Friday, July 31, 2015

Mistakes We Don't Make at the Supermarket

"On average, a family of four spends up to $1,300 a month on the food they consume at home. To make matters worse, most are spending more than they need to because of mistakes they are making when shopping at the supermarket."

The actual article title is "Biggest Supermarket Shopping Mistakes." This kind of story from Kiplinger's plays on our fear that we aren't as smart as we hope, that we don't know how to do our lives correctly. A vast number of so-called "helpful" articles start with the premise that we, the readers, are constantly making mistakes.
What about those mistakes at the supermarket? Apparently, we shop every week without noticing what's on sale that week and stocking up on it. We also don't compare prices, and we don't plan our meals around the perishable items on sale that week.

Uh. No. We do the due diligence. We read the store circulars and we cut out or print out the coupons for products we already use, and yes, we do know what time of the year to buy Bing cherries and sweet corn at the best prices, too. If we're really supermarket mavens, we also know that just about everything in a grocery store goes on sale every six weeks. All we have to do to never buy at full price is stock up enough during a sale to tide us over to the next sale. Works like a charm, plus this way we never run out of toilet paper.

Of late, companies have been pushing different sizes and packages of some staples, paper towels being the best example. Hardly a week does by when some version of Bounty towels isn't on sale. Mega sizes, double sizes, regular sizes, different numbers of rolls per pack, and more. We stock up and then we stock up some more, and the company's hope is that we use the paper towels more rapidly because we have so many in reserve. This is a pretty good guess about how people behave. It's the number one reason to put cash earmarked for savings into a savings account rather than keeping it in the regular checking account or as bills on top of the dresser. The less we feel we have, the more careful we are.

But paper towels are minor. Where the typical American grocery shopper makes mistakes is in buying processed foods that are full of chemical additives, including the number one evil chemical, partially hydrogenated oil. 

Partial hydrogenation keeps oil that's sitting around a factory in big drums for months on end from going rancid. It also keeps cookies soft for weeks on end on the grocery store shelf. But food items move swiftly in a grocery. The hydrogenated oils are in a vast quantity of food products merely for the convenience of the food processor. You don't need to give cheese puffs a nearly immortal shelf life. Those items are put in the store fresh nearly every day of the week, and frankly, most people who buy them consume them almost immediately. The oil is there anyway, and you can look up why it's so bad for people right on Wikipedia.

I love looking at what's in other people's shopping carts, and most of what I see are processed foods, not fresh foods. Only around major holidays do people fill their carts with fresh foods, plus the normal building blocks such as flour, sugar, and chocolate chips. This surely has to do with lack of time to prepare meals from scratch, but everybody ought to read ingredient labels and walk away from those that run long and contain many unpronounceable chemicals. It's supposed to be food we're eating, not man-made chemicals. That's our number one mistake at the grocery store. 

Wednesday, April 15, 2015

Be Happy About Your Tax Refund

At this time of year, personal finance professionals switch from chiding us about filing our taxes on time to chiding us about getting refunds. To get a tax refund is proof that we overwithhold, they say. It's proof that we can't manage our finances properly. Worse, receiving a tax refund is proof that we taxpayers are childish, incapable of saving unless Big Brother holds our money for us and only gives it back once a year, without paying any interest.

I don't think so. Federal law has allowed the IRS to behave over the years in a terrifying manner. It has seized people's property, shut down their businesses, hauled them into court, and even sent them to prison over unpaid taxes. What people fear most about the IRS is owing money. They may specifically fear an audit, but more generally, the fear is that they'll come up short on April 15, and not have any ready cash to pay what they owe. Then they'll owe interest and penalties, both of which mount up very quickly. Once a taxpayer gets into tax debt, it often takes years to clear the account.

A letter from the IRS is scarier than a cease-and-desist letter from a lawyer threatening a lawsuit. Those at least are clear about what the perceived offense is and how to stop further action. The IRS often sends letters people don't even understand, demanding money according to tax schedules the taxpayers never used, about taxes filed years in the past. The IRS also has a well-deserved reputation for bullying taxpayers over very small dollar amounts, in order to terrify the rest of us. It works.

How do taxpayers protect themselves from the threat the IRS represents? We overwithhold. It's a simple yet winning strategy. Maybe when banks were paying 5% interest on savings accounts, we might have been tempted to underwithhold, and just pay up on tax day. But that strategy doesn't help us sleep at night, and banks these days don't pay interest worth talking about.

Laughably, several of the articles I've read that sanctimoniously say we're fools to get refunds also say that we should have put that refund money, month by month, into the stock market and made a killing. Right. We also could have lost it all. This is not brilliant advice, and it's not even a sane comparison. Comparing a speculative, uninsured stock investment to the dependability of receiving a tax refund from our stable federal government is nuts.   

There's also the little matter that Congress changes tax rules every year, but drags its heels and often does it on the last day of December. How are taxpayers to plan in January for not-yet-enacted new tax rules? We can't.

Overwithholding gives the government free use of our money, the critics say. But we the people are the government, so we're saving ourselves the interest the government would have to pay to borrow the money we're lending it for free. Our patriotic gesture, in fact. Meanwhile, we're also arranging for forced savings that can result in a large chunk of cash that we'd never see in one place otherwise. Could we obtain that chunk of cash by mere savings? Not easily, because there are so many daily demands on our money.

By overwithholding, we create a happy tax time scenario: We're getting a refund! Hurray!

The financial critics should lay off.

Friday, February 13, 2015

Can You Afford It?

A lot of us make more than enough money to take care of life's essentials. It's when we consider other possible purchases that we tend to screw up. We don't seem to know what we can afford and what we can't. That is when we turn to credit to fund our extravagances, and we get into trouble.

Have you ever noticed that most books on personal finance do not discuss what we can and can't afford? Most personal finance TV segments don't discuss limits on spending, either. Suze Orman is the rare exception, with her "Can I Afford It?" segment on her television show. But even Suze has only lately come up with a formula to help children--not adults, but children--determine how much of their savings to spend on something they're lusting after. Suze says spend no more than 10% of savings on any item you want but don't need. It's a great concept, but hard to put into practice as an adult because we'd have to look at it in reverse to determine where to draw the line.

During the Cold War, a very long time ago, magazines sometimes ran cute little features comparing how many hours a U.S. citizen had to work in order to afford to buy a suit or a dress, versus how many more hours a Soviet Union (Russian) citizen had to work. Of course the U.S. always came out better in these comparisons, because we had and still have superior access to a wide range of consumer goods, many of them at cheap prices. People in the U.S. were paid well back then, too. The situation has changed. We now are paid badly compared to the inflation since the Cold War, but the price of clothing has dramatically reduced, to the point where people feel they can buy items and never wear them, or wear them only once, and then ignore them. Determining what is too much in this scenario is complicated because you'd have to add up every dime you spent on clothing and then compare it to your income. Few people do that.

Let's consider something simple, a Coach bag. Coach makes leather handbags, purses, and other accessories. These are good quality items in solid leather that usually will wear well for decades. Thus a Coach bag, which can easily run $300, can be viewed as an "investment" whose cost will amortize over the long time it can be used. If you're the kind of person who is willing to carry the same bag for decades, buying one that costs 6 times your usual $50-on-sale bag might make a kind of daft sense. Except that most people who become fixated on a designer handbag don't use it exclusively, or that long, because they will be captivated by some newer design or designer. An Hermes Birkin bag can run you $10,000. That's 33 times what the Coach bag costs. If you bought a house that was 33 times the price of a house you could afford, and your bank approved you to buy a $500,000 house, you'd be spending $16.5 million dollars on a house. That's how out of whack buying a Birkin bag is for anyone who is not rich. But what about the Coach bag? How do you discover whether you can afford it, or whether you ought to buy a less expensive brand at a discount store or on sale somewhere?

First you look for descriptions that suggest what percentage of income can or should be spent on clothing. A shopping site that seems to push expensive clothing says 5% of your net pay, your take-home pay, is the limit. Let's assume for giggles that you only bought one clothing item, that Birkin bag, all year. Your net pay after taxes would have to be $200,000 a year. Yikes. What about the Coach bag at only $300? There it begins to get complicated again. Three hundred dollars is 5% of a $6,000 a year income, but $6,000 a year is below the poverty level. The 5% figure doesn't help us here because it's not a reasonable purchase with such a low income.

A personal blog that isn't trying to flog expensive clothing cites the Bureau of Labor Statistics information that the average family spent $1,700 on clothes in 2010, on after-tax income of $60k. That's 2.8%. Assuming there are four people in the family, that's only $425 a year per person. On the face of it, then, a $60k take-home income does not justify spending nearly 71% of your annual personal clothing budget on one Coach handbag. What happens if you go ahead and do it, and then you need new running shoes, a couple of t-shirts, and a pair of sweatpants? Even buying them all at discount stores, you'll be over budget in the wink of an eye. If there are only two people in the family, each person has $850 to spend all year, and the Coach bag represents 35% of it. Still too expensive.

Typically, women are pressured by our society to spend more on clothing than men do, which often pushes the percentage higher. On a $60k net income, that's $3,000 a year, and the Coach bag is 10%. We're back to Suze Orman's standard number.

It's so tempting. That Coach bag would look good on the custom-built shelf in our walk-in closet--except that with a take-home pay of $60k, we don't have a walk-in closet or a custom-built shelf for designer handbags. Too many of us want to pretend we can afford the appurtenances of the wealthy, when we can't.

Friday, January 2, 2015

New Year's Resolution: Save More Money

You think don't have enough money, yet I want you to save more? Yes. Here's how. We all have a tendency to forget about the money we don't see directly in front of us. Our paychecks typically deduct for a wide variety of taxes and insurance, and once the shock of how little we get to take home wears off, we simply do not pay attention to whatever comes off the top. If we add an automatic deduction directly to a savings account, we won't notice it.  

Retirement savings should go directly into your 401k. Do this first, before you work on the other savings. You will grow old someday, if all goes well. When that happens, either you won't want to work anymore, or you won't be in good enough health to work. Your future self will be very grateful you saved to make all those years of being a geezer more bearable. Max out your contributions at work first, because the dollar amount you can put in a 401(k) is significantly larger than the maximum you're allowed to contribute to a regular IRA or Roth IRA—almost four times as much, in fact. Only the SEP-IRA, meant for business owners and self-employed sole proprietors who earn a profit, has a feature that allows individuals to pile up significant retirement cash. Of course you're not looking forward to growing old. You're sure it'll never happen to you. Save for retirement anyway.

Having set up retirement savings on automatic, it's now time to organize the other savings accounts. Some employers offer the option of making a direct deposit to a savings account as well as a checking account, which makes the automatic savings very easy. If yours doesn't, see if your bank will set up an automatic withdrawal from your checking to your savings. There's also the method of treating regular savings like the first bill you pay once you receive your paycheck, and writing that check to savings, or transferring the money from one bank to another, before you pay for anything else.

How hard is it to save a little more money? If you eat out four times a week as The Simple Dollar and other sources say is average, you're spending around $230 a month on commercially prepared meals.
If all you do is save the equivalent of one night out, $25 for two people (and find something fun to do that night that does not involve spending money, so you don't feel deprived) you will have approximately $100 extra for savings per month. At this time of New Year's resolutions, I've already seen a lot of people resolving to eat out less. Make the goal specific by signing up for automatic savings in the amount you intend to save per week, and you're done.

Once money has gone to a savings account, it should be subdivided and transferred into other savings accounts. Here's the rundown of what you need:
1. Rainy day savings of eight to ten months of living expenses. Do I have to tell you why this is a really, really good idea? Have you forgotten 2008 already? Build up this savings account as fast as you can.
2. Savings for large purchases, usually a car. Unless you live a strictly urban life, you need a car to get to work, to shop, to socialize, and more. Cars fall apart and have to be replaced. The moment your monthly payment ends on your current car, you should divert the same dollar figure (okay, rounded to an even number) to a savings account for the next vehicle. You can divert less if you imagine that the next car you buy will costs thousands of dollars less. Not likely, is it? If you're still paying on a vehicle, put a few token dollars into the fund for the next one, anyway. Your refrigerator might break down.    
3. Savings for vacations, toys, life's pleasures, etc. Everyone should have some savings that are not allocated to the business of life. Each person in a relationship should have a separate savings account, even if you funnel the regular paycheck deposits into a joint checking account. If I want to give my spouse a present, I don't want to do it through a joint account. It spoils the fun.

At first, the dollar amounts that go into your savings accounts may not amount to much. Be patient. Increase the amounts as you can. Getting into the habit of saving regularly is more important than the immediate total. You'll have more confidence to face life's ups and downs when you know you have savings.