’ve spent less than $50 on hosting for the year.  I would still have a computer and Internet connection even if I wasn’t blogging so I haven’t included those as part of my cost.

Congress has made the news in the last couple weeks for it’s inability to fix AMT, the Alternative Minimum Tax.  The alternative minimum tax was established in the late 60s (1969) to prevent the uber wealthy from continuing to exploit the many tax loopholes that existed from paying little or no taxes. Not only were many these tax loopholes closed during the tax reform of 1983, but more critically the levels at which AMT kicks in were never adjusted for inflation.  Because the levels were never adjusted for inflation, the AMT impacts many upper middle class families.

In the last few years, Congress has typically enacted temporary measures preventing the AMT from hitting a wider swath of the middle class.  However as we head towards the end of the year, Congress is split along partyl lines. Democrats want to tie any reduction in AMT revenue with a corresponding increase in tax revenue somewhere else. Republican congressman do not support such proposals, and President Bush has vowed to veto any tax bill that includes any tax increases.  As a result there is deadlock.  Personally I do think if we are going to fix the AMT problem, in the long run we will have to either raise taxes somewhere else or cut spending.  I’d probably prefer a little of both.  While the two different political parties may not agree on the solution, they do agree that something needs to be done. For that reason, I’m hopeful we will have at least another temporary fix by the end of the year. Personally, the AMT does not affect me. Being unmarried and without children, I don’t have quite enough tax deductions to be affected.

So who does the AMT affect? Primarily high income families in high tax states. In essence what the AMT is intended to do is ensure that citizens are paying some minimum level of taxes even after taking allowable deductions. This made much more sense in 1969 when there were numerous and egregious tax deductions that allowed many of the wealthiest families in America pay little to no taxes even though the top tax bracket was much higher than it is currently. The top tax bracket in 1969 was 70% versus 35% today. The AMT was really intended for the richest 155 families who were not paying their fair share of taxes.

So what can one do to avoid the AMT? While in many ways it’s very easy to avoid the AMT, it actually doesn’t make sense on the most part to actively avoid. Avoiding the AMT, generally means avoiding tax deductions. Not having deductions means paying more taxes under the standard tax code. That’s the beauty of AMT, it doesn’t kick in unless it means you’ll be paying more in taxes. An upper middle class family in high tax state with a few kids and a McMansions ends up being hit with the AMT because right off the bat they often have the following deductions (but not limited to).

• State and Property Taxes
• 2nd Mortgages/Home Equity Lines
• Dependents
• Medical Expenses

Other less common but potentially more odious complications are:

• Stock Options - Under AMT you pay taxes on difference between the market price and the strike price at the time of exercise
• Depreciation - This is important for business and property owners who pass depreciation into their personal taxes
• Misc. Itemized Deductions

All these deductions can reduce the effective tax rate below 28% at which point AMT kicks in.  AMT ensures that wealthy tax payers are paying at least around 28%.  Personally, I prefer a more transparent tax code that ensures everyone pays his or her fair share in taxes.  The AMT partially serves that goal, but far from a transparent manner, hence being named the “stealth tax.”  One reason the Government is loathe to solve the AMT problem is that it has basically allowed it to give with one hand and take with the other.  For example the 2000 tax cuts by themselves should’ve been a great boon to upper middle class families, but for many families it just meant they ended up paying the AMT.  There was still a substantial tax cut for the rich, but not as much as advertised for the moderately so.  The key is not avoiding AMT, but ensuring your tax foot print is minimized both under the regular tax code, and under AMT.

The most notable and seemingly arbitrary difference in treatment under AMT versus the standard tax code is related to municipal bonds.  Typically income from municipal bonds are exempt from local (assuming you live from the state the bonds originate) and federal taxes, however income from “specified private activity” municipals bonds fall under AMT while “general obligation” bonds do not.  For example let’s say I held bonds issued by the State ofMassachusetts to construct a new waterfront stadium that gave off income of 100 thousand dollars a year, and had no other income source. Under the regular tax code I would owe nothing in taxes, however under the AMT I would owe almost 28% because a stadium is considered specified private activity.  However, I could’ve easily held instead “general obligation” bonds issued by the state that would not be subject to the AMT.  General obligation bonds are simply debt issued by local governments not tied to any specific project.  The other deductions that are treated favorably under AMT are mortgage interest (on a primary home), and charitable giving.

As has been indicated I’ve been without high speed internet access the last month.  It’s amazing how you miss things when they’re gone. It’s true of people, and apparently High Speed Internet Access.  I was hoping to have been up and running by today as my DSL in service date was yesterday.  However, I’m writing this still connected via by mobile. The DSL is still not working, and am beginning to lose hope that I will be able to get it activated.  I tried two years ago to get DSL without a phone line.  It never worked and I gave up. I ended up having access via Comcast. Now I have DishNetwork and was hoping to try DSL again.  I even got a phone line which I didn’t need, hoping that it would help the provisioning process - it hasn’t. I spent nearly a month trying to work with Verizon to get things to work last time. I’m only going to give them a week this time around and do not have high expectations.  In the end, I may have to switch over to Comcast just for the high speed connection.

1. Dishnetwork + Verizon DSL, Aproximately $75/month
2. Dishnetwork + Comcast High Speed, Aproximately $100/month
3. Comcast Cable and High Speed, Approximately $85/month

I picked option one because it was the best deal, but it’s not much of deal if it doesn’t work. I may be forced to option 2 for 3 months because I’m on contract with Dishnetwork. After my contract runs out, I can then go with option 3 and use Comcast for everything.  I imagine I can find some deals if I do some research this week, but it’s a little harder without high speed.

I set a new record on consecutive daily weekdays posts On Wednesday. I only set it because I broke the streak yesterday when I failed to make a post.  Even though I set a new record, I can say with a clean conscience I’m am not in the Mitchell report.  Like Roger Clemens I have never tested positive for steroids, and unlike Roger my face has never been suspiciously puffy except after eating too much.

I’ve been extremely busy at work this past week, logging about 60 hours over the last 4 days. It’s kicked my ass. In general my work schedule is pretty good. I work 40-45 hours week, basically 9-6. I don’t need to be in exactly at anytime, and can easily take some afternoons off or show up late every so often. However because of the nature of my work, I go through some very busy periods. This past week was one of them, and I can look forward to another stretch of long hours in the few months after the new year. Times like this make me think, it would nice to know that I can be home by 6pm everyday. However then I think about not having the flexibility to sleep in every so often, and am glad that I have flexibility.

What do you prefer?

I eat out alot, more than I’m willing to admit to myself (I am trying to pitch frugality after all). One factor that ends up helping me out is that I tend to eat ethnic, and by a large measure sit down ethnic food is often quite a bit cheaper than American food.  I don’t know why this is exactly.  Though, I do have a couple of hypothesis. Ethnicrestaurants are run by immigrants, and immigrants are cheap.  Ethnic restaurants often cater to immigrants, and immigrants are cheap. Ethnic restaurants employ immigrants, and well immigrants are cheap to hire. Sense a recurring theme? Ethnic restaurants in some weird fashion are able to import some the low prices of their home country to America, hence why only ethnic restaurants of lesser developed nations are actually affordable.  Ever been to cheap french restaurant? Can’t say I have either.  Actually that last bit on employing immigrants - that’s not completely true as almost all restaurants employ immigrants in the kitchen.  So ethnic restaurants are really saving money on paying their waitstaff poorly and that’s why I’ve been trying to tip in cash when I can, to give the waiters and waitresses a better chance at pocketing the tip.

• Chinese ($)
• Mexican ($)
• Indian ($)
• Thai ($$)
• “American” ($$)
• Japanese ($$$)
• Italian ($$$)
• French ($$$$)

I generally eat out for the convenience. I don’t have to prepare the food, and I don’t have to clean up. T hese are two services I’m paying for. Most of the time, I’m not paying to eat better tasting food than what I could make at home. However, that does not mean I don’t want to eat good food.  I do, and from my experience the quality of ethnic food at the same or lower price is better.