AskDong

According to my estimates, I will owe taxes next year come April 15th. I will owe enough taxes that I should be paying estimated taxes. I already missed my 1st payment on April 15th. I didn’t forget. I missed the payment on purpose. I had decided that I rather pay the penalty rather than pay the actual taxes. I made this decision because I believed the penalty rate was determined by the short term fed rate. Given that the short term fed rate is currently sitting at 2.75% as measured by the fed fund rate, I figured I would be doing about the same by leaving the money in a high yield savings account.

In my haste I missed that penalty rate is actually the short term fed rate plus 3%. The total penalty is 6% according to IRS.. So today I made my first estimated tax payment. Even if the penalty rate was the lower rate that I believed it to be, I think I might have still changed my mind and made a payment.

I’m no tax lawyer, and am confused somewhat exactly on how the penalty is assessed. In my original post about filing taxes, I stated that a safe way to determine what the safest minimum payment required by the IRS is 110% of the previous year’s taxes. That’s what I’ve chosen to do. However, if I choose not to make any estimated tax payments at all, do I have to pay the penalty on the full amount that I owe? For example let’s say my taxes last year were $1000, and this year I’m required to make estimated tax payments. I can make pay $1100 in estimated taxes even though I know I’ll owe $2000 in taxes. I pay the remaining balance of $900 on April 15th, and still avoid paying a penalty because made payments that were 110% of my last year’s taxes during the course of the year. However, had I chosen not make any estimated tax payments do I owe a penalty on the full $2000 or the $1100 that I was suppose to make? Since I know I’ll actually owe more taxes than my required estimated taxes, I’ve decided not to find out.

I like many other employees I am partially paid in the form company stock. Companies rightly choose to pay their employers by stock options or outright stock grants as means to better align company and employee interests. Enormous stock option packages get a lot of press as they often pad CEO pay excessively, but stock options and outright grants are an important part of the pay package for many individuals. Stock options have made millionaires out of many Microsoft employees in the 80s and 90s. Today we have Google millionaires.

The real question of stock denominated benefits is are we to treat them like cash or are we to treat them as something more? I think most people treat them as something more. Some of this makes sense given that stock compensation typically have to become vested. Usually it takes at least a year before options or stock grants are vested. If an employee is terminated or leaves before the vesting period is over that employee forfeits his or her claim. That’s one issue - stock options and grants that have a lengthy vesting periods are only claims on compensation rather than outright compensation. For that reason, an employee might not want to count (reinvest) too early the chickens before they’ve hatched.

However, aside from the vesting issue which most employees have a pretty good sense if they will fulfill or not, there aren’t really all that many good reasons to hold onto stock grants or options unless required to by rules even when those grants haven’t vested. An employee can easily sell short company shares, or options without actually owning the shares or options. This might be seen as a vote of no-confidence, but it’s really an act of diversification. Most employees don’t have that much influence on the stock a price. If an employee were promised a cash payment, it would be generally be ridiculous for that employee to go and buy options or shares of the company. Effectively that’s what we do when we do nothing and hold onto shares or the options.

The risk because of the vesting period is that we never receive those grants or options. However, the only situation in which the hedges (i.e. selling short shares or options, or buying put options) would be out of the money is when the company is chugging along nicely, i.e. the stock price has risen. Under these circumstances, the most likely reasons for a employee not to meet shorter term vesting requirements are under the employee’s control. Either the employee chooses to leave or is terminated because of performance issues. The sensible thing for an employee with short term vesting options or shares is to hedge. This action would’ve certainly served the many employees at Bear Stearns well. Of course by hedging, it’s possible to miss out on millions like the ones reaped by employees of MSFT and/or GOOG. However for every Google there are dozens of pets.com. Keep the stock or options only if you think you would actually buy those same options in the open market.

Worry not readers, I’m not becoming a professional blogger anytime soon. However, it seems many of my more successful compatriots are. I read the other day that Trent at The Simple Dollar turned in his letter of his resignation. Who would’ve seen that coming? <END SARCASM> I thought Trent was long overdue. He’s successful blogger who clearly has demonstrated an ability to monetize his blog, but more importantly keep his spending down. He knows what his priorities are: his Ninentdo Wii, kids, and some tasty meals. Not necessarily in that order. He joins other bloggers like J.D. at Get Rich Slowly and Lazy Man (though Lazy Man did not do it quite out of his own volition) on trying to make it a go as an independent. Others such as Flexo at Consumerist Commentary remain on the Fence.

Given that I don’t read too many blogs other than personal finance blogs, I’m not sure how common it is for bloggers to go “pro”. That said I’m not surprised that so many succesful personal finance bloggers have gone pro. The mentality that leads one to write a blog on personal finance is the exactly the mentality that it takes to escape the 9 to 6 rat race. What are some of these qualities?

• A Plan
• Frugality
• A desire for independence

Personal finance bloggers even if they love their jobs almost always have a strong desire to be financially independent. This is what drives them to frugality. This I also think what leads them to write public blogs. They want their voice to be heard above the crowd, and may cause them to dislike working under the structure of most corporations.

It is highly unlikely that I will join the ranks of financially self sufficient personal finance blogerss anytime in the near future. While I may be on my way to becoming a six figure blogger, it’s six figures in Mongolian Turgiks. While I like to believe I share some of the same qualities as these independent bloggers, I also realize I have still few more things I like to accomplish at work before I could even consider doing something else. I believe blogging will be part of that something else someday, but I’ve got some other plans for that something else as well.

I’ve talked in the past about earning more money. I’ve blogged about blogging, dividends, rental income, and getting a raise. What I haven’t explicitly talked about is what earning money really means. I’m a capitalist in the Adam Smith kind of way. I believe that capitalism adds value, and funadamentally we are only paid when we add value to the world. There are of course nasty externalities and market power problems that make capitalism not as straight forward as some would like to believe, but that’s a topic for another day.

Too often we approach a money making venture, be it our day jobs or be it our alternative incomes with a focus on the numbers. How much rent can I get? What’s the dividend yield. These are not the wrong questions to ask, but they may not be the questions that truly need answering. We I really should be asking myself is, “What value am I adding?”, “What value can I add that someone else can’t or doesn’t?” Being able to answer these questions is more important than figuring out what the payday is.

For example if I think I can make money picking stocks, I shouldn’t be worried about making 20%. I should be worried about what makes me more skilled at picking stocks. Do I understand the industry better than other people, and therefore can identify companies that the general populace doesn’t properly value? Am I skilled accountant who understands balance sheets and income statements far better than the average investor? Do I associate with CEOs and know which ones are principled and disciplined? When I take the time to answer those questions, I realize I don’t have very many of the necessary skills. And that’s why on the most part I try to avoid making individual stock picks.

The same principle can be applied more generally to any endevour. People who have successful careers are people add significant value in their work. In some cases as with a salesperson, this value is easy to discern and quantify. A good sales person sells more than his or her peers and that’s the value. However for most jobs, the distinction is harder to quantify. However, to be successful it’s not just about doing your job. Almost anyone can be trained to perform a given set of tasks. Succeeding is about creating value. Too often we think of our jobs as about finishing in assignment when we really should be thinking about new ideas. We live in society that rewards those who think of and implement new ideas.

I was forwarded this . Rich Dad, Robert Kyosaski, is coming to Boston. He know is if you’ve been naughty or nice. Robert himself has been mostly naughty. He’s not really coming to Boston. Instead one of his flunkies will be coming to Boston to peddle his wares. Robert and his wife, Kim, have gotten rich off the lecture circuit and preying are the get rich quick desires of many Americans. While this particular lecture, “Learn to Be Rich” is billed as free, I’m sure there is angle in it for him to make money.

I’ve registered for a session against my better interest, but if I’m going to criticize I should at least attend a session and give it a chance to convince me otherwise. I’m curious also to see what the mindset of most of participants will be. Are people actually interested in learning real lessons about being financially secure? Or are people more interested in getting rich quick? I fear the latter even as I hope for the former.