Let's Talk Money

Things that don't belong anywhere else. (Check first).

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Tyndmyr
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Re: Let's Talk Money

Postby Tyndmyr » Tue Jun 21, 2016 9:42 pm UTC

I dunno. It's not internet speed. Swipe transactions are super fast. Chip transactions are a crawl, or at least, it feels like it.

I have no good explanation for why that should be the case.

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Isaac Hill
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Re: Let's Talk Money

Postby Isaac Hill » Tue Jun 21, 2016 10:39 pm UTC

From what I remember, in the US if soeone defaults on their mortgage, the bank can take the house. Your credit is trashed, and it'll be difficult if not impossible to get another mortgage for a while, and you need to find a new place to stay. When the housing market crashed, lots of people realized they owed more than their house was worth, and just let the bank take it. They figured it didn't make sense to pay off a $300k loan on an asset worth only $200k.

When I saw MSNBC cover the story, they stressed that they were not advising anyone to do this, and to discuss their situation with their financial advisor. When the Daily Show covered this, they included instances of mortgage companies walking away from office buildings they'd bought for the same reason.


I currently have 0 credit cards, though not for lack of trying. I described my first attempt at getting a card in the Rant Thread. Basically, Discover said I didn't exist and declined me.

I'd given up until I got an offer in the mail for a Capital One card. I got rejected, with a vague statement that "Based on you credit report from Equifax, credit bureau information is missing or unavailable". There were similar statements for Experian and Trans Union. The only more specific info was that my Trans Union score was unavailable.

I called TU and was assured that I do have a score, though they wouldn't tell me what it is without me paying. My credit monitoring service noted that Capital One had accessed all three agency reports. I ordered my three credit reports, and they seem correct to me.

I called C1 and was told they'd e-mail me specifics about what info was missing within two weeks. That was a lie. I called back, and was told they knew nothing about any e-mail, and that the most likely reason for the rejection was some info mismatch between my application and reports, and that I should try applying again.

I did, copying as much info as I could from my credit report, and was rejected because I had recently rejected application.

I called back and was told that I had to wait 30 days to reapply. The offer I got for a no-fee card expires by then. Plus, I don't even know if the application was the problem. Maybe it is something with all three credit agencies. But, every agency I call about this (credit card, credit monitoring, credit report agency) is sure the problem lies with someone else.


I haven't bothered looking into bonds or investing, since just failing to get a credit card is stressing me out too much. I'd rather the house I retire in have one or two fewer bedrooms than deal with financial shit anymore.

When I was car shopping 2.5 years ago, two dealerships ran my credit and said I was approved. One told me my score. I've forgotten the exact number, and it's probably changed since then, what with me paying off that car, but it was between 700 and 750, which should be pretty good.
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sardia
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Re: Let's Talk Money

Postby sardia » Wed Jun 22, 2016 1:45 am UTC

There are services that offer to provide and store your credit scores, and updates every 2 weeks. It's run by the credit score agencies, and it's funded by offers of for credit cards via banner ads. It's a good deal, and I used it for a year with no obvious problems.
https://www.creditkarma.com
There are others, but this one got my attention first. It won't solve your problems, but it's a start. For one thing, it shows what's on your credit report, so you can have the paperwork in front of you and watch for changes as you call customer support. Not only that, but it explains any derogatory remarks and breakdowns of your score. Do you know what's generally wrong with your credit?

PS Have you considered a secured credit card or a cosigned card? It's not very useful for much but it does build your credit.

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Isaac Hill
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Re: Let's Talk Money

Postby Isaac Hill » Thu Jun 23, 2016 3:02 am UTC

Thanks for the tips, but I don't know how much they'll help. As far as I know, there's nothing wrong with my credit. My student loans, mortgage, and car are all paid off. As a U.S. government employee, my data appears to have been compromised as part of the OPM hack. They gave us free credit monitoring, and that doesn't show any suspicious activity.

Both the on-line credit monitoring service and the hard copies I received look good, and show that Capitol One got my data. The hard copy TU report says it was a Regular Inquiry. The on-line service says, "CAPITOL ONE BANK USA NA obtained a copy of your [insert agency here] Credit Report" for all three agencies. But, Capitol One won't tell me what the problem is.

I only plan to use the card for a few on-line purchases, so I don't know if either of the cards you suggested would actually help me build that much credit. One or two credit card purchases don't seem likely to do much that paying off a house won't. Plus, I don't actually know if I could get one. The problem seems to be miscommunication between the credit agencies and the credit card companies.

The last time I successfully applied for credit was a car loan. Maybe I'll stop by the dealership and ask them to run my credit again to see if it's still good.
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sardia
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Re: Let's Talk Money

Postby sardia » Thu Jun 23, 2016 6:03 am UTC

Spoiler:
Isaac Hill wrote:Thanks for the tips, but I don't know how much they'll help. As far as I know, there's nothing wrong with my credit. My student loans, mortgage, and car are all paid off. As a U.S. government employee, my data appears to have been compromised as part of the OPM hack. They gave us free credit monitoring, and that doesn't show any suspicious activity.

Both the on-line credit monitoring service and the hard copies I received look good, and show that Capitol One got my data. The hard copy TU report says it was a Regular Inquiry. The on-line service says, "CAPITOL ONE BANK USA NA obtained a copy of your [insert agency here] Credit Report" for all three agencies. But, Capitol One won't tell me what the problem is.

I only plan to use the card for a few on-line purchases, so I don't know if either of the cards you suggested would actually help me build that much credit. One or two credit card purchases don't seem likely to do much that paying off a house won't. Plus, I don't actually know if I could get one. The problem seems to be miscommunication between the credit agencies and the credit card companies.

The last time I successfully applied for credit was a car loan. Maybe I'll stop by the dealership and ask them to run my credit again to see if it's still good.

Isaac, get the creditkarma thing going, and check for derogatory comments. You might have to start disputing errors in your report.

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Re: Let's Talk Money

Postby Chen » Thu Jun 23, 2016 11:47 am UTC

Tyndmyr wrote:I dunno. It's not internet speed. Swipe transactions are super fast. Chip transactions are a crawl, or at least, it feels like it.

I have no good explanation for why that should be the case.


This can be the reader I think. We've had Chip and Pin readers here in Canada for quite a while now, and the speed can vary significantly. The one at my local shawarma place is super slow, the one at the subway next door is reasonably fast and the one we have at our work cafeteria is insanely fast. The work one is definitely a newer machine compared to the other two so there clearly could be something there. Granted the work one is also on a much stronger internet connection though there's not that much info passing so I can't imagine that's a huge part, as you mentioned.

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sardia
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Re: Let's Talk Money

Postby sardia » Thu Jun 23, 2016 1:40 pm UTC

Tyndmyr wrote:I dunno. It's not internet speed. Swipe transactions are super fast. Chip transactions are a crawl, or at least, it feels like it.

I have no good explanation for why that should be the case.

The time to complete a transaction is the same, the issue is swiping doesn't lock up your card while it's working. They are working on updates that lets you dip the card and put it back into your wallet. It should make the apparent time go by faster.

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sardia
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Re: Let's Talk Money

Postby sardia » Fri Jun 24, 2016 4:57 am UTC

http://www.nytimes.com/2016/05/17/your- ... geant.html
Alright, the Brexit just happened, and the world is increasingly looking like a scary place. Time to go over your retirement/investing emergency drills.
Rule number 1, Don't panic, and continue to contribute to your retirement plan as scheduled.
There is no rule 2.
■ You made your portfolio based on your goals.
■ It still matches your goals.
■ If you sell that portfolio now and buy it back later when the markets are better, all you will do is lose money.
It’s that simple. Just. Don’t. Do it.
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ucim
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Re: Let's Talk Money

Postby ucim » Fri Jun 24, 2016 3:09 pm UTC

So... you're not a fan of the Erosion method?

"If it's high, BUY!
If it fell, SELL!"
Spoiler:
To make a small fortune in the stock market, start with a large one.
Jose
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sardia
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Re: Let's Talk Money

Postby sardia » Tue Jun 28, 2016 5:58 pm UTC

ucim wrote:So... you're not a fan of the Erosion method?

"If it's high, BUY!
If it fell, SELL!"
Spoiler:
To make a small fortune in the stock market, start with a large one.
Jose

I always find it funny and sad when people panic sell. I usually chase after disasters, good source of long term profit.

Turns out I was wrong ok credit card utilisation ratios. It's both per card and In total.

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addams
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Re: Let's Talk Money

Postby addams » Sat Jul 23, 2016 4:17 pm UTC

sardia wrote:Simple Sketches: Personal Finance on a Napkin
http://www.nytimes.com/2015/12/22/your- ... ref=topics
Image
A financial planner, has been explaining the basics of money through simple graphs and diagrams. This one asserts the monetary savings of buying a high quality item that you love and use all the time over something cheaper.

I'm not sure how generally applicable this concept is. How would you know what you'll love and use forever(defined as long enough to obtain monetary savings over buying several inferior products)? Take cooking, I love to cook, but what is the super high quality item that I would love to use forever? Would it be the latest pot? My latest blender? I do agree with the idea of finding something you love and doing it forever vs jumping from one new thing to another. I.e. I own only 2-3 games and they have thousands of hours on them. My friends have dozens of games and have new ones coming every month. I've seen them jump from one new thing to another, I've been burned by the game abandonment syndrome too many times.

The author of the article is 'preaching to the Choir', to my ears.

Warning:True Story:
The Department brought in a Ph.D. from Yale Business School to teach us Basic Business.
The graph on the napkin reminds me of one of her graphs.
Spoiler:
I was am, to this day, grateful for my education.
It was a Gift from the People of the United States of America.
She told us to break our money into thirds.
Love It was Live On It.
Keep It was Save It.
Use It was Invest It.

She taught us a bunch of other stuff, too.

She taught us to read the Business Section of the NewsPaper.
Before taking her class that section of the NewsPaper was 'Greek to Me'.

I have forgotten how to read the Business Section.
I have not forgotten her confidence and passion.
Life is, just, an exchange of electrons; It is up to us to give it meaning.

We are all in The Gutter.
Some of us see The Gutter.
Some of us see The Stars.
by mr. Oscar Wilde.

Those that want to Know; Know.
Those that do not Know; Don't tell them.
They do terrible things to people that Tell Them.

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sardia
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Re: Let's Talk Money

Postby sardia » Sun Aug 14, 2016 1:27 am UTC

Credit utilization ratio has a hidden bracket that they don't tell anybody about. See how my credit utilization went from 4% to 6%? That's not listed on any brackets. They hid an extra bracket worth roughly 2 points. Given how much I hate having my score go up and down based on my credit usage, I'll need to consider an extra credit card or raising my limits, both of which uses up a credit check inquiry (because chase bank are hardasses). Next year I'll have to consider raising my credit limit or getting a new credit card. It means the convenience of having a 1 stop site for viewing my credit statement or keeping track of a third credit card that I'll never use.*
grrrr.

*You shouldn't get too many new accounts at once as it drags down the average age of your credit lines/accounts active. aka bad for your score.
Edit: I'm aware I could spend less, or just eat the hit on my credit score.
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ucim
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Re: Let's Talk Money

Postby ucim » Sun Aug 14, 2016 2:51 am UTC

sardia wrote:Credit utilization ratio has a hidden bracket that they don't tell anybody about. See how my credit utilization went from 4% to 6%? That's not listed on any brackets. They hid an extra bracket worth roughly 2 points.
Cause and effect are not clearly implied. I suspect that the credit score is based on detailed (and probably proprietary) formulas, and the consumer graphics they send you as a credit report are very simplified. It may be affected by the products you bought, the websites you visited, or the number of miles you drove one report to the next. The (small) change in credit utilization may be irrelevant.

It might also not be bracketed in their formulas, but continuous. It could be presented in brackets for consumer convenience. It could be that they take the change, rather than the absolute amount, into consideration. Dunno. I don't think I'd read too much into it.

Jose
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sardia
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Re: Let's Talk Money

Postby sardia » Sun Aug 14, 2016 4:19 am UTC

ucim wrote:Cause and effect are not clearly implied. I suspect that the credit score is based on detailed (and probably proprietary) formulas, and the consumer graphics they send you as a credit report are very simplified. It may be affected by the products you bought, the websites you visited, or the number of miles you drove one report to the next. The (small) change in credit utilization may be irrelevant.
It might also not be bracketed in their formulas, but continuous. It could be presented in brackets for consumer convenience. It could be that they take the change, rather than the absolute amount, into consideration. Dunno. I don't think I'd read too much into it.

Jose

Au contraire, they are nice enough at TransUnion and Experian to reveal the curtain behind the credit scores formulas for two of the three major credit scoring agencies. Note how simplistic their criteria is. Each major criteria is broken up into a range of scores from poor to excellent. There are basic techniques you can use to extrapolate formulas and rules that underlie algorithms. A basic one is a time series where you keep everything the same, and change one variable. In this case, the age of my account went up 0.5 weeks and my credit utilization ticked up from 4% to 6%. Logic would tell you that if X lowers my score, Y raises it, and then the resulting change is negative, then that means that Criteria A was bigger than Criteria B. If you kept changing variables, and tracked your changes, you can then derive a pretty accurate formula that they use. Credit cards are a great tool to figure out the hidden variables since they affect several parts on your credit score. The age, the credit utilization, credit checks, # of accounts, and missed payments/derogatory remarks. The most useful factor is that credit utilization is measured weekly, but you only need to pay off your card monthly.
That gives you room to play around by running up your credit card bill until it reaches 5%, 10%, or 20%. Then you could pay it down 1 week at a time, and measure how much that one change affects your overall score as each week passes.
ImageImage

*The age of all your credit lines are averaged, and all scores are updated weekly.
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sardia
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Re: Let's Talk Money

Postby sardia » Thu Dec 01, 2016 10:30 pm UTC

Grrr, I just lost like 200-300 dollars in lost matching funds because I maxed out my 401k a paycheck too early.* =(
Does anyone else's 401k (or similar matching funds) not show how much you contributed this year? With today's side incomes and gig economy, it really throws a monkey wrench into the normally staid world of 401k savings percent. Especially if you're trying to save your excess money instead of letting it burn a hole in your pocket.

*First world problems, yea I know. Still hurts.

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Re: Let's Talk Money

Postby Chen » Fri Dec 02, 2016 12:51 pm UTC

sardia wrote:Grrr, I just lost like 200-300 dollars in lost matching funds because I maxed out my 401k a paycheck too early.* =(
Does anyone else's 401k (or similar matching funds) not show how much you contributed this year? With today's side incomes and gig economy, it really throws a monkey wrench into the normally staid world of 401k savings percent. Especially if you're trying to save your excess money instead of letting it burn a hole in your pocket.

*First world problems, yea I know. Still hurts.


I'm Canadian so I don't have a 401k, so is the matching there not somehow linked to the total amount put in? Why would maxing it out early make any difference?

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sardia
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Re: Let's Talk Money

Postby sardia » Fri Dec 02, 2016 2:55 pm UTC

It's on a per paycheck basis. If you get hired, you're guaranteed to lose the first couple paychecks worth of matched income. Because it takes them time to set up your account. They do not make it up to you.

Not sure why, probably easier to not make exceptions and have a simple rule to calculate.

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sardia
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Re: Let's Talk Money

Postby sardia » Thu Jan 12, 2017 9:31 pm UTC

An IRA is a tax shelter that's limited to roughly $5000. Are you sheltering more money if you shelter post tax versus sheltering pre tax dollars?
Normally the math is the same either way, but the monetary limit would make the post tax IRA (Roth) more valuable. Does my logic make sense, and how much does it matter?
Spoiler:
Assume you have an IRA and no financial worries. And that investments grow 5% a year for the next 10 years. You only invest once. If you make 10,000 and the tax is 50%. If you shelter post tax money, then you pay half, and store $5000 which grows tax free.
If you shelter pre-tax, you store$5000 , pay half on the rest, leaving you with $2500 in your bank, $5000 in the IRA, and a tax bill a decade later.
5000$ invested compounds to $8235.


The Roth IRA leaves you with 8235$.
The normal IRA leaves you with $4117+the$2500 you started with.

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Re: Let's Talk Money

Postby ucim » Thu Jan 12, 2017 11:19 pm UTC

It seems to me that it shouldn't matter, because multiplication is commutative:
Principal x growth* x tax* = Principal x tax* x growth*
*where growth and tax are set up as proper multipliers: 4% growth would be 1.04^n

If growth is the same and tax is the same, the result should be the same.

The point of an IRA is to shelter money now (when you're in a high income tax bracket), and pay tax on it later (when you're retired and in a lower tax bracket). That makes the tax one way different from the tax the other way.

But, if you shelter money now (when you're scraping by) and pay tax later (when your idea made you a millionaire), the system has beaten you. It's just another gamble on the future.

Jose
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Re: Let's Talk Money

Postby sardia » Fri Jan 13, 2017 3:30 pm UTC

ucim wrote:It seems to me that it shouldn't matter, because multiplication is commutative:
Principal x growth* x tax* = Principal x tax* x growth*
*where growth and tax are set up as proper multipliers: 4% growth would be 1.04^n

If growth is the same and tax is the same, the result should be the same.

The point of an IRA is to shelter money now (when you're in a high income tax bracket), and pay tax on it later (when you're retired and in a lower tax bracket). That makes the tax one way different from the tax the other way.

But, if you shelter money now (when you're scraping by) and pay tax later (when your idea made you a millionaire), the system has beaten you. It's just another gamble on the future.

Jose

I just realized you're sorta right. The investment limit favoring one type only applies if you're too poor to take advantage of the full limit. Otherwise they are mostly equal. *
Aren't you explaining the appeal of the Roth?(pay now, be tax free later. Gamble that the government doesn't renege)?

*I'm ignoring the additional capital gains tax on your extra income for a standard IRA. It gets into the nitty gritty of the Roth vs a standard IRA.

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Re: Let's Talk Money

Postby ucim » Fri Jan 13, 2017 4:55 pm UTC

sardia wrote:Aren't you explaining the appeal of the Roth?(pay now, be tax free later. Gamble that the government doesn't renege)?
I guess... depends on which way you think the wind blows.

What "additional capital gains tax on an IRA" are you referring to though?

Jose
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Re: Let's Talk Money

Postby Chen » Fri Jan 13, 2017 8:38 pm UTC

Roth IRA is better for when you're just starting out and your tax burden is low because you're making little money. Best pay the low tax rate now and reap the rewards later.

Once you're making more money and your tax rate is higher, it can be better to put it in the traditional IRA and take the tax hit later when you withdraw it and your tax rate is back to being low due to you being retired.

If you expect your retired tax rate to ALWAYS be lower than your current tax rate, the traditional IRA would always make more sense. There's no free lunch here, you're getting taxed on that money at some point. You want to make sure it's at the lowest rate.

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Re: Let's Talk Money

Postby New User » Mon Jan 16, 2017 11:58 am UTC

I've never heard of maxing out a 401k account too early in a year. How can I find out about this? Is there a max limit to how much I can contribute in a year? If I can find out what that max limit is, I can just do the math from there based on my income, I suppose.

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Re: Let's Talk Money

Postby doogly » Mon Jan 16, 2017 2:51 pm UTC

It's a shade under 20k

Chen wrote:There's no free lunch here, you're getting taxed on that money at some point. You want to make sure it's at the lowest rate.

If you never withdraw the money but just take capital gains and pay that tax rate, it's essentially free lunch.
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Re: Let's Talk Money

Postby Chen » Mon Jan 16, 2017 3:33 pm UTC

doogly wrote:If you never withdraw the money but just take capital gains and pay that tax rate, it's essentially free lunch.


If you've deferred the taxes on the amount in the account, isn't anything removed from the account considered income?

I don't know the specifics in the US, but in Canada if I put things into my RRSP account, I can deduct it from my taxes that year, but when I take ANYTHING out of that account, it counts as income (no capital gains).

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Re: Let's Talk Money

Postby doogly » Mon Jan 16, 2017 3:43 pm UTC

Oh, hmm... maybe?
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Re: Let's Talk Money

Postby eran_rathan » Mon Jan 16, 2017 3:54 pm UTC

Chen wrote:
doogly wrote:If you never withdraw the money but just take capital gains and pay that tax rate, it's essentially free lunch.


If you've deferred the taxes on the amount in the account, isn't anything removed from the account considered income?

I don't know the specifics in the US, but in Canada if I put things into my RRSP account, I can deduct it from my taxes that year, but when I take ANYTHING out of that account, it counts as income (no capital gains).


This is correct, however with some caveats:

from http://www.taxpolicycenter.org/briefing ... ains-taxed -

Most long-term capital gains (capital gains from assets held for more than a year) face a top federal rate of 23.8 percent (including the 3.8 percent tax on net investment income) compared to a 43.4 percent rate for ordinary income. Short-term capital gains are taxed at the same rate as ordinary income. The lower maximum capital gains rate applies under both the regular income tax and the alternative minimum tax.
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Re: Let's Talk Money

Postby Chen » Mon Jan 16, 2017 5:42 pm UTC

eran_rathan wrote:This is correct, however with some caveats:

from http://www.taxpolicycenter.org/briefing ... ains-taxed -

Most long-term capital gains (capital gains from assets held for more than a year) face a top federal rate of 23.8 percent (including the 3.8 percent tax on net investment income) compared to a 43.4 percent rate for ordinary income. Short-term capital gains are taxed at the same rate as ordinary income. The lower maximum capital gains rate applies under both the regular income tax and the alternative minimum tax.


Is growth in your IRAs not sheltered from Capital gains taxes? That's one of the main draws of Canada's RRSPs. Yes the gains you make will be taxed as income but that's instead of capital gains, and it is just deferring the tax anyways. Are you dinged twice (income and capital gains) on the tax for IRAs?

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Re: Let's Talk Money

Postby eran_rathan » Mon Jan 16, 2017 5:51 pm UTC

I'm not sure, but I think it is only counted once, when it is withdrawn - and when its withdrawn in relation to when it was put in depends on whether or not it is taxed as income or capital gains.

(I'll ask my wife, she's a tax accountant).
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Re: Let's Talk Money

Postby sardia » Mon Jan 16, 2017 7:58 pm UTC

Chen wrote:
eran_rathan wrote:This is correct, however with some caveats:

from http://www.taxpolicycenter.org/briefing ... ains-taxed -

Most long-term capital gains (capital gains from assets held for more than a year) face a top federal rate of 23.8 percent (including the 3.8 percent tax on net investment income) compared to a 43.4 percent rate for ordinary income. Short-term capital gains are taxed at the same rate as ordinary income. The lower maximum capital gains rate applies under both the regular income tax and the alternative minimum tax.


Is growth in your IRAs not sheltered from Capital gains taxes? That's one of the main draws of Canada's RRSPs. Yes the gains you make will be taxed as income but that's instead of capital gains, and it is just deferring the tax anyways. Are you dinged twice (income and capital gains) on the tax for IRAs?

IRA is only taxed once. Either at the end, or at the beginning. Capital gains are tax free in this scenario.

The 401k employee* contribution limit is 18000$ for 2016. IRA limit is 5500$. Both numbers are indexed somewhat to inflation. This assumes you aren't making 6 figures.

*Your employer's contribution doesn't count to this limit. Their contribution limit is 53000$. That means if you had a hundred man company, your employer could contribute 50 grand a year if they wanted. Most don't, instead matching a percentage of your contribution to save money.
For companies that are willing to go through the extra effort, you're allowed to contribute up to said 53000$ limit I mentioned earlier. It's a neat trick for the upper middle class who are thrifty.

https://www.nytimes.com/2015/09/23/your ... .html?_r=0

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Re: Let's Talk Money

Postby sardia » Sun Feb 19, 2017 4:37 am UTC

Has anyone ever used their health insurance reward points? What have you guys bought with it? It's a simple incentives program where you earn points by
learning about health,
tracking your health
Exercising
Giving them your data*

I just bought stuff on a lark, and they have some really good deals. I got a 40 lb free weight for a few thousand points, (you get like 20000 a year without much effort), a chef knife, and a cutting board. There's really fancy stuff there like a refrigerator, but who's gonna wait 10 years just to earn that? Or do most of the people here have noncorporate jobs?

*There's no need to actually give them real data, so long as you give them something.
Last edited by sardia on Sun Feb 19, 2017 4:46 pm UTC, edited 2 times in total.

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Re: Let's Talk Money

Postby ucim » Sun Feb 19, 2017 6:02 am UTC

HIPPA or not, I don't trust them to not "enhance the value" of the data they would capture. So no, I haven't even looked into it and pretty much ignore the insurance companies' pleas to put on ankle bracelets and/or sign up for monitoring. Maybe I'm paranoid, but I don't even click on links people send me in email; I examine them and go to the source if I'm interested.

I do not welcome our robotic overlords.

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Re: Let's Talk Money

Postby sardia » Fri Mar 17, 2017 3:45 pm UTC

Sigh, I just got into a long argument about the drawbacks and benefits of buying a house as an investment with my parents. I used various papers about rent vs own formulas, economic distortions, and how real estate doesn't grow as fast as they think. They kept repeating the mantra "every day, more people, less land" and "stocks are paper, houses are real". Needless to say, quite frustrating to deal with.

How do you guys feel about houses? Am I crazy or does the research bear me out?

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Re: Let's Talk Money

Postby KnightExemplar » Fri Mar 17, 2017 4:06 pm UTC

sardia wrote:Sigh, I just got into a long argument about the drawbacks and benefits of buying a house as an investment with my parents. I used various papers about rent vs own formulas, economic distortions, and how real estate doesn't grow as fast as they think. They kept repeating the mantra "every day, more people, less land" and "stocks are paper, houses are real". Needless to say, quite frustrating to deal with.

How do you guys feel about houses? Am I crazy or does the research bear me out?


Financially speaking, the house + mortgage is the only thing you can buy at 4-to-1 leverage and be considered normal... or even underleveraged. I don't think the typical person even goes for the 20% downpayment, and instead just eats the PMI insurance from lower down-payments. That makes buying a house a very different kind of investment than virtually everything else, aside from maybe highly-leveraged call options.

Theoretically, a REIT (such as stock-ticker O) get you ~4% dividends and a relatively stable value. O also buys homes and rents them out to people... except they're a company that is diversified across the country. So O should get you exposure to the real-estate market much simpler.

So now the question is: would you buy a $300,000 home ($60,000 downpayment) and then rent it out... or should you just buy $60,000 of O?? At the 4.26% dividend rate, O will give you $2556 of profit per year. Its clear to me that renting out a home would get you far better income (don't forget, if you're "paying off the mortgage", any bit of principle is a profit since you're increasing the equity of your home). If you're able to rent out your home for $2000 / month 80% of the time, that's $19,200. $5k to property taxes, $10k to interest, and you're still up $4200... twice the profits of O.

Assuming 4.5% interest, 1.25% property taxes.

Now that was worst-case, since I'm calculating your profitability in year 1. As the years go by, your interest goes down and principal payments go up. (And principal is profit). In 10 years, the mortgage payment breakdown becomes $8500 Interest / $6000 principal per year. So in 2027, your profits are now $5700. In 2037, the interest is only $5,100, making your profits $9100 / year. Needless to say, this beats the shit out of O.

EDIT: You can't take the Home Mortgage Interest Deduction on rental property FYI. You have to live in the home at least some of the time for it to count. Renting-out a bedroom is allowed, but not the whole house.

FYI: O is an REIT, so it is required by law to distribute over 90% of its profits back to the shareholders. It cannot "grow" like a typical company, the growth of O is mostly capped to the natural growth of the housing market. O and your home will probably grow and/or fall at roughly the same rate. If O grows by 30% in the next 10 years, I'm going to assume that the hypothetical house also grew by 30%.

---------

Stock-ticker O is a far easier instrument to buy of course. But any way I cut the calculation, it seems like with decent occupancy rates... the home will be a better investment. That's your primary risk though: occupants. I dunno how much a management company costs, but I'd bet that they'd take a good chunk to make it worth their while. I mean, Stock-ticker O is basically property + the management company wrapped into one. So if you get a management company to manage your property... buying O instead might be better.

Still, over the long term (15+ years), it seems like buying a home and renting it out will in fact beat O and other REITs. You are in a highly-leveraged situation however, which innately makes it high risk / high reward.

---------------

Oh right, one more thing. If you aren't renting it out... and if you aren't flipping the home... then it isn't an investment. Sooooooooo.... yeah. If you're buying a home to live in... buy a home to live in. I don't think it really should count as an "investment". The mortgage is a "forced bank account" in some respects (you're required to pay the mortgage, and a bit of your mortgage goes into principal... and all of the principal is really your money).
Last edited by KnightExemplar on Fri Mar 17, 2017 4:44 pm UTC, edited 3 times in total.
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Re: Let's Talk Money

Postby Zohar » Fri Mar 17, 2017 4:25 pm UTC

I don't know as much about the numbers. We're looking to buy a place in the next year. In our case, we're lucky enough to be able to put a pretty big down payment (closer to 40%), and we're planning to live in it, not rent it out. Of course, every month of not paying rent is also money we're essentially making - it's very likely our mortgage would be lower than our rent. Additionally, though, we're hoping to gain more peace of mind from owning a place, and that has actual value we're willing to pay for. This will not be the same for everyone - other people will appreciate not being tied down, able to move from place to place, and not be obligated to repay a loan for twenty years.
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Re: Let's Talk Money

Postby KnightExemplar » Fri Mar 17, 2017 4:30 pm UTC

Zohar wrote:I don't know as much about the numbers. We're looking to buy a place in the next year. In our case, we're lucky enough to be able to put a pretty big down payment (closer to 40%), and we're planning to live in it, not rent it out. Of course, every month of not paying rent is also money we're essentially making - it's very likely our mortgage would be lower than our rent. Additionally, though, we're hoping to gain more peace of mind from owning a place, and that has actual value we're willing to pay for. This will not be the same for everyone - other people will appreciate not being tied down, able to move from place to place, and not be obligated to repay a loan for twenty years.


Yeah. The main downside is that you have to tie up your money. 40% downpayment is a shit-ton of money. There's nothing quite like looking at the cashier's check when you hand it over... when you're signing all the papers. There are more digits in that one check than almost everything else you'll see in your life.

With that said, you really don't "lose" the money, since if you sell your home, you mostly get it back... sans the 6% fee to real-estate agent and the closing costs associated with the mortgage in the first place. The fees and stuff really tie you down there for a few years, since it takes a while to "make back" those closing costs.

I think the rule of thumb was ~7 years. If you're planning to live for less than 7 years, its better to rent. For more than 7 years, its better to buy.
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Re: Let's Talk Money

Postby Zohar » Fri Mar 17, 2017 6:04 pm UTC

Random online calculatortold me four years is enough to make it worth to buy, where we're looking and for the amount we're talking about.
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Re: Let's Talk Money

Postby KnightExemplar » Fri Mar 17, 2017 8:10 pm UTC

Zohar wrote:Random online calculatortold me four years is enough to make it worth to buy, where we're looking and for the amount we're talking about.


Hmm, setting the "growth of real estate" and "growth of rental prices" sliders to 0% leads my area to the 7-year rule of thumb.

That's a lot of sliders though. It seems like a reasonable calculator and it matches more or less what I remember calculating a while back when I made my personal "buy or rent" decision. It takes into account more factors... but when I put the numbers for my personal case in... it seems to be accurate.
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Re: Let's Talk Money

Postby ucim » Fri Mar 17, 2017 10:36 pm UTC

You gotta live somewhere.

The way to compare it strictly financially is to compare renting (straight out), vs buying real estate (and then renting it to yourself). But to do so you will need to make many assumptions about job stability, taxes (including income and deductions), stock market growth (and risk), real estate growth (and risk), interest rates and the mortgage type you (would) choose, and the other investment you would choose instead of real estate... you can probably make these numbers come out any way you like by making the appropriate assumptions.

I doubt there's a financially clear win. If there were, people would flock to (or from) real estate and the financial return would adjust accordingly.

The mantra (more people, less land, stock is only paper...) is one input to evaluate when considering additional real estate as a part of your investment portfolio. And real estate (as an investment) isn't all that passive. It's a job, unless you hire a manager. Real estate is only paper too, unless you protect it with your own guns. (The right to live in your home is protected by the same web of paper that protects any other investment).

But there is one thing that needs to be considered which is not financial. If you own your home, you cannot be kicked out of it. If you rent, you're on the street as soon as the landlord doesn't like what you're cooking. Ok, it's not quite that extreme, but it's certainly a factor, laws to the contrary notwithstanding. This gets even more important as you get older, and start edging into the "take advantage of the feeble senior citizen" territory.

There are things I am willing to pay a premium for to own; housing is one of them. (I'm not much of a fan of leasing a car either, although I can see situations where it could be advantageous).

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Re: Let's Talk Money

Postby sardia » Fri Mar 17, 2017 11:01 pm UTC

I guess I should be more clear. I already own a home. This is in regards to owning a second home. A less common scenario. The biggest commonality is the irrational exuberance​ in the belief that home values will never fall.


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