AskDong

There’s understandably a great deal of confusion on the subject of inflation and some of it’s measurements, CPI (Consumer Price Index) and core CPI. I think we all know inflation when feel the pinch of it on our wallets. Houses prices have gone up. As have food and gas prices. Yet those prices are not considered a part of core CPI. Funny considering food, shelter, and transportation are the core expenditures for most households.

What we typically think of as inflation is not the same thing that worries the Federal Reserve who is given the mandate to control inflation and keep economic growth chugging along. Inflation as thought of by the Federal Reserve is almost purely a monetary issue. The federal reserve is worried about the inflation caused by too many dollars chasing to few goods and services, and not worried about too few goods and services chasing too many dollars - if that makes sense. So for example if the economy were humming along great, and people and businesses are able to borrow money easily and cheaply this can lead to excess inflation. Easy credit allows more “money” to flow through the economy, and when times are good it leads businesses and people to potentially bid up prices too much as they compete for goods and services.

The Core CPI doesn’t include food and energy products even though for many families these are core expenditures. Food and Energy prices are generally determined more by supply than demand, and the supply of those products are volatile and subject to many external factors that are not inherent to the economy, weather being the most notable. The Federal Reserve tends to look at only the Core CPI values when making monetary decisions. The Fed effectively controls the money supply in the U.S. It has certain tools, most notably it’s ability to set the discount rate (the rate it allows banks to borrow from it) to control the money supply. The other tools are: Open Market activity (i.e selling Government Bonds and therefore creating new “money”), and determining the reserve requirement (the amount that Banks needs to hold against deposits that cannot be lent out).

The other big problem with inflation as measured by CPI and and most measure of inflation is that the index relies on a basket of goods and services. While the government takes a scientific approach to this problem, inherently this is a bit of subjective problem. Should the basket of goods be the same as the basket of good from 1880? I think that’s where many including myself unduly blame the CPI for being understated measure of inflation. The CPI certainly does have problems, but it’s inherently difficult to capture the lifestyle creep of the last century that is pervasive in American society. We don’t just pay more for stuff, we pay more for more stuff.

I realize it’s a bit late in the year for me to be doing my recap of 2007 of expenses, but better late than never. Besides this way it’s actually closer to being a year away from last year’s report.

While I actually had more details of my expenditures this year compared to last year, I decided to simplify what I actually report in the blog. Mostly, I wanted to remove savings from the report.  While I actually feel like savings is one of the most important “expenditures” there is, I also feel the least comfortable reporting it.  For that reason I also removed charities and gifts as a category.  However, another reason I decided to remove savings as category is that I want my monthly investment performance report (admittedly very much a work in progress) to be the reflection of how I’m saving and investing. This report really is a report of how I SPEND my money.

For those who know me there should be no surprises here.  My biggest expenditures are Dining Out/Entertainment, Vacations, and Rent in that order.  In actuality the number for Dining Out/Entertainment is somewhat exaggerated because I’ve put all cash expenditures into that category. I don’t track cash expenses.  I switched late last year to using my credit card almost exclusively for all purchases big and small, and as result that number will be increasingly more accurate.  That said when I do use cash it’s almost always for food or drinks anyways.

Here’s a look of my expenses by month.

I’ve expressed each category per month as a percentage of the annual total. As you can see, there’s quite a bit volatility month to month.

My girlfriend asked me help pick a 529 plan for nephew and niece. While I was already familiar with 529 plans, I had never done a whole lot of research into them. The basics of my 529 knowledge consisted of:

• Contributions to 529 plan grow tax free as long as the money spent in on higher education spending
• Some states make contributions to in state 529 plan tax deductible (for state tax purposes)
• Each state have different plans and different plan administrators

Beyond those three facts, I didn’t and still don’t know too much about 529 plans. That’s probably because I don’t have children, nephews, or nieces that I would want to open plan for. However I did some quick research a learned that Utah, Michigan, and Ohiohave good plans and low cost fund selections.

• Utah - Vanguard
• Michigan - TIAA-CREFF
• Ohio - Vanguard and Putnam Funds

For my girlfriend it makes sense for her to open an account with any of the above. Massachusetts does not offer and state tax deduction for contributions made to a in-state 529 plan. However since my girlfriend was looking to combine with the other aunt (her other sister) to open two different accounts, one for the nephew and one for the niece, it actually made sense to open one account in Virginia. The other aunt lives in Virginia which makes 529 contributions tax deductible. Even though the beneficiary of the 529 is out of state, the deductibility of the contribution is only determined by the residency of the contributor. Well at least according to what I read in the Oregon 529 FAQ.

With health care reform in the air because of the current presidential primaries, I thought I would explore the Massachusetts Healthcare Plan which some candidates past (Romney) have touted as the solution for all of America. Health care reform is something I feel strongly about and an issue that is both complicated and confusing.

The highlights of the Massachusetts are:

• Individual Mandate - Forces individuals to pay for insurance or impose a fine that’s nearly 50% the cost of insurance
• Subsidized Health Insurance for Low Income Earners ($29,400 for Individuals and 60,000 for a family of four)
• Penalties for Employers who fail to offer insurance to employees
• A government run marketplace for private individual and small group insurance - The Health care Connector

The Massachusetts plan is a hybrid private/public solution. It uses the legal power of the Government to mandate that both individuals and employers contribute to sharing the cost of health care either by purchasing insurance or penalties if insurance is not chosen while still allowing consumers choose specific plans offered by private insurance companies. It shifts some of the monies that have in the past gone directly to paying for the cost of caring for the uninsured towards subsidies for individuals to help pay for health insurance.

I thought I would shop for a plan and compare it to the plan I currently have via my employer. The Massachusetts’s Health Connector effectively breaks the plans into three categories; Bronze, Silver and Gold

• Bronze - Smaller Network, Low Payments, Higher Co-payments and Deductibles
• Silver - Moderate Co-payments, and higher Deductibles than Bronze plans and smaller networks than Bronze plans
• Gold - Comprehensive Network, Low Co-payments, No Deductibles

While I personally would most likely opt for a Bronze plan with the higher out of pockets costs, I would actually prefer higher out of pocket costs and a comprehensive network. This is not an option. This is no great loss, however since people like me generally already have insurance through work - which I do.

I compared three different plans, one from each category.

• Bronze, Neighborhood Health Plan, $201.30 Monthly Premium,  $2,000 Deductible, $5,000 Max, $25 Doctor Visit, 20% co-insurance on lab tests
• Silver, Advantage HMO Select 750, $271.50 Monthly Premium, $750 Deductible $5,000 Max, $15 Doctor Visit, lab tests covered under deductible
• Gold, Blue Cross Blue Shield, $526.90 Monthly Premium, No Deductible, $10 Doctor Visits, lab tests are free

These plans are not cheap, but like many fortunate Americans, I don’t actually know if these plans are expensive. I have never shopped for health insurance. I’ve always had insurance through work, and as a result have had no reason or option to shop around. For comparison my insurance has no deductible, $1,250 Annual Max I pay out of pocket, and $25 Doctor’s visits.  While I know I pay approximately $200 from the “flex” dollars I get as part of my benefits package, I actually have no idea what the total cost that is actually paid by the company.  One reason insurance and health care is so expensive is neither the cost of insurance nor the cost of health care is transparent.  I don’t know what insurance costs, and I definitely don’t know what lab tests cost.  Neither doctors or individuals are given incentive to minimize costs.

I think part of this lack of transparency is related the employer paid nature of health insurance. Why is health insurance tied to an employer, and full time employment for that matter? That linkage has increased the incentive for employers to prefer temporary or part time workers over full time employees. While I think that companies and individuals should share the social burden of health insurance, it would be much simpler to do so via a payroll tax (while potentially cutting other taxes) to help insure the uninsured. I also believe if we let individuals not only pick and choose their insurance but give them actual exposure to the cost of care, lower prices would result. This was the hope in Massachusetts, but it has yet to happen. The road to sustainable universal health insurance is a long one, and one that will require tinkering. Not everyone will get everything they want. Those who already have quality care may find waiting times for appointments may go up and we will probably have to accept that universal care will not truly cover everyone for everything.

I’ll be eating in for the next couple weeks I believe.   I splurged for Valentine’s Day, and took my girlfriend to what ended up being one of the most expensive meals for two I’ve ever had.   My girlfriend deserves it, and I would be less than honest if I didn’t admit that I wanted to try this restaraunt, O Ya.  We ended up getting the tasting menu, and a moderately priced bottle of wine.    The tasting menu consisted of 14 courses.   Given that most of this was Sushi, 14 courses isn’t quite as much as it would initially sound like.   The sushi was also very different from what I typically think of as Sushi.  No wasabi.  No soy sauce on the table.   Each sushi came with it’s own unique sauce.  The food was excellent.  Was it worth the couple of C notes that I ended up paying is always hard to say?