AskDong

It’s hard to believe that the stock market is about as low as it was when I first graduated college, over 11 years ago.  Taking inflation into account, it’s even lower than that.  I’m not sure it can go much lower, but in truth it can go all the way to zero.  While I’m certainly poorer for it, I’m young and have a lifetime of earnings ahead of me.

In the end however, I hope for the nation that this collapse is not a momentary dip before the next meteoric rise.    Like the last turn of a century, this recent speculative bubble across all asset classes has been fed by unrealistic greed.    As a nation we’ve forgotten that real wealth comes from real work.    Some believe that real work only produces real tangible things, i.e. manufacturing.   I don’t subscribe to this limited view.  Music and film have little worth if measured solely in physical terms, but have enormous value in real terms.   Making scientific discoveries even if they have no practical value increases our understanding of the universe.   I don’t believe knowledge is worthless.

What true wealth is not - is the act of buying something for $10, and turning around and selling it in month $20 more.   This is not to say there isn’t room for wheelers and dealers, speculators and their ilk (I could be counted amongst these people).    There is real value when someone recognizes what is truly undervalued, and is able to buy at a discount.   Such individuals facilitate the process of price discovery which benefits everyone involved.  Sellers get a fairer market price, and buyers learn of something that they might want.  There is also value creation when financiers allocate capital between different business opportunities.  I do not discount the value that financiers, and financial institutions provide the economy.  A solid banking system is critical to well functioning economy.

What I do discount is rampant unabashed speculation of the last quarter century.   We’ve become a nation of get rich schemers at every level.  From the house flipper in Florida, to the hedge fund mogul in Connecticut.   As a nation we’ve decided the way to riches is to sell higher rather than to add value.   The greater financial mess in some ways mirrors the truly egregious financial scams that have already to come to light.   The wealth of nation when built on rampant speculation is not much different from Madoff’s Ponzi scheme.

It’s my hope that we as individuals and as nation learn some valuable lessons in these difficult economic times.   Get rich quick schemes are built on castles made of sand, sustained wealth only comes from true work and real sacrifice.  Is it any surprise that the “Greatest Generation” rose from the ashes of the Great Depression?  That was generation that learned the value of saving over transient paper profits.  I hope my generation can be such a generation.

I don’t say any of this imply that there isn’t a place for investing.  There is, but people should neither expect or desire to quickly double their money.   Investors in companies that add real value to society will continue to be rewarded.  The illusory profits tha puffed up the “earnings” of many of the financial istutions have been revealed to be what they always were - smoke and mirrors.   Banks should have spent more time worrying about who they lent money to instead of selling the next mortgage backed security.

I spend more time than the average person looking at finances.   I like to think I’m pretty good at it.   At the end of the day, however, I’m not a particularly good accountant.

I’m still putting together my year end summary.  I keep monthly numbers that I can just add up, but I also try to make the effort of creating a cash flow summary using annual numbers.   Currently the two numbers do not jive.  I’m off not by a few dollar or even a few hundred dollars.  I’m off by a few thousand dollars.  Not good.

I don’t think I’ve misplaced any funds, and am even pretty sure what the source of error is.  I don’t balance my checkbook.  I never have, and probably never will.  This is not to say I don’t track what flows in and flows out.  I do, and I have spotted anomolies that I’ve had to track down.  But, at the end of the day I don’t reconcile the transfers between my various checking, saving, and investment account.  I track some of them, and that’s part of the problem.    Because I have a haphazard tracking system, I’m never quite sure what I’m counting and what I’m not counting.   So as I go through my annual review, I’m having a difficult time making sure I compare apple to apples.

Despite the accounting irregularities, I spot an unpleasant trend:

I’ve basically increased in my spending across the board over the last 3 years.   My housing costs have gone up substantially this past year because I decied to buy the apartment that I was renting.   My variable spending and utilities (damn iPhone!) have gone up as well.  While my expenses are still below my income, I have to be first to acknowledge that I’ve been rather laconic with regards to managing my expenses and cash flow.  At the end of the day, I’m less upset that I’ve spent more money and more upset that I’m not sure how I’ve benefited.

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.