Hat Tip: At least two readers including one friend. Article has been linked, published, and commented on in numerous places. Thanks for being my eyes and ears.
On the flip side of my previous link showing the challenges of the quarter-million-dollar income netting family, there is an article circulating in a handful of news sources crunching the numbers of a welfare family vs. a $30,000 income earning family and a $60,000 income earning family. And, the result is outrageous.
There will be those who will not believe that a (single) parent bringing in $14,500 and taking from all the programs can be better off than the family currently earning only $30,000, or the family earning $60,000, but my own experience in the area tells a similar story. (Note: I believe the tax figures in the charts include both sides of the employment tax for the $60K earner, so I'm not quite in sync with the numbers, but the point is a sad one nevertheless).
Read and comment.
Showing posts with label American Economics. Show all posts
Showing posts with label American Economics. Show all posts
Monday, December 20, 2010
Thursday, December 16, 2010
$250,000 in Income = Spend Wisely
I'm not quite sure how $250,000 in income (an income level unimaginable to me, or in the words of the article "an unattainably high annual sum") became the threshold of "rich", but somehow that number is thrown about both in our world and in the outside world.
While the magical quarter-of-a-million dollar figure can certainly make a family comfortable (especially if the distribution of the income earners is favorable), such income is not indication that one can throw conscious to the wind.
One of my readers (as well as my husband) pointed out this financial article that is making the rounds, Down and Out on $250,000 a Year. What can we learn from this article and it's eight city analysis:
1. Location, location, location: Living on either coast is expensive. If you can manage to earn a high salary away from the coasts, you will automatically be better off.
2. Location, location, location: Even better if you can earn a high salary in a income tax-free state or in a location where property taxes are more under control.
3. House, house, house: Especially considering the couple presented uses public schools, it makes a lot of sense to live in a better area which can be costly, but this presentation is a good argument for "moving on up" and rolling the money one is able to *save* while living in a nice, but less expensive, area with good home resale when the kids are younger. No matter how you cut it, paying a mortgage (even with 20% down) on a home in an expensive area is hard to sustain, especially if the financial situation changes for the worse.
4. Savings, savings, savings: Saving the max in a company's 401k tax plan makes a big difference in your tax bill and allows you to put away from the future. If you don't do this, your tax bill will be even higher and every additional dollar you earn will be worth less.
5. Used, used, used: Your car that is. Two car payments when you make a quarter of a million makes just as little sense as two car payments when you make a lot less.
6. Debt, debt, debt: Student debt of the couple presented isn't particularly "high" but it, combined with the high mortgage and the car payments is a killer. Getting rid of debt is key to getting and staying ahead.
7. Shave, shave, shave: Even though our couple doesn't go overboard with expenses, if they want to get ahead and stay ahead, they need to shave expenses from each area of their budget. That would be the "little" expenses including activities for the kids, annual vacations, entertainment, dog, transportation (public transportation makes a lot of sense given parking and gas in this budget!), cleaning help, dry cleaning, and food (both take out and lunches--brown bag it!), in addition to controlling he big expenses listed above including the mortgage and automobiles.
As a final note, I have a rule to NEVER include investment income in a regular budget and was a bit surprised to see it included here, although the article shows two bottom lines, one with only earned income and one without earned income. It is a style issue, but I am of the opinion that investment income is best kept in a separate budget and then moved into other investments. If you need your investment income to meet your bottom line, you are way over budget, even if you include 529 college savings in the budget. My preference is to create a separate budget for such investment income and fund other investments from the spin off, or put away the extra for every-ten-year purchases. (Clarification based on a comment: my rule to not include investment income in a regular budget is not actually a never, ever. Obviously, a family in retirement will be relying on their investment income. My comments were more based on the type of budget I would create for a young/youngish family that has limited investment income. To get ahead, I highly recommend that such income should be used to strengthen one's financial position, not building such income into the budget for consumption and meeting regular expenses).
Even if it is hard to relate to the (young) $250,000 couple (there is still $15K in the budget for childcare) and it is easy to imagine that as the kids get older some of the expenses could ease, the article underscores just how important thrift is at all budget levels. And, it underscores the difficult situation that higher income earning couples in our own communities have when tuition is piled on.
P.S. I do realize that some of the out-of-pocket medical expenses are also exaggerated for a family without major issues. I don't know how one gets to over $4000 dental and over$5000 medical with insurance and without (bli ayin hara) major issues. However, the point of the article and anaylsis is still infomative and educational.
While the magical quarter-of-a-million dollar figure can certainly make a family comfortable (especially if the distribution of the income earners is favorable), such income is not indication that one can throw conscious to the wind.
One of my readers (as well as my husband) pointed out this financial article that is making the rounds, Down and Out on $250,000 a Year. What can we learn from this article and it's eight city analysis:
1. Location, location, location: Living on either coast is expensive. If you can manage to earn a high salary away from the coasts, you will automatically be better off.
2. Location, location, location: Even better if you can earn a high salary in a income tax-free state or in a location where property taxes are more under control.
3. House, house, house: Especially considering the couple presented uses public schools, it makes a lot of sense to live in a better area which can be costly, but this presentation is a good argument for "moving on up" and rolling the money one is able to *save* while living in a nice, but less expensive, area with good home resale when the kids are younger. No matter how you cut it, paying a mortgage (even with 20% down) on a home in an expensive area is hard to sustain, especially if the financial situation changes for the worse.
4. Savings, savings, savings: Saving the max in a company's 401k tax plan makes a big difference in your tax bill and allows you to put away from the future. If you don't do this, your tax bill will be even higher and every additional dollar you earn will be worth less.
5. Used, used, used: Your car that is. Two car payments when you make a quarter of a million makes just as little sense as two car payments when you make a lot less.
6. Debt, debt, debt: Student debt of the couple presented isn't particularly "high" but it, combined with the high mortgage and the car payments is a killer. Getting rid of debt is key to getting and staying ahead.
7. Shave, shave, shave: Even though our couple doesn't go overboard with expenses, if they want to get ahead and stay ahead, they need to shave expenses from each area of their budget. That would be the "little" expenses including activities for the kids, annual vacations, entertainment, dog, transportation (public transportation makes a lot of sense given parking and gas in this budget!), cleaning help, dry cleaning, and food (both take out and lunches--brown bag it!), in addition to controlling he big expenses listed above including the mortgage and automobiles.
As a final note, I have a rule to NEVER include investment income in a regular budget and was a bit surprised to see it included here, although the article shows two bottom lines, one with only earned income and one without earned income. It is a style issue, but I am of the opinion that investment income is best kept in a separate budget and then moved into other investments. If you need your investment income to meet your bottom line, you are way over budget, even if you include 529 college savings in the budget. My preference is to create a separate budget for such investment income and fund other investments from the spin off, or put away the extra for every-ten-year purchases. (Clarification based on a comment: my rule to not include investment income in a regular budget is not actually a never, ever. Obviously, a family in retirement will be relying on their investment income. My comments were more based on the type of budget I would create for a young/youngish family that has limited investment income. To get ahead, I highly recommend that such income should be used to strengthen one's financial position, not building such income into the budget for consumption and meeting regular expenses).
Even if it is hard to relate to the (young) $250,000 couple (there is still $15K in the budget for childcare) and it is easy to imagine that as the kids get older some of the expenses could ease, the article underscores just how important thrift is at all budget levels. And, it underscores the difficult situation that higher income earning couples in our own communities have when tuition is piled on.
P.S. I do realize that some of the out-of-pocket medical expenses are also exaggerated for a family without major issues. I don't know how one gets to over $4000 dental and over$5000 medical with insurance and without (bli ayin hara) major issues. However, the point of the article and anaylsis is still infomative and educational.
Wednesday, September 01, 2010
Guest Post: The New Normal
With thanks CJ Srullowitz, a financial advisor in New York City and blogger. I have more guest posts coming (as well as some original posts) and I am very thankful since I have work coming out my ears, to say nothing of the real work of the month, preparation for Yom Tov.
The New Normal
Once, when I was in the eighth grade, the boys in my class were discussing what to do with their bar mitzvah money. One of the boys mentioned something called a money market, which he explained was just like a savings account, and paid around ten percent interest. To my young, impressionable, pre-teen mind, that number became the benchmark against which all other rates of return were judged; for years, I considered ten percent to be a normal passive rate of return on money.
Fast forward many years. I became a financial advisor. I had already learned that ten percent money market returns were an aberration. In fact, no relatively safe investment could be counted on to deliver a return approaching that number. One would have to take on the full measure of volatility in the stock market to potentially average ten percent over time.
Fast forward to today.
Bill Gross is the co-Chief Investment Officer of PIMCO, a Newport Beach, California money management firm. PIMCO’s flagship Total Return Fund, under the stewardship of Gross, has grown to become the largest mutual fund in the world. Last summer, Gross and company described the economic circumstances and market conditions that they believe will face us over the coming years. They called it “the new normal.”
What is the new normal? Among other things it means slower economic growth, high unemployment, low interest rates, and tepid, “half-sized” - that is to say, four to five percent - stock market returns. In other words, you know the financial crisis we’ve been trying to shake? Well, get used to it. “All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago,” Gross insists.
The new normal will naturally have ramifications in the Jewish world, and in particular, the frum world. Consider:
In 2003, The Wall Street Journal reported how Indians were quickly replacing Jews as the premier diamond dealers in Antwerp, Belgium. The Jews, who had at one point controlled 70% of the trade, saw their influence dwindle to just 25% in a few years. That number is even smaller today. At the time, Henri Rubens, one of the community’s leaders, declared the end of the glory days noting, “We were too complacent. Now that we realize it, it’s too late.” Mr. Rubens went into real estate.
These past few decades have been remarkable for the Jewish nation, and for the Orthodox in particular. We have grown both materially and spiritually, and the two often worked hand-in-hand. Much of our largesse was committed to building a strong infrastructure of homes, shuls, yeshivos and mosdos.
But the last couple of years have been challenging; the infrastructure is showing strain and even some cracks. Many feel that we simply have to get through this rough period before going back to “normal.” But what if we’re in for a new normal? What if we need to adjust our thinking and our budgets accordingly-not just for a few years but permanently?
God will surely provide us with what we need; but our definition of “need” may have to be adjusted. Should a more moderate financial future face us, we must not allow it to slow down our spiritual growth. Our commitment to Torah and mitzvos, to educating our children and feeding our poor, to learning diligently and working honestly, must not waver.
But what we spend on our homes, our cars, our vacations, and even our simchas may need to be reigned in considerably.
The New Normal
Once, when I was in the eighth grade, the boys in my class were discussing what to do with their bar mitzvah money. One of the boys mentioned something called a money market, which he explained was just like a savings account, and paid around ten percent interest. To my young, impressionable, pre-teen mind, that number became the benchmark against which all other rates of return were judged; for years, I considered ten percent to be a normal passive rate of return on money.
Fast forward many years. I became a financial advisor. I had already learned that ten percent money market returns were an aberration. In fact, no relatively safe investment could be counted on to deliver a return approaching that number. One would have to take on the full measure of volatility in the stock market to potentially average ten percent over time.
Fast forward to today.
Bill Gross is the co-Chief Investment Officer of PIMCO, a Newport Beach, California money management firm. PIMCO’s flagship Total Return Fund, under the stewardship of Gross, has grown to become the largest mutual fund in the world. Last summer, Gross and company described the economic circumstances and market conditions that they believe will face us over the coming years. They called it “the new normal.”
What is the new normal? Among other things it means slower economic growth, high unemployment, low interest rates, and tepid, “half-sized” - that is to say, four to five percent - stock market returns. In other words, you know the financial crisis we’ve been trying to shake? Well, get used to it. “All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago,” Gross insists.
The new normal will naturally have ramifications in the Jewish world, and in particular, the frum world. Consider:
- Yeshivos today, most of which were never-even at the height of the economic bubble-flush with funds, are under enormous financial strain. Some are being starved out of existence.
- While Information Technology is poised to be one of the growth areas of the new economy (along with Healthcare and Biotech), many frum people who are “in computers” do not currently possess the knowledge and skills for these jobs. According to a friend of mine who works for a cutting-edge IT firm, many are only trained for obsolete systems and have not kept up with the rapid changes in this field.
- For awhile it seemed like every former yeshiva guy and his brother-in-law were mortgage brokers, working very long days and weeks financing and refinancing properties for anyone and everyone who came along-making terrific commissions along the way. No longer. Fewer people are buying houses, fewer people are qualifying for mortgages, and those who are and do are finding that some banks (Chase, for example) are not taking mortgage loan applications from independent brokers.
- The frum world will always have its share of entrepreneurs, but with the severe tightening of credit, many are not getting the chance to borrow the money required to build, or even expand, businesses. Established real estate investors are finding deals, and many have cash on hand to finance them. But many younger people who are trying to get started in that business have it tough.
- One of the biggest supporters of kollelim in Eretz Yisrael saw his fortune-in the hundreds of millions-evaporate in a matter of weeks. I happened to meet him briefly by chance when he was borrowing office space from a client of mine, and watched as he sat hunched over on his cell phone trying to keep his kollelim from going under. He will survive, but many of his beneficiaries are already leaving kollel and returning to America.
In 2003, The Wall Street Journal reported how Indians were quickly replacing Jews as the premier diamond dealers in Antwerp, Belgium. The Jews, who had at one point controlled 70% of the trade, saw their influence dwindle to just 25% in a few years. That number is even smaller today. At the time, Henri Rubens, one of the community’s leaders, declared the end of the glory days noting, “We were too complacent. Now that we realize it, it’s too late.” Mr. Rubens went into real estate.
These past few decades have been remarkable for the Jewish nation, and for the Orthodox in particular. We have grown both materially and spiritually, and the two often worked hand-in-hand. Much of our largesse was committed to building a strong infrastructure of homes, shuls, yeshivos and mosdos.
But the last couple of years have been challenging; the infrastructure is showing strain and even some cracks. Many feel that we simply have to get through this rough period before going back to “normal.” But what if we’re in for a new normal? What if we need to adjust our thinking and our budgets accordingly-not just for a few years but permanently?
God will surely provide us with what we need; but our definition of “need” may have to be adjusted. Should a more moderate financial future face us, we must not allow it to slow down our spiritual growth. Our commitment to Torah and mitzvos, to educating our children and feeding our poor, to learning diligently and working honestly, must not waver.
But what we spend on our homes, our cars, our vacations, and even our simchas may need to be reigned in considerably.
Saturday, July 03, 2010
Higher Taxes: No I'm not Crazy Thinking that Yeshiva Tuition is Going to Become Even Harder To Pay
With apologies to my readers who object to politically charged posts, please be forgiving . . . . . . I realize that not all my reader are fans of the ATR (Americans for Tax Reform) and might take issue with the use of the terms "ObamaCare" and "Death Tax" as opposed to Health Care Reform and the Estate Tax, but as far as I can tell, all the details in the following article (posted after my ramblings) are accurate. I have also spoken to tax professionals and any repeal of the rollback appears highly unlikely. (Happy 4th of July!)
One thing I can't stand is when discussions of political policy turns completely self-centered and the entire focus of the frum community is inward, i.e. what's in it, or not in it, for me? But one reason I'm pointing out the tax changes coming your way and mine is because this is something the frum world needs to grapple with and get prepared for now. In January 2011 your withholdings should go up. If you are self-employed/contractor, prepare to make greater quarterly payments. In 2012, a higher tax bill is coming. So, feel free to self-center the comments and let us know which tax hikes are going to affect you, and how they will affect your ability to give tzedakah and/or pay yeshiva tuition.
Numbers would be even better (feel free to mark yourself under an anon# name to preserve privacy). I'm not usually so open, but my current calculation of tax hikes (assuming no change in income) between 2010 and 2011 to be in the neighborhood of $2600, which doesn't include changes on dependent care credits and the use of Coverdells. Nor does that include additional tax which we will incur regardless of changes in income as our itemized deductions fall (yeah for refinancing, boo for the rest of it). I've included the social security and state tax damage from capping the Flexible Spending Accounts in my calculation. To put the $2,600 in perspective, it isn't peanuts.
It if probably a good thing that I'm already convinced that yeshiva tuition isn't going to be something we can afford long into the future because, I hate surprises! We might as well start mentally preparing now. As I was trying to explain to a friend recently, adding another tuition + covering the steep tuition increases + all the other expenses that come with age isn't a simple matter of just cutting back on retirement savings because there isn't a 1:1 relationship. (Someone really should remind me not to enter tax planet while on a pleasant day in the park with the kids and the other Moms because I just start running scenarios and talking mostly to myself. Not to be politically incorrect, but ladies generally like to give "chizuk" not listen to ramblings from an accountant about teetering on the edge of credit phaseouts, the next tax bracket, and how big medical expenses are about to become even less affordable).
The article detailing many tax hikes is cut and pasted below. There is a lot of bad news in here for Americans hoping for an economic recovery. There is a tax hike in here for everyone, and by that I mean almost everyone (yes, even Kollel Families!). The 10% tax bracket is being eliminated for starters. Below is a chart of what the estimated tax brackets for 2010 and 2011 for those who want to start making calculations. My apologies for only including Married Filing Jointly. I'm not attempting to discriminate, but to not overload a post with too much information. A few comments, as usual, in orange will be interspersed in the article.
2010 Estimated Tax Brackets (Married Filing Jointly)
10% Bracket $0 – $16,750
15% Bracket $16,750 – $68,000
25% Bracket $68,000 – $137,300
28% Bracket $137,300 – $209,250
33% Bracket $209,250 – $373,650
35% Bracket $373,650+
2011 Estimated Tax Brackets (Married Filing Jointly)
Tax Bracket Married Filing Jointly
15% Bracket $0 – $70,040
28% Bracket $70,040 – $141,419
31% Bracket $141,419 – $215,528
36% Bracket $215,528 – $384,860
39.6% Bracket Over $384,860
Six Months to Go UntilThe Largest Tax Hikes in History From Ryan Ellis on Thursday, July 1, 2010 4:15 PM
BREAKING: Wounded Warriors Face New Tax This Independence Day
In just six months, the largest tax hikes in the history of America will take effect.
They will hit families and small businesses in three great waves on January 1, 2011:
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:
Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
- The 10% bracket rises to an expanded 15% [excluding those who get hit by the AMT, all benefit from the 10% bracket. My experience tells me that many large families and kollel families sit in the 10% bracket]
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%
Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. [Ouch!The child tax credit includes up to 3 children currently. Really an ouch. I mistakenly confused the phaseout on a welfare credit I deal with too often with this credit (oops). This will really hit families hard. Not really an upside, but families that cut back on retirement and hit the phaseout won't get such a double-whammy] The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut. [A hit for dual income families].
The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. [In other words, don't think a yerusha will pay your bills. . . and, no, tax planning isn't just for the super rich].
Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013. [Confusing sentence. In other words, dividends will be taxed as regular income and then, there will be an additional tax on investment income, including royalities and rental properties, come 2013 as part of the Health Care Package].
Second Wave: Obamacare
There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:
The “Medicine Cabinet Tax” Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). [In other words, if you overshoot on your FSA come 2011, you will end up forfeiting the funds because you will no longer be allowed to load up on Advil at tax advantaged prices].
The “Special Needs Kids Tax” This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. [Special Needs is only one demographic sure to be hit by the lowering of the FSA. A few other demographics: families with lots of kids, families paying for catastrophic care, any family paying for braces or major dental work].
The HSA Withdrawal Tax Hike. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.
Third Wave: The Alternative Minimum Tax and Employer Tax Hikes
When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:
The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers. [I wish I understood the AMT better].
Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be “depreciated."
Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.
Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families. [Unlike most employees who must meet a 2% floor before deducting any business expenses as an itemized deduction, educators have been given a nice gift, decreasing both federal and state income tax. Like I said, these changes are broad and there is an increase in there for everyone].
Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there. [Shuls, schools, and all tzedakas listen up. . . the news isn't good].
Read more: http://www.atr.org/sixmonths.html?content=5171#ixzz0sgPL3f3c
One thing I can't stand is when discussions of political policy turns completely self-centered and the entire focus of the frum community is inward, i.e. what's in it, or not in it, for me? But one reason I'm pointing out the tax changes coming your way and mine is because this is something the frum world needs to grapple with and get prepared for now. In January 2011 your withholdings should go up. If you are self-employed/contractor, prepare to make greater quarterly payments. In 2012, a higher tax bill is coming. So, feel free to self-center the comments and let us know which tax hikes are going to affect you, and how they will affect your ability to give tzedakah and/or pay yeshiva tuition.
Numbers would be even better (feel free to mark yourself under an anon# name to preserve privacy). I'm not usually so open, but my current calculation of tax hikes (assuming no change in income) between 2010 and 2011 to be in the neighborhood of $2600, which doesn't include changes on dependent care credits and the use of Coverdells. Nor does that include additional tax which we will incur regardless of changes in income as our itemized deductions fall (yeah for refinancing, boo for the rest of it). I've included the social security and state tax damage from capping the Flexible Spending Accounts in my calculation. To put the $2,600 in perspective, it isn't peanuts.
It if probably a good thing that I'm already convinced that yeshiva tuition isn't going to be something we can afford long into the future because, I hate surprises! We might as well start mentally preparing now. As I was trying to explain to a friend recently, adding another tuition + covering the steep tuition increases + all the other expenses that come with age isn't a simple matter of just cutting back on retirement savings because there isn't a 1:1 relationship. (Someone really should remind me not to enter tax planet while on a pleasant day in the park with the kids and the other Moms because I just start running scenarios and talking mostly to myself. Not to be politically incorrect, but ladies generally like to give "chizuk" not listen to ramblings from an accountant about teetering on the edge of credit phaseouts, the next tax bracket, and how big medical expenses are about to become even less affordable).
The article detailing many tax hikes is cut and pasted below. There is a lot of bad news in here for Americans hoping for an economic recovery. There is a tax hike in here for everyone, and by that I mean almost everyone (yes, even Kollel Families!). The 10% tax bracket is being eliminated for starters. Below is a chart of what the estimated tax brackets for 2010 and 2011 for those who want to start making calculations. My apologies for only including Married Filing Jointly. I'm not attempting to discriminate, but to not overload a post with too much information. A few comments, as usual, in orange will be interspersed in the article.
2010 Estimated Tax Brackets (Married Filing Jointly)
10% Bracket $0 – $16,750
15% Bracket $16,750 – $68,000
25% Bracket $68,000 – $137,300
28% Bracket $137,300 – $209,250
33% Bracket $209,250 – $373,650
35% Bracket $373,650+
2011 Estimated Tax Brackets (Married Filing Jointly)
Tax Bracket Married Filing Jointly
15% Bracket $0 – $70,040
28% Bracket $70,040 – $141,419
31% Bracket $141,419 – $215,528
36% Bracket $215,528 – $384,860
39.6% Bracket Over $384,860
Six Months to Go UntilThe Largest Tax Hikes in History From Ryan Ellis on Thursday, July 1, 2010 4:15 PM
BREAKING: Wounded Warriors Face New Tax This Independence Day
In just six months, the largest tax hikes in the history of America will take effect.
They will hit families and small businesses in three great waves on January 1, 2011:
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:
Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
- The 10% bracket rises to an expanded 15% [excluding those who get hit by the AMT, all benefit from the 10% bracket. My experience tells me that many large families and kollel families sit in the 10% bracket]
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%
Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. [Ouch!
The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. [In other words, don't think a yerusha will pay your bills. . . and, no, tax planning isn't just for the super rich].
Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013. [Confusing sentence. In other words, dividends will be taxed as regular income and then, there will be an additional tax on investment income, including royalities and rental properties, come 2013 as part of the Health Care Package].
Second Wave: Obamacare
There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:
The “Medicine Cabinet Tax” Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). [In other words, if you overshoot on your FSA come 2011, you will end up forfeiting the funds because you will no longer be allowed to load up on Advil at tax advantaged prices].
The “Special Needs Kids Tax” This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. [Special Needs is only one demographic sure to be hit by the lowering of the FSA. A few other demographics: families with lots of kids, families paying for catastrophic care, any family paying for braces or major dental work].
The HSA Withdrawal Tax Hike. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.
Third Wave: The Alternative Minimum Tax and Employer Tax Hikes
When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:
The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers. [I wish I understood the AMT better].
Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be “depreciated."
Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.
Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families. [Unlike most employees who must meet a 2% floor before deducting any business expenses as an itemized deduction, educators have been given a nice gift, decreasing both federal and state income tax. Like I said, these changes are broad and there is an increase in there for everyone].
Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there. [Shuls, schools, and all tzedakas listen up. . . the news isn't good].
Read more: http://www.atr.org/sixmonths.html?content=5171#ixzz0sgPL3f3c
Thursday, June 24, 2010
A Simplistic Approach to Vouchers and one Heck of a Ridiculous Assertion
There is an article in a New Jersey newspaper about the push for private school vouchers coming from Lakewood which happened to be published shortly after my recent post in which I explained why even (political) Conservative, even a right-wing religious fanatic, might be ambivalent about school vouchers (how timely!). While the debate regarding school vouchers might appear to be Republican vs. Democrat/Conservative vs. Liberal, at least on the more Conservative end of the spectrum, there is both support and opposition.
Within the frum community, I've been watching the occasional political push for vouchers and I would label the approach to be 1) simplistic and 2) openly self-serving, neither of which is likely to help garner support needed to push through legislation.
Following is a quote from page 3 of the referenced article which highlights just how simplistic of an approach is being taken:
Cost-savings for the taxpayer of allowing students to choose an education at a lower cost, I think, is almost a no-brainer," Rabbi Shlomo Katz, a member of Igud, Lakewood Jewish schools' equivalent to a board of education, said in his testimony before the statehouse crowd in Trenton. "The only reason we have failing districts today is because there is no competition in education."
I really don't like being taken for stupid, and both of these claims are insulting to the intelligence of the American taxpayer:
1. It is most certainly not a "no-brainer" that there will be tax savings if current private school students were to receive vouchers to subsidize their private education. In fact, the fear that parents have that taxes could rise and/or their own children's public school education will suffer are not unfounded.
In my district, there is a long standing school board member that runs on platform of universal pre-school. The district already provides public pre-school to certain students with special education needs, as well as public pre-school programs and services to low-income students through Head Start. All other parents must either pay for pre-school out of pocket, or wait until Kindergarten to send their children to school. I'd estimate that with little exception, most parents pay for at least one-year of pre-school out of pocket.
Now as a taxpayer who believes that the tax burden where I live is quite burdensome, I have no interest in subsidizing a year of education that parents are already paying for (to say nothing of the issues of increasing the size and reach of government and requiring a year of schooling for this age group--so much for choice, right?).
When NJ taxpayers consider the issue of voucher and paying for private education of students already in private school, they aren't going to see "cost-savings" even if the schools are a third of the cost. Even where a taxpayer sees a public school system full of waste and inefficiency, as many do, paying for students that don't cost the district is still more than $0.
2. " The only reason we have we have failing districts today is because there is no competition in education." [Emphasis added] The only reason? This is such a ridiculous statement, I'm rather embarrassed that it was printed in an article.
Let's leave aside the education in certain schools of our own, for which there is a large amount of competition (I believe there are over 60 Orthodox Jewish schools in Lakewood for approximately 16,000 students. . . compare this to the district I grew up in for which there were 12 schools for about 10,000 students) could be considered lacking in certain areas.
You know it, I know it, and the American taxpayer knows it. Lack of educational choice is hardly the reason why there are failing students and failing districts! There are certainly strong arguments to be made in favor of education competition where students have choice through vouchers, one cannot ignore the fact that the rise of social ills (especially, but not at all limited to the breakdown of the family) has accompanied a decline in education. Blaming failing districts/students on lack of educational choice, something that has yet to exist en masse, is ignoring the elephant in the room.
Within the frum community, I've been watching the occasional political push for vouchers and I would label the approach to be 1) simplistic and 2) openly self-serving, neither of which is likely to help garner support needed to push through legislation.
Following is a quote from page 3 of the referenced article which highlights just how simplistic of an approach is being taken:
Cost-savings for the taxpayer of allowing students to choose an education at a lower cost, I think, is almost a no-brainer," Rabbi Shlomo Katz, a member of Igud, Lakewood Jewish schools' equivalent to a board of education, said in his testimony before the statehouse crowd in Trenton. "The only reason we have failing districts today is because there is no competition in education."
I really don't like being taken for stupid, and both of these claims are insulting to the intelligence of the American taxpayer:
1. It is most certainly not a "no-brainer" that there will be tax savings if current private school students were to receive vouchers to subsidize their private education. In fact, the fear that parents have that taxes could rise and/or their own children's public school education will suffer are not unfounded.
In my district, there is a long standing school board member that runs on platform of universal pre-school. The district already provides public pre-school to certain students with special education needs, as well as public pre-school programs and services to low-income students through Head Start. All other parents must either pay for pre-school out of pocket, or wait until Kindergarten to send their children to school. I'd estimate that with little exception, most parents pay for at least one-year of pre-school out of pocket.
Now as a taxpayer who believes that the tax burden where I live is quite burdensome, I have no interest in subsidizing a year of education that parents are already paying for (to say nothing of the issues of increasing the size and reach of government and requiring a year of schooling for this age group--so much for choice, right?).
When NJ taxpayers consider the issue of voucher and paying for private education of students already in private school, they aren't going to see "cost-savings" even if the schools are a third of the cost. Even where a taxpayer sees a public school system full of waste and inefficiency, as many do, paying for students that don't cost the district is still more than $0.
2. " The only reason we have we have failing districts today is because there is no competition in education." [Emphasis added] The only reason? This is such a ridiculous statement, I'm rather embarrassed that it was printed in an article.
Let's leave aside the education in certain schools of our own, for which there is a large amount of competition (I believe there are over 60 Orthodox Jewish schools in Lakewood for approximately 16,000 students. . . compare this to the district I grew up in for which there were 12 schools for about 10,000 students) could be considered lacking in certain areas.
You know it, I know it, and the American taxpayer knows it. Lack of educational choice is hardly the reason why there are failing students and failing districts! There are certainly strong arguments to be made in favor of education competition where students have choice through vouchers, one cannot ignore the fact that the rise of social ills (especially, but not at all limited to the breakdown of the family) has accompanied a decline in education. Blaming failing districts/students on lack of educational choice, something that has yet to exist en masse, is ignoring the elephant in the room.
Monday, March 22, 2010
Tick Tock
It must be the needed breaks from kitchen cleaning while a chemical penetrates or a grate soaks is what is keeping me coming back to the Wolf's recent post, but after last night's vote to further nationalize healthcare, one-sixth of the economy, I'm not really sure that at the end of the day, between our own mismanagement and the command-and-control economy we are almost certain to end up living in, that there will be much more to discuss. Whether you are a supporter of the health care bill, or you are opposed to it in every way, shape, and form, there is no denying that the bill (should it not be thrown out in the court system or repelled after an upheavel in November) will fundamentally alter the economic landscape here in the United States.
One thought on my mind is that whatever starts to happen in the general economy will be magnified many fold within our own micro-economy. I believe that Jewish communities have an above average number of people employed in the healthcare sector (not just physicians, I'm thinking the big two: Occupational and Speech Therapy). I believe that we also have an above average number of people who draw some of their livelihood indirectly from those in the healthcare sector (lawyers, accountants, programmers, etc, etc, etc). There is already talk of raising taxes on investments, and another large group in the Jewish community draws their livelihood, directly or indirectly, from investors. Our synagogues, schools, and non-profits are also quite dependent donations from those who are directly or indirectly affected by this fundamental change.
In other words, nearly every sector of the American economy and nearly every sector of the Jewish economy, will be affected by this healthcare bill. With the exception of fighting "toeva marriage," I can't recall any of our umbrella organizations fighting against some of the big issues, e.g. the move to a command-and-control economy or the increasing tax burden on "the rich." On second thought, I do believe the OU had a statement regarding capping itemization for charitable donations, but in general the lobbying has been for more money for certain communities and projects and more money/tax credits for yeshivot.
Sorry for the gloom and doom, but I'm very concerned that at the end of the day there won't be much more left to talk about if our economy is fundamentally altered. That's one [wo]man's opinion.
One thought on my mind is that whatever starts to happen in the general economy will be magnified many fold within our own micro-economy. I believe that Jewish communities have an above average number of people employed in the healthcare sector (not just physicians, I'm thinking the big two: Occupational and Speech Therapy). I believe that we also have an above average number of people who draw some of their livelihood indirectly from those in the healthcare sector (lawyers, accountants, programmers, etc, etc, etc). There is already talk of raising taxes on investments, and another large group in the Jewish community draws their livelihood, directly or indirectly, from investors. Our synagogues, schools, and non-profits are also quite dependent donations from those who are directly or indirectly affected by this fundamental change.
In other words, nearly every sector of the American economy and nearly every sector of the Jewish economy, will be affected by this healthcare bill. With the exception of fighting "toeva marriage," I can't recall any of our umbrella organizations fighting against some of the big issues, e.g. the move to a command-and-control economy or the increasing tax burden on "the rich." On second thought, I do believe the OU had a statement regarding capping itemization for charitable donations, but in general the lobbying has been for more money for certain communities and projects and more money/tax credits for yeshivot.
Sorry for the gloom and doom, but I'm very concerned that at the end of the day there won't be much more left to talk about if our economy is fundamentally altered. That's one [wo]man's opinion.
Saturday, December 19, 2009
Incentive
Parshat Miketz offers tried and true savings advice recalling that the grain, during the years of plenty, was collected hand over hand, or in the interpretation of some little by little. Often people through up their hands and proclaim why bother savings as it is impossible to do so anyways with all of the numerous bills, etc.
What they haven't quite comprehended is the power or addition in conjunction with the miracle of compounding interest. There were periods of time when we were able to save money in major lump sums, or what I like to call before tuition or BT. Those days have seemingly passed. But, we are still able to see satisfying changes in financial position for the positive despite no longer being able to save the amounts of the past.
Just a few weeks ago I received my statement from my first 401k from my first job. There is something extremely satisfying about seeing that percentage of investment income earned is about to surpass the amount of money invested. I wish I understood this more clearly when I started this first retirement account. If I could go back in time, I would have invested more pre-tax income. At the time I lacked some incentive.
Speaking of incentive and the parsha, I think there is an important lesson to learn. From a basic reading of the text (I'm ignoring commentaries to the contrary so as to not loose my point), Yosef enacted a one-fifth (20%) tax rate on gross domestic product during the seven years of plenty and the land produced an abundance. He also stored the grains within close proximity of the taxed. Economic theory tells us that overtaxing decreases production, so I think we can reasonably conclude that the tax rate enacted by Yosef was not draconian.
When it comes to yeshiva tuition and tuition assistance, many would like to see parents take on more employment, higher paying jobs, more jobs, etc. It is fantastic that so many parents view tuition as their duty and will go to all lengths to avoid scholarships. But, others simply won't; the incentive is simply not there.
Should schools want to see parents who are on scholarship pay more tuition by increasing their incomes, they need to understand the underpinnings of incentive. If those on tuition assistance believe that if they change their earning situation that the school will nab 100% of the new earnings, they are unlikely to take on additional employment without heavy handed techniques that provide incentive through fear. But, if you only take a smaller amount of the new income and most of the new income can be used at the discretion of the earner, the incentive to earn is kept intact.
Of course, what makes economic sense might not be great school policy. I'm not quite sure how practical it would be to enact a tax on additional income of mothers that return to work, for example, while dual income families are charged tuition at a different rate. There are already plenty of hard feelings on all sides. And speaking of practical, schools really shouldn't be playing big brother any more than they already do. Additionally, when the marginal governmental tax rates (social security + medicare + the marginal federal rate + the marginal state rate) already takes up nearly a third of the income to say nothing of the costs of transport, childcare, and non-tangibles such as decreased family time and stress, there isn't much left for anyone else to grab.
Just some thoughts for this evening. A shavua tov.
Parshat Miketz offers tried and true savings advice recalling that the grain, during the years of plenty, was collected hand over hand, or in the interpretation of some little by little. Often people through up their hands and proclaim why bother savings as it is impossible to do so anyways with all of the numerous bills, etc.
What they haven't quite comprehended is the power or addition in conjunction with the miracle of compounding interest. There were periods of time when we were able to save money in major lump sums, or what I like to call before tuition or BT. Those days have seemingly passed. But, we are still able to see satisfying changes in financial position for the positive despite no longer being able to save the amounts of the past.
Just a few weeks ago I received my statement from my first 401k from my first job. There is something extremely satisfying about seeing that percentage of investment income earned is about to surpass the amount of money invested. I wish I understood this more clearly when I started this first retirement account. If I could go back in time, I would have invested more pre-tax income. At the time I lacked some incentive.
Speaking of incentive and the parsha, I think there is an important lesson to learn. From a basic reading of the text (I'm ignoring commentaries to the contrary so as to not loose my point), Yosef enacted a one-fifth (20%) tax rate on gross domestic product during the seven years of plenty and the land produced an abundance. He also stored the grains within close proximity of the taxed. Economic theory tells us that overtaxing decreases production, so I think we can reasonably conclude that the tax rate enacted by Yosef was not draconian.
When it comes to yeshiva tuition and tuition assistance, many would like to see parents take on more employment, higher paying jobs, more jobs, etc. It is fantastic that so many parents view tuition as their duty and will go to all lengths to avoid scholarships. But, others simply won't; the incentive is simply not there.
Should schools want to see parents who are on scholarship pay more tuition by increasing their incomes, they need to understand the underpinnings of incentive. If those on tuition assistance believe that if they change their earning situation that the school will nab 100% of the new earnings, they are unlikely to take on additional employment without heavy handed techniques that provide incentive through fear. But, if you only take a smaller amount of the new income and most of the new income can be used at the discretion of the earner, the incentive to earn is kept intact.
Of course, what makes economic sense might not be great school policy. I'm not quite sure how practical it would be to enact a tax on additional income of mothers that return to work, for example, while dual income families are charged tuition at a different rate. There are already plenty of hard feelings on all sides. And speaking of practical, schools really shouldn't be playing big brother any more than they already do. Additionally, when the marginal governmental tax rates (social security + medicare + the marginal federal rate + the marginal state rate) already takes up nearly a third of the income to say nothing of the costs of transport, childcare, and non-tangibles such as decreased family time and stress, there isn't much left for anyone else to grab.
Just some thoughts for this evening. A shavua tov.
Sunday, November 29, 2009
Potpourri: Chanukah Gelt, Fundraising, Lending, and Fraud
---The time has come in which schools and Parent Teacher Associations start collecting for holiday gifts. I turned over my check last week and the money is being handled by the president of the PTA who is picking out gifts for the staff and will be letting us know shortly what was collected and what was gifted. School administration is uninvolved with collection and distribution of the funds and contributions are optional. Thankfully we were able to contribute the modest amount requested.
In other schools, the dance is a bit different. Years ago, a friend of mine told me that the Rebbes in her children's school go home with thousands of dollars each Chanukah. In her school, gifts are given to the Rebbes directly by parents/students in a custom known as Chanukah Gelt. Let us leave aside the tax issues for a moment (I do believe this money should be processed through payroll and subject to normal with holdings) and consider the inequity such a practice could potentially create. This custom, as well as the expectation of tipping camp counselors to increase their pay, are problematic and create plenty of animosity.
---The Jewish Standard has another article on the community funding model . I'm glad some people are more optimistic than I because being told that a large and growing communal fund isn't going to lower tuition, but rather just stem the tide of future increases isn't particularly encouraging. I mean, how much higher can tuition go?
The reader who kindly sent me the story informs me that the lowest listed tuition for a school funded by NNJKIDS is $15,000. After five months of fundraising, eight elementary schools received money each received a little over $22,000. There are still many influential people who believe that more fundraising is the answer to communal issues. And certainly where communal fundraising helps the schools communicate, there is a positive benefit. But, as far as I am concerned, the only way to get to the bottom of the issue is to shrink the infrastructure. Meanwhile, I'm told that the infrastructure continues to expand at a multi-million dollar cost.
---Meanwhile, the Jewish Worker asks an important question based on a Mishapacha article, namely are (money lending) gemachs harmful? I do believe there is a prohibition in extending a loan for which payment is simply impossible. Yet in Israel, running from gemach to gemach is a known sport. Borrowed money is known to play into increased costs. I read an interesting article recently in an economic publication that made the argument that had mortgage borrowers been required to place a traditional down payment on homes, there would not have been a bubble to burst.
Here in our own little bubble we are seeing that unsustainable spending habits, fueled largely by credit, have pushed the cost of Orthodoxy into the stratosphere. The extension of credit isn't being used to fund new businesses or learning vocations. It is mostly being used to fund consumption. A return to the (very Jewish) concept of thrift coupled with an avoidance of debt would be most helpful in restoring some economic sanity. It is time to leave this culture of debt behind at the individual level and the organizational level. See a previous post of mine: A Plan that Starts with Debt isn't Must of a Plan.
---Remember that offhand comment from the 5Towns Newspaper Editor to the visiting Rebbe about laundering money to the Eida faction through American schools? Well, it seems that someone is one step ahead because something fraudulent (or is more tzniut language "not nice") is going on in Yerushalayim as Education Ministry officials have discovered that 20,000 Eida Haredit children's names have been used by other Haredi schools that do accept "Zionist money." I'm not quite sure how those names and identification numbers ended up in the hands of the other G-d fearing administrators, but something is definitely fishy. The Eida has proclaimed that they are "aware of the phenomenon." Nevertheless, they refuse to cooperate in the investigation out of ideological motives. I guess theft isn't tzniut or Shabbos, so it isn't important.
---The time has come in which schools and Parent Teacher Associations start collecting for holiday gifts. I turned over my check last week and the money is being handled by the president of the PTA who is picking out gifts for the staff and will be letting us know shortly what was collected and what was gifted. School administration is uninvolved with collection and distribution of the funds and contributions are optional. Thankfully we were able to contribute the modest amount requested.
In other schools, the dance is a bit different. Years ago, a friend of mine told me that the Rebbes in her children's school go home with thousands of dollars each Chanukah. In her school, gifts are given to the Rebbes directly by parents/students in a custom known as Chanukah Gelt. Let us leave aside the tax issues for a moment (I do believe this money should be processed through payroll and subject to normal with holdings) and consider the inequity such a practice could potentially create. This custom, as well as the expectation of tipping camp counselors to increase their pay, are problematic and create plenty of animosity.
---The Jewish Standard has another article on the community funding model . I'm glad some people are more optimistic than I because being told that a large and growing communal fund isn't going to lower tuition, but rather just stem the tide of future increases isn't particularly encouraging. I mean, how much higher can tuition go?
The reader who kindly sent me the story informs me that the lowest listed tuition for a school funded by NNJKIDS is $15,000. After five months of fundraising, eight elementary schools received money each received a little over $22,000. There are still many influential people who believe that more fundraising is the answer to communal issues. And certainly where communal fundraising helps the schools communicate, there is a positive benefit. But, as far as I am concerned, the only way to get to the bottom of the issue is to shrink the infrastructure. Meanwhile, I'm told that the infrastructure continues to expand at a multi-million dollar cost.
---Meanwhile, the Jewish Worker asks an important question based on a Mishapacha article, namely are (money lending) gemachs harmful? I do believe there is a prohibition in extending a loan for which payment is simply impossible. Yet in Israel, running from gemach to gemach is a known sport. Borrowed money is known to play into increased costs. I read an interesting article recently in an economic publication that made the argument that had mortgage borrowers been required to place a traditional down payment on homes, there would not have been a bubble to burst.
Here in our own little bubble we are seeing that unsustainable spending habits, fueled largely by credit, have pushed the cost of Orthodoxy into the stratosphere. The extension of credit isn't being used to fund new businesses or learning vocations. It is mostly being used to fund consumption. A return to the (very Jewish) concept of thrift coupled with an avoidance of debt would be most helpful in restoring some economic sanity. It is time to leave this culture of debt behind at the individual level and the organizational level. See a previous post of mine: A Plan that Starts with Debt isn't Must of a Plan.
---Remember that offhand comment from the 5Towns Newspaper Editor to the visiting Rebbe about laundering money to the Eida faction through American schools? Well, it seems that someone is one step ahead because something fraudulent (or is more tzniut language "not nice") is going on in Yerushalayim as Education Ministry officials have discovered that 20,000 Eida Haredit children's names have been used by other Haredi schools that do accept "Zionist money." I'm not quite sure how those names and identification numbers ended up in the hands of the other G-d fearing administrators, but something is definitely fishy. The Eida has proclaimed that they are "aware of the phenomenon." Nevertheless, they refuse to cooperate in the investigation out of ideological motives. I guess theft isn't tzniut or Shabbos, so it isn't important.
Wednesday, October 28, 2009
An A for Effort?
YWN is reporting that Rabbi Genack, of the OU, put out a letter in support of Governor Corzine's bid for re-election. The goal of the letter appears to be to explain to the Orthodox community why the Governor is best for the community, but the letter is rather puzzling to say the least.
For example, the Rabbi states that the Governor does not support private school vouchers on constitutional, policy, and financial grounds, he would be willing to put together a commission to look into how to support private school students. Correct me if I am mistaken, but New Jersey provides busing to private school students and New Jersey also gives small amounts per students for textbooks and other educational resources.
I view vouchers as almost a pipe dream, despite my ideological support for vouchers (i.e. parental choice in education and competition through the private market). But, nonetheless, every Orthodox group that is politically connected wants vouchers and claims it is a major issue! Officials in both the OU and the Agudah and people who write on the tuition issue have placed their hopes in solving the "tuition crisis" on vouchers. So why, pray tell, would you throw support behind a candidate who has clearly stated that he opposes vouchers? If vouchers are a top issue, endorsing candidates who are open to and/or supportive of vouchers, or at the very least are strong supporters of parental say in education, would seem to be more logical.
Secondly, my understanding is that New Jersey property tax is a huge financial burden. I can't even imagine being faced with property tax bills that exceed the annual payments on our first mortgage. The Rabbi gives the Governor a pat on the back because property taxes haven't risen in the past year as much as previous years writing "last year, the increase in property taxes across the State was the lowest in 10 years." I don't know if this letter was proofed before sending it out to those in the New Jersey Orthodox communities, but I can't see how a lower increase of an already massive burden is of any consolation to families that have seen their property taxes skyrocket. Having to work increased property taxes into an already strained budget wouldn't give me a reason to cheer.
Interesting enough, a school I know of also pointed out the same thing to parents in regards to the last tuition increase. Know your audience! Fine, you didn't raise tuition 7% like in previous years. The parents who are paying still feel soaked!
And speaking of knowing your audience, Rabbi Genack endorses the Governor because he has "delivered nearly $7 billion in property tax relief to New Jersey families. And, this year, even while he cut the budget, he preserved rebates for seniors and those who need it most – families with incomes $75,000 and below."
Now this letter didn't go out to families in blue collar neighborhoods or upwardly mobile lower to middle income neighborhood, it was directed at modern Orthodox families. Like honestly frum who is "disturbed" by the letter, I have to ask, how many families make a combined income of "only" $75,000? Certainly some families do. But the majority of the families receiving this letter that are desperate for some tax relief likely make into the six figures. Those families already carry a high tax burden at the federal and state level, and they would like some tax relief too, not an assurance that the Governor is trying and that he deserves an "A for effort" because the percentage increase wasn't as steep as in past years.
Know your audience is a prime rule in politics and public relations. Unless I am sorely mistaken, I can't imagine that Teaneck residents are going to be terribly impressed by a commission on how to help private schools while there have already been cutbacks, increased property taxes (even if the increases are lower than in past years, and proposed tax relief for households making less than $75,000*.
Letters like this make me wonder if those representing ours interests in the halls of government actually understand the difficulties being experienced.
Comments please.
*Note: This is not to endorse not granting tax relief to families making such an income, just a note that few families reading the letter will see the potential for relief as applicable to their household.
YWN is reporting that Rabbi Genack, of the OU, put out a letter in support of Governor Corzine's bid for re-election. The goal of the letter appears to be to explain to the Orthodox community why the Governor is best for the community, but the letter is rather puzzling to say the least.
For example, the Rabbi states that the Governor does not support private school vouchers on constitutional, policy, and financial grounds, he would be willing to put together a commission to look into how to support private school students. Correct me if I am mistaken, but New Jersey provides busing to private school students and New Jersey also gives small amounts per students for textbooks and other educational resources.
I view vouchers as almost a pipe dream, despite my ideological support for vouchers (i.e. parental choice in education and competition through the private market). But, nonetheless, every Orthodox group that is politically connected wants vouchers and claims it is a major issue! Officials in both the OU and the Agudah and people who write on the tuition issue have placed their hopes in solving the "tuition crisis" on vouchers. So why, pray tell, would you throw support behind a candidate who has clearly stated that he opposes vouchers? If vouchers are a top issue, endorsing candidates who are open to and/or supportive of vouchers, or at the very least are strong supporters of parental say in education, would seem to be more logical.
Secondly, my understanding is that New Jersey property tax is a huge financial burden. I can't even imagine being faced with property tax bills that exceed the annual payments on our first mortgage. The Rabbi gives the Governor a pat on the back because property taxes haven't risen in the past year as much as previous years writing "last year, the increase in property taxes across the State was the lowest in 10 years." I don't know if this letter was proofed before sending it out to those in the New Jersey Orthodox communities, but I can't see how a lower increase of an already massive burden is of any consolation to families that have seen their property taxes skyrocket. Having to work increased property taxes into an already strained budget wouldn't give me a reason to cheer.
Interesting enough, a school I know of also pointed out the same thing to parents in regards to the last tuition increase. Know your audience! Fine, you didn't raise tuition 7% like in previous years. The parents who are paying still feel soaked!
And speaking of knowing your audience, Rabbi Genack endorses the Governor because he has "delivered nearly $7 billion in property tax relief to New Jersey families. And, this year, even while he cut the budget, he preserved rebates for seniors and those who need it most – families with incomes $75,000 and below."
Now this letter didn't go out to families in blue collar neighborhoods or upwardly mobile lower to middle income neighborhood, it was directed at modern Orthodox families. Like honestly frum who is "disturbed" by the letter, I have to ask, how many families make a combined income of "only" $75,000? Certainly some families do. But the majority of the families receiving this letter that are desperate for some tax relief likely make into the six figures. Those families already carry a high tax burden at the federal and state level, and they would like some tax relief too, not an assurance that the Governor is trying and that he deserves an "A for effort" because the percentage increase wasn't as steep as in past years.
Know your audience is a prime rule in politics and public relations. Unless I am sorely mistaken, I can't imagine that Teaneck residents are going to be terribly impressed by a commission on how to help private schools while there have already been cutbacks, increased property taxes (even if the increases are lower than in past years, and proposed tax relief for households making less than $75,000*.
Letters like this make me wonder if those representing ours interests in the halls of government actually understand the difficulties being experienced.
Comments please.
*Note: This is not to endorse not granting tax relief to families making such an income, just a note that few families reading the letter will see the potential for relief as applicable to their household.
Monday, October 26, 2009
Education and Economics: "Financial Aid"
The part in orange is outdated as the Justice Department put a stop to this practice, but I'm including it for context. While the Ivy Leagues may no longer collude, it is certainly relevant to the discussion of tuition as such a practice was just proposed by a Brooklyn school principal in the Yated who is upset that parents are "shopping around" for schools. He believes a "unified standard of tuition as well as scholarship standards" can put a stop to this awful practice. It certainly could put a stop to such a practice and destroy any semblance of a market. So take the orange notes in historical context. Additionally, even where there is not organized collusion, I have heard of certain schools that wait to see where other schools set tuition before raising their tuition.
While the parallels to our own yeshiva system are not particularly strong, I do see some parallels, most specifically that "financial aid" in the form of credit and perhaps even "subsidies" from grandparents allow (combined, of course, with pressure to stay within the system) allows for an exponential increase in tuition. Additionally, our schools know a tremendous amount about the finances of their applicants and are able to create individual tuition prices, which is probably one of the challenges that stands in the way of creating "Chevrolet Schools."
I hope that everyone has taken some new idea out of these excerpts. I feel I have more clarification over certain concepts. So, at the very least, it has been interesting to me. :)
In the ordinary transactions of the marketplace, competition from rival producers limits how much a given business can charge its customers. In the academic world, however, organized collusion among some of the most expensive colleges has stripped the students and their parents of this consumer protection. Each spring, for 35 years, the Ivy League colleges, M.I.T., Amherst, Northwestern, and a dozen other colleges and universities have met to decide how much money they would charge, as a net price, to each individual student out of more than 10,000 students who have applied to more than one institution in this cartel. The lists of students have been compiled before the annual meetings and officials from the various colleges have decided how much money could be extracted from each individual, given parental income, bank account balance, home equity, and other financial factors. Where their estimates differed, these differences were reconciled in the meetings and the student then received so-call "financial aid" offers so coordinated that the net cost of going to one college in the cartel would be the same as the net cost of going to another.
The U.S. Department of Justice began investigating these and other colleges in 1989. With a legal threat of anti-trust prosecution by the government, and a class action suit on behalf of students, handing over this group of colleges, pending the outcome of the investigation, Yale and Barnard dropped out of the meetings in 1990, and in 1991 the meetings were canceled.
A cartel or a monopoly maximizes its profits by charging not only a high price but also, if possible, a different price to different groups of customers, according to what they market will bear in each separate case. Seldom can most business cartels or monopolies carry this to the ultimate extreme of charging each individual customer what the traffic will bear, as the academic cartel did. But academic institutions are armed with more detailed financial information from financial aid forms than most credit agencies require, and for decades have been comparing notes when setting their prices, in a way that would long ago have caused a business to be prosecuted for violation of the anti-trust laws. In other respects, however, the colleges and universities use the same methods as business cartels or monopolies. Like monopolistic price discriminators in the commercial world, private colleges and universities set an unrealistically high list price and then offer varying discounts. In academia, this list price is called tuition and the discounts is called "financial aid."
The widespread availability of financial aid--often received by more than half of the students at the more expensive colleges--changes the whole nature of tuition. Back when scholarships were awarded to a needy fraction of the students, this was clearly a matter of philanthropy and reward for academic ability. Today, varying amounts of financial aid are awarded up and down the income scale, and very little of it has anything to do with the quality of the student's academic record or with philanthropy to the poor. Approximately two-thirds of the undergraduates at Harvard and four-fifths of those at Rice receive financial aid. The average family income of financial aid recipients at Harvard in academic year 1990-91 was $45,000. These financial aid recipients included more than 400 whose family incomes were above $70,000, of whom 64 came from families with incomes exceeding $100,000.
Harvard is not unique in this respect. At Marquette University, for example, out of 119 students in the class of 1989--90 who came from families with incomes of $60,000 to $70,000 and who applied for financial aid, 71 were declared eligible for it, as were 74 of 192 students from families with incomes above $70,000. Similar figures are common at other private colleges and universities. The President of M.I.T. noted that financial aid applicants at that institutions "are distributed almost uniformly across the spectrum of family income." The percentage of applicants who receive aid typically varies by income level and so does the amount of the aid received, so that the net price actually charged is adjusted to the most that can be extracted from each applicant's family.
Ordinarily, price discrimination does not work in a competitive marketplace, because those charge extortionate prices will be bid away by competitors, until the price is competed down to a level commensurate with the cost of producing whatever commodity or service is being sold. But this does not happen among high-priced colleges which engage in organized collusion. The picture is complicated somewhat by the fact that the term "financial aid" encompasses both paper discounts from tuitions listed in college catalogues and actual transfers of money--the real bulk of this money being government-provided or government-subsidized. Philanthropic aid also continues, enabling a needy fraction of students to cover their cost of living, as well as tuition. Fundamentally, however, college-provided "financial aid" is a method of producing a sliding scale of tuition charges, like ordinary price discrimination elsewhere--and like successful price discrimination elsewhere, it is a by-product of collusion.
The part in orange is outdated as the Justice Department put a stop to this practice, but I'm including it for context. While the Ivy Leagues may no longer collude, it is certainly relevant to the discussion of tuition as such a practice was just proposed by a Brooklyn school principal in the Yated who is upset that parents are "shopping around" for schools. He believes a "unified standard of tuition as well as scholarship standards" can put a stop to this awful practice. It certainly could put a stop to such a practice and destroy any semblance of a market. So take the orange notes in historical context. Additionally, even where there is not organized collusion, I have heard of certain schools that wait to see where other schools set tuition before raising their tuition.
While the parallels to our own yeshiva system are not particularly strong, I do see some parallels, most specifically that "financial aid" in the form of credit and perhaps even "subsidies" from grandparents allow (combined, of course, with pressure to stay within the system) allows for an exponential increase in tuition. Additionally, our schools know a tremendous amount about the finances of their applicants and are able to create individual tuition prices, which is probably one of the challenges that stands in the way of creating "Chevrolet Schools."
I hope that everyone has taken some new idea out of these excerpts. I feel I have more clarification over certain concepts. So, at the very least, it has been interesting to me. :)
In the ordinary transactions of the marketplace, competition from rival producers limits how much a given business can charge its customers. In the academic world, however, organized collusion among some of the most expensive colleges has stripped the students and their parents of this consumer protection. Each spring, for 35 years, the Ivy League colleges, M.I.T., Amherst, Northwestern, and a dozen other colleges and universities have met to decide how much money they would charge, as a net price, to each individual student out of more than 10,000 students who have applied to more than one institution in this cartel. The lists of students have been compiled before the annual meetings and officials from the various colleges have decided how much money could be extracted from each individual, given parental income, bank account balance, home equity, and other financial factors. Where their estimates differed, these differences were reconciled in the meetings and the student then received so-call "financial aid" offers so coordinated that the net cost of going to one college in the cartel would be the same as the net cost of going to another.
The U.S. Department of Justice began investigating these and other colleges in 1989. With a legal threat of anti-trust prosecution by the government, and a class action suit on behalf of students, handing over this group of colleges, pending the outcome of the investigation, Yale and Barnard dropped out of the meetings in 1990, and in 1991 the meetings were canceled.
A cartel or a monopoly maximizes its profits by charging not only a high price but also, if possible, a different price to different groups of customers, according to what they market will bear in each separate case. Seldom can most business cartels or monopolies carry this to the ultimate extreme of charging each individual customer what the traffic will bear, as the academic cartel did. But academic institutions are armed with more detailed financial information from financial aid forms than most credit agencies require, and for decades have been comparing notes when setting their prices, in a way that would long ago have caused a business to be prosecuted for violation of the anti-trust laws. In other respects, however, the colleges and universities use the same methods as business cartels or monopolies. Like monopolistic price discriminators in the commercial world, private colleges and universities set an unrealistically high list price and then offer varying discounts. In academia, this list price is called tuition and the discounts is called "financial aid."
The widespread availability of financial aid--often received by more than half of the students at the more expensive colleges--changes the whole nature of tuition. Back when scholarships were awarded to a needy fraction of the students, this was clearly a matter of philanthropy and reward for academic ability. Today, varying amounts of financial aid are awarded up and down the income scale, and very little of it has anything to do with the quality of the student's academic record or with philanthropy to the poor. Approximately two-thirds of the undergraduates at Harvard and four-fifths of those at Rice receive financial aid. The average family income of financial aid recipients at Harvard in academic year 1990-91 was $45,000. These financial aid recipients included more than 400 whose family incomes were above $70,000, of whom 64 came from families with incomes exceeding $100,000.
Harvard is not unique in this respect. At Marquette University, for example, out of 119 students in the class of 1989--90 who came from families with incomes of $60,000 to $70,000 and who applied for financial aid, 71 were declared eligible for it, as were 74 of 192 students from families with incomes above $70,000. Similar figures are common at other private colleges and universities. The President of M.I.T. noted that financial aid applicants at that institutions "are distributed almost uniformly across the spectrum of family income." The percentage of applicants who receive aid typically varies by income level and so does the amount of the aid received, so that the net price actually charged is adjusted to the most that can be extracted from each applicant's family.
Ordinarily, price discrimination does not work in a competitive marketplace, because those charge extortionate prices will be bid away by competitors, until the price is competed down to a level commensurate with the cost of producing whatever commodity or service is being sold. But this does not happen among high-priced colleges which engage in organized collusion. The picture is complicated somewhat by the fact that the term "financial aid" encompasses both paper discounts from tuitions listed in college catalogues and actual transfers of money--the real bulk of this money being government-provided or government-subsidized. Philanthropic aid also continues, enabling a needy fraction of students to cover their cost of living, as well as tuition. Fundamentally, however, college-provided "financial aid" is a method of producing a sliding scale of tuition charges, like ordinary price discrimination elsewhere--and like successful price discrimination elsewhere, it is a by-product of collusion.
Next up: To be determined.
Sunday, October 25, 2009
The Economics of Education Continued
I have been breaking this portion down for readability. The last section was about how government subsidies, student loans, and other debt tools continue to make tuition rates rise. I believe this parallels some of the financing trends we see vis-a-vis Yeshiva tuition where families beg, borrow, and sometimes even steal to continue to pay ever increasing costs. The last section also examined the bundling of services and how tuition payers are told they are getting a good deal, and therefore shouldn't complain, when in fact there is no average cost of a joint product. At the grade school level, I believe Yeshiva tuition is mostly reflective of cost, but by the high school level there is certainly a bundle of products in some schools.
Continuing:
It may seem odd that college admissions directors are under heavy pressure to enroll more students, if the college are losing money on each student enrolled, as academic administrators so often claim. When Darmouth vice-president Robert Field announced that the college was accepting more transfer students, in order to bring in more revenue, the Dartmouth Review asked editorially: "How can Field make more money on new students when every time he raises tuition, he claims tuition pays for only half the cost of each student?" The probing question goes to the heart of the economic issue, and its answer depends upon incremental costs. Once a college is built and its dormitories and classroom buildings are in place, the additional or incremental costs of adding more students is relatively low, so long as their numbers do not exceed the existing capacity. Within those limits, adding more students may well bring in far more additional revenue than any additional costs they represent.
The claim by college administrators that tuition does not cover the average cost of a college education is both meaningless and misleading. It is meaningless because there is no such thing as the average cost of a joint product, and it is misleading because there is no more reason why tuitions should cover all the costs of a college than there is for magazine subscriptions to cover all the costs of producing a magazine. Advertisers often pay most of the costs of producing a magazine or newspaper, and advertisements, just as academic institutions produce both teaching and research. No one believes that magazine are doing a favor to their subscribers by offering subscriptions at prices which do not cover the average cost of producing the magazine. Nor do magazines make any such sanctimonious claims.
It is commonplace in the ordinary business transactions of the marketplace for joint products to be sold simultaneously to different groups, no one of whom pays enough to cover the total costs of the business. A professional baseball team not only sells tickets to those who enter its stadium; it also sells television and radio rights to broadcasters who cover the game, and rents out the stadium to others who use it for rock concerts, boxing matches, and other events while the team is on the road or during the off-season. If ticket prices for baseball games rose to exorbitant levels, it would be no answer to the fans to say that they were still not being charged enough to cover the total costs of the baseball club. Yet colleges and universities use this as an argument against students and their parents who complain about exorbitant tuition.
More to come, most importantly about how schools can maintain a monopoly while costs skyrockets. Extremely important to help understand why it is difficult to create alternatives within the market!
I have been breaking this portion down for readability. The last section was about how government subsidies, student loans, and other debt tools continue to make tuition rates rise. I believe this parallels some of the financing trends we see vis-a-vis Yeshiva tuition where families beg, borrow, and sometimes even steal to continue to pay ever increasing costs. The last section also examined the bundling of services and how tuition payers are told they are getting a good deal, and therefore shouldn't complain, when in fact there is no average cost of a joint product. At the grade school level, I believe Yeshiva tuition is mostly reflective of cost, but by the high school level there is certainly a bundle of products in some schools.
Continuing:
It may seem odd that college admissions directors are under heavy pressure to enroll more students, if the college are losing money on each student enrolled, as academic administrators so often claim. When Darmouth vice-president Robert Field announced that the college was accepting more transfer students, in order to bring in more revenue, the Dartmouth Review asked editorially: "How can Field make more money on new students when every time he raises tuition, he claims tuition pays for only half the cost of each student?" The probing question goes to the heart of the economic issue, and its answer depends upon incremental costs. Once a college is built and its dormitories and classroom buildings are in place, the additional or incremental costs of adding more students is relatively low, so long as their numbers do not exceed the existing capacity. Within those limits, adding more students may well bring in far more additional revenue than any additional costs they represent.
The claim by college administrators that tuition does not cover the average cost of a college education is both meaningless and misleading. It is meaningless because there is no such thing as the average cost of a joint product, and it is misleading because there is no more reason why tuitions should cover all the costs of a college than there is for magazine subscriptions to cover all the costs of producing a magazine. Advertisers often pay most of the costs of producing a magazine or newspaper, and advertisements, just as academic institutions produce both teaching and research. No one believes that magazine are doing a favor to their subscribers by offering subscriptions at prices which do not cover the average cost of producing the magazine. Nor do magazines make any such sanctimonious claims.
It is commonplace in the ordinary business transactions of the marketplace for joint products to be sold simultaneously to different groups, no one of whom pays enough to cover the total costs of the business. A professional baseball team not only sells tickets to those who enter its stadium; it also sells television and radio rights to broadcasters who cover the game, and rents out the stadium to others who use it for rock concerts, boxing matches, and other events while the team is on the road or during the off-season. If ticket prices for baseball games rose to exorbitant levels, it would be no answer to the fans to say that they were still not being charged enough to cover the total costs of the baseball club. Yet colleges and universities use this as an argument against students and their parents who complain about exorbitant tuition.
More to come, most importantly about how schools can maintain a monopoly while costs skyrockets. Extremely important to help understand why it is difficult to create alternatives within the market!
Friday, October 23, 2009
The Economics of Education: Average Cost
I am splitting the next series of posts into three separate posts to try to separate out some ideas on the economics of education. Thomas Sowell, a well known economist and author, in his writings is addressing College and University education. But I believe that some of the concepts contained herein are also relevant to Yeshiva Education, albeit in a less direct way perhaps. I believe this is the case most particularly in Yeshivot that host numerous functions (kollelim, post-high school Beit Midrash, high schools, adult education for the community at large and/or Beit Midrash/kollel grads, and dorming).
I am highlighting some key economic points that I do believe are extremely important and relevant and I hope this post and additional posts will bring some clarity. They certainly have help me clarity many ideas I have worked with on my blog, which is why I want to get them out of paper.
Read on:
. . . .when parents are being asked to borrow against the equity in their homes to pay rising tuition, it is not simply to cover the increased cost of educating their children, but also to help underwrite the many new boondoggles thought up by faculty and administrators, operating with little sense of financial constraints. As an official of the U.S. Department of Education put it, many college "choose to increase tuition because they can get away with it." While college claim that the increased spending is to improve education, this official saw it as going into "the swelling of the ranks of vice presidents and deans" and to other costly endeavors which make little or no contribution to the quality education, which is "not a function of money." The availability of federal grants and loans to help students meet rising tuition costs virtually ensures that those costs will rise. . . . . .
Arguments have often been made that students are getting a good deal from college, because tuition does not cover the full costs of their education. Such statements are much more difficult to check than they might seem to be. First of all, education is not the only activity going on at research universities, and even at liberal arts colleges, research is increasingly expected of the professors. This research is paid for not only by faculty grants but also by reduced teaching loads--which is to say, by hiring far more professors than were required before to teach the same number of courses. These additional costs may be carried on the books as instructional costs, but they are in fact research costs. Almost anything can be treated as a cost of education students -- on paper. At the University of Texas, for example, more than $11 million of student fee payments were applied to paying for construction of a microelectronics research facility, located more than 6 miles away from the campus.
The research imperative has spread across all kinds of institutions and down the academic pecking order. Virtually everywhere, the education of undergraduates is a joint product, along with research and other activities. As any economist knows, there is no such thing as an average cost of producing a joint product -- that is, there is no such thing as the average cost of producing pig skin, because it is produced jointly with bacon, ham, and pork chops. There is an average cost of producing a pig, but not its components, which cannot be produced separately.
Even if it were possible to separate out the cost of undergraduate education, there is no reason why tuition should cover it, since alumni and other donors contribute money for the express purpose of subsidizing education. Endowment funds often were contributed for the same purpose. When college and university administrators expand their empires by raising tuition, this is not necessarily an enhancement of education, nor something reflecting student demand through the marketplace. In the public institutions, where most students go, it is largely a matter of administrators' convincing legislators to contribute the taxpayers' money.
To be continued. . . . ..
I am splitting the next series of posts into three separate posts to try to separate out some ideas on the economics of education. Thomas Sowell, a well known economist and author, in his writings is addressing College and University education. But I believe that some of the concepts contained herein are also relevant to Yeshiva Education, albeit in a less direct way perhaps. I believe this is the case most particularly in Yeshivot that host numerous functions (kollelim, post-high school Beit Midrash, high schools, adult education for the community at large and/or Beit Midrash/kollel grads, and dorming).
I am highlighting some key economic points that I do believe are extremely important and relevant and I hope this post and additional posts will bring some clarity. They certainly have help me clarity many ideas I have worked with on my blog, which is why I want to get them out of paper.
Read on:
. . . .when parents are being asked to borrow against the equity in their homes to pay rising tuition, it is not simply to cover the increased cost of educating their children, but also to help underwrite the many new boondoggles thought up by faculty and administrators, operating with little sense of financial constraints. As an official of the U.S. Department of Education put it, many college "choose to increase tuition because they can get away with it." While college claim that the increased spending is to improve education, this official saw it as going into "the swelling of the ranks of vice presidents and deans" and to other costly endeavors which make little or no contribution to the quality education, which is "not a function of money." The availability of federal grants and loans to help students meet rising tuition costs virtually ensures that those costs will rise. . . . . .
Arguments have often been made that students are getting a good deal from college, because tuition does not cover the full costs of their education. Such statements are much more difficult to check than they might seem to be. First of all, education is not the only activity going on at research universities, and even at liberal arts colleges, research is increasingly expected of the professors. This research is paid for not only by faculty grants but also by reduced teaching loads--which is to say, by hiring far more professors than were required before to teach the same number of courses. These additional costs may be carried on the books as instructional costs, but they are in fact research costs. Almost anything can be treated as a cost of education students -- on paper. At the University of Texas, for example, more than $11 million of student fee payments were applied to paying for construction of a microelectronics research facility, located more than 6 miles away from the campus.
The research imperative has spread across all kinds of institutions and down the academic pecking order. Virtually everywhere, the education of undergraduates is a joint product, along with research and other activities. As any economist knows, there is no such thing as an average cost of producing a joint product -- that is, there is no such thing as the average cost of producing pig skin, because it is produced jointly with bacon, ham, and pork chops. There is an average cost of producing a pig, but not its components, which cannot be produced separately.
Even if it were possible to separate out the cost of undergraduate education, there is no reason why tuition should cover it, since alumni and other donors contribute money for the express purpose of subsidizing education. Endowment funds often were contributed for the same purpose. When college and university administrators expand their empires by raising tuition, this is not necessarily an enhancement of education, nor something reflecting student demand through the marketplace. In the public institutions, where most students go, it is largely a matter of administrators' convincing legislators to contribute the taxpayers' money.
To be continued. . . . ..
Sunday, September 06, 2009
Excellent Article: The Frum "Cash for Clunkers" Mentality
Great article! Wish I wrote it. :) And from the Yated no less. I will file this under GOOD Financial Advice.
The Frum “Cash for Clunkers’ Mentality
by Avrohom Birnbaum
I have an admission to make. It’s going to be difficult to get it out of my mouth, or out of my keyboard and on to the screen, but I am going to gather the strength, steel myself, overcome the difficulty and make the admission. Okay, here goes: I drive a 1998 Ford Windstar! There. I did it! I got it out. It’s now public knowledge. I feel better already.
Yes, I am one of those guys who usually drives around town in what is classified as a bonafide old clunker!It even fits the criteria of “clunker” as set forth by our beloved commander-in-chief, President Barack Obama. Why, then, am I so hesitant about publicizing my admission? Is it because my car is missing most of its hubcaps? Is it perhaps because it has several unsightly dents and even has paint peeling in a couple of spots?
Maybe it’s because I am one of the only people driving that model car without Pennsylvania license plates and am a legal upstanding citizen of this great republic. Either way, over the past few weeks, a number of goodhearted souls have told me that they feel happy for me that I will now be able to trade in my clunker and receive some $4,500 from Mr. Obama towards a spanking brand new car. After all, my 1998 Windstar fits all of the government mandated criteria - it is a gas guzzling old car that I have owned for approximately 9 years, thus making me a textbook case of one who is eligible for the program. “Wouldn’t it be nice to trade in the old bus for a new Honda Accord, Toyota Camry, or perhaps even a Honda Odyssey?” a good friend proposed. The philosophical, one-word answer that I gave him was, “No.” I may get a $4,500 discount on the new car, but after all is said and done, the new car, with taxes, will cost me more than $20,000. That’s a lot of money that I am not willing to pay, or better said, put on credit, when I have multiple tuitions to pay and myriad other expenses that are part and parcel of sustaining a family. My trusty old clunker will just have to do for as long as the One Above grants it life. And, when its day comes, I suspect that it will be exchanged for another clunker that will once again fit Obama’s criteria.
My friend countered with what seemed to be an irrefutable argument. “You can buy the new car and then sell it after two years. You will get back virtually the entire balance of your loan and you will have had the use of a beautiful, brand new car for two years, for nothing. Zippo! Zilcho! Free!”
The refutation of his logic targets the crux of what is so troubling about the Cash for Clunkers program, and the many similar justifications that so many people make for buying things that are really out of their range. Firstly, after two years of enjoying the car, it is very unlikely that one will sell it. If one does sell it, one will be hard-pressed to step back into an old clunker after experiencing the taam of driving a brand new, mechanic-free, headache-free car. Taking advantage of the program will effectively place one in a status bracket and accustom him to a comfort level that he cannot afford.
That is the truly troublesome issue with the Cash for Clunkers program. It encourages the population to spend beyond their means and go into unsustainable credit debt. Was that not one of catalysts for the economic crisis in the first place?Indeed, one need not avail himself of the Cash for Clunkers program to see how - way before Obama cooked up the program - this mentality had already seeped into many areas of our own lives.
Recently, I was conversing with a frum electrician employed by many in the frum communities in both New Jersey and New York. He told me that in the 13 years since he began working, he has discerned a fundamental metamorphosis. “The standard of home in which I worked 13 years ago, which was limited to only the considerably wealthy, is today the home of the simple, poor or lower middle class income family.”
I asked him, “How could it be? How could a person with minimal income buy the kind of house that only the wealthy possessed a decade or a decade and a half ago?”
He replied, “Most of them have elaborate cheshbonos that ‘made it impossible for them not to buy the home’! It sort of goes like this,” he explained. “They get their hands on or borrow a certain sum that serves as a down payment. Then they design the house to have a rental; the industrious ones even find a design that allows for two rentals. Then they plan on living in the basement for at least five years while renting out the upstairs. If they do all of that, their monthly portion of the bill is just several hundred dollars more than they would be paying if they had to rent. Therefore, it would be a crime not to buy and own your own large home, no?!”
This is the classic example of how the Cash for Clunkers syndrome infiltrated our thinking long before the president proposed it. Everyone is a brilliant oiber chochom, concocting elaborate schemes to justify the excess. If everything works according to the scheme, one would be a fool not to buy the large house. Never mind the fact that so many of these people are young couples, barely after marriage, who are undertaking massive mortgages and massive debt that could destroy them if all the cheshbonos don’t work out as planned. Let’s say the rental market falls drastically. Let’s say the property taxes skyrocket. There are so many scenarios that can doom a person if he does not have a realistic cushion. Even if he is not doomed and somehow comes up with the payments, he will be in a constant state of angst about how he will come up with the astronomic monthly sum to cover the payment and thus forfeit some of his most precious assets: menuchas hanefesh, time for learning, shalom bayis, time with the children, and the list goes on... All because he thought he was smarter than everyone and the “opportunity” was too good not to take advantage of.
Perhaps we, as a community, should stop to ask ourselves whether we have been guilty of the same fundamental mistake and premise that is wrong with the Obama Cash for Clunkers program. Are we being oiber chachomim when it comes to our lifestyles? Are many of us behaving like “Obama on steroids”? Not only with the houses that we must have, and the cars that we must buy…or lease, but also with the clothes we buy, the recreation we “require,” and the general lifestyles that we live? Sometimes, driving the 1998 Windstar can ultimately afford one a greater comfort level than the brand new car. Sometimes, living for the first decade of marriage in a rented apartment or a small starter house while not giving a couple room to spread out surely affords them the room to breathe. Are the new car and the new house really worth it? What is the price - both spiritual and material - that they are truly costing? Perhaps it is time to analyze these questions in a moment of brutal, unadulterated emes. Think about it.
Great article! Wish I wrote it. :) And from the Yated no less. I will file this under GOOD Financial Advice.
The Frum “Cash for Clunkers’ Mentality
by Avrohom Birnbaum
I have an admission to make. It’s going to be difficult to get it out of my mouth, or out of my keyboard and on to the screen, but I am going to gather the strength, steel myself, overcome the difficulty and make the admission. Okay, here goes: I drive a 1998 Ford Windstar! There. I did it! I got it out. It’s now public knowledge. I feel better already.
Yes, I am one of those guys who usually drives around town in what is classified as a bonafide old clunker!It even fits the criteria of “clunker” as set forth by our beloved commander-in-chief, President Barack Obama. Why, then, am I so hesitant about publicizing my admission? Is it because my car is missing most of its hubcaps? Is it perhaps because it has several unsightly dents and even has paint peeling in a couple of spots?
Maybe it’s because I am one of the only people driving that model car without Pennsylvania license plates and am a legal upstanding citizen of this great republic. Either way, over the past few weeks, a number of goodhearted souls have told me that they feel happy for me that I will now be able to trade in my clunker and receive some $4,500 from Mr. Obama towards a spanking brand new car. After all, my 1998 Windstar fits all of the government mandated criteria - it is a gas guzzling old car that I have owned for approximately 9 years, thus making me a textbook case of one who is eligible for the program. “Wouldn’t it be nice to trade in the old bus for a new Honda Accord, Toyota Camry, or perhaps even a Honda Odyssey?” a good friend proposed. The philosophical, one-word answer that I gave him was, “No.” I may get a $4,500 discount on the new car, but after all is said and done, the new car, with taxes, will cost me more than $20,000. That’s a lot of money that I am not willing to pay, or better said, put on credit, when I have multiple tuitions to pay and myriad other expenses that are part and parcel of sustaining a family. My trusty old clunker will just have to do for as long as the One Above grants it life. And, when its day comes, I suspect that it will be exchanged for another clunker that will once again fit Obama’s criteria.
My friend countered with what seemed to be an irrefutable argument. “You can buy the new car and then sell it after two years. You will get back virtually the entire balance of your loan and you will have had the use of a beautiful, brand new car for two years, for nothing. Zippo! Zilcho! Free!”
The refutation of his logic targets the crux of what is so troubling about the Cash for Clunkers program, and the many similar justifications that so many people make for buying things that are really out of their range. Firstly, after two years of enjoying the car, it is very unlikely that one will sell it. If one does sell it, one will be hard-pressed to step back into an old clunker after experiencing the taam of driving a brand new, mechanic-free, headache-free car. Taking advantage of the program will effectively place one in a status bracket and accustom him to a comfort level that he cannot afford.
That is the truly troublesome issue with the Cash for Clunkers program. It encourages the population to spend beyond their means and go into unsustainable credit debt. Was that not one of catalysts for the economic crisis in the first place?Indeed, one need not avail himself of the Cash for Clunkers program to see how - way before Obama cooked up the program - this mentality had already seeped into many areas of our own lives.
Recently, I was conversing with a frum electrician employed by many in the frum communities in both New Jersey and New York. He told me that in the 13 years since he began working, he has discerned a fundamental metamorphosis. “The standard of home in which I worked 13 years ago, which was limited to only the considerably wealthy, is today the home of the simple, poor or lower middle class income family.”
I asked him, “How could it be? How could a person with minimal income buy the kind of house that only the wealthy possessed a decade or a decade and a half ago?”
He replied, “Most of them have elaborate cheshbonos that ‘made it impossible for them not to buy the home’! It sort of goes like this,” he explained. “They get their hands on or borrow a certain sum that serves as a down payment. Then they design the house to have a rental; the industrious ones even find a design that allows for two rentals. Then they plan on living in the basement for at least five years while renting out the upstairs. If they do all of that, their monthly portion of the bill is just several hundred dollars more than they would be paying if they had to rent. Therefore, it would be a crime not to buy and own your own large home, no?!”
This is the classic example of how the Cash for Clunkers syndrome infiltrated our thinking long before the president proposed it. Everyone is a brilliant oiber chochom, concocting elaborate schemes to justify the excess. If everything works according to the scheme, one would be a fool not to buy the large house. Never mind the fact that so many of these people are young couples, barely after marriage, who are undertaking massive mortgages and massive debt that could destroy them if all the cheshbonos don’t work out as planned. Let’s say the rental market falls drastically. Let’s say the property taxes skyrocket. There are so many scenarios that can doom a person if he does not have a realistic cushion. Even if he is not doomed and somehow comes up with the payments, he will be in a constant state of angst about how he will come up with the astronomic monthly sum to cover the payment and thus forfeit some of his most precious assets: menuchas hanefesh, time for learning, shalom bayis, time with the children, and the list goes on... All because he thought he was smarter than everyone and the “opportunity” was too good not to take advantage of.
Perhaps we, as a community, should stop to ask ourselves whether we have been guilty of the same fundamental mistake and premise that is wrong with the Obama Cash for Clunkers program. Are we being oiber chachomim when it comes to our lifestyles? Are many of us behaving like “Obama on steroids”? Not only with the houses that we must have, and the cars that we must buy…or lease, but also with the clothes we buy, the recreation we “require,” and the general lifestyles that we live? Sometimes, driving the 1998 Windstar can ultimately afford one a greater comfort level than the brand new car. Sometimes, living for the first decade of marriage in a rented apartment or a small starter house while not giving a couple room to spread out surely affords them the room to breathe. Are the new car and the new house really worth it? What is the price - both spiritual and material - that they are truly costing? Perhaps it is time to analyze these questions in a moment of brutal, unadulterated emes. Think about it.
Thursday, August 20, 2009
Social Ills and Dependency
I have some posts in my lineup on tuition, but I'd prefer a diversion of sorts. (Sorry, it isn't a big diversion).
Rabbi Wein has published a most fantastic article titled No Free Lunch. The economics of human behavior is inescapable and for a long time I've been saying that you can't create a dependency class without experiencing the ill social consequences that come along with dependency. This is why, even if we had unlimited resources, I wouldn't fund my children's every desire, whether that desire be some gedolim card collection or the avoidance of making a living because I simply don't believe it is good for their development. Certainly our sages recognized the dangers of dependency, idleness, over consumption, entitlement, and reversing gender roles.
If I was an Orthodox economist living 30 + years ago when the community embarked upon some of the current practices that permeate the scenery today, I hope that I would have tried to sound the alarm because regardless of the economic climate, many of the practices that are commonplace, certainly aren't commonsense.
Rabbi Wein brings his own touch to the message that you can't have "a free lunch is always present and eatable without later consequences." He touches upon dependency, governmental arm twisting, fraud, dependency, kollel, (lack of) employment, begging, and dysfunction. . . basically all of the Orthonomic subjects we talk about here.
And this story is just so illustrative. Here is what happens when the only "trade" you teach your children is begging:
Classic!
Heed these words and try to spread the wisdom. You can't escape the ills of dependency anymore than you can escape the laws of physics. Of course, there are those in the klal who think frum Jews can escape all of the above.
And, while I'm at it, I can't help but point out another article that relates directly to the subject at hand. The JPost has an article titled "Most haredim want secular higher education, survey finds." The study quoted basically shows that haredim are interested in higher education under certain conditions. Fine and well.
But the interesting part of the article to me is the disparity in desire between men and women: "63% of female respondents said they would, while only 41% of males were interested. "
Hassidim were more open to secular learning, with 59% answering in the affirmative, while only 42% of the Lithuanian respondents said yes.
Note the 22 point difference between men and women answering in the affirmative. I imagine I can't make any scientific declarations as the study did not concentrate on the disparity, but I can't help but think that the men have become far too comfortable with the gender role reversal and dependency. I believe it is a very natural, masculine quality to want to work and support a family. But it seems that normal inclinations have been broken and many men have been emasculated. I can't help but think about the commentary on what the slavery in Mitzrayim entailed. One commentary, as I recall, states that the slavery consisted on having the men do women's work and having the women do men's work.
Also note the difference between Hassidim (male and female inclusive) and so called Lithuanian respondents, a 17 point difference. Here too I believe we are seeing the effects of dependency.
Comment away.
I have some posts in my lineup on tuition, but I'd prefer a diversion of sorts. (Sorry, it isn't a big diversion).
Rabbi Wein has published a most fantastic article titled No Free Lunch. The economics of human behavior is inescapable and for a long time I've been saying that you can't create a dependency class without experiencing the ill social consequences that come along with dependency. This is why, even if we had unlimited resources, I wouldn't fund my children's every desire, whether that desire be some gedolim card collection or the avoidance of making a living because I simply don't believe it is good for their development. Certainly our sages recognized the dangers of dependency, idleness, over consumption, entitlement, and reversing gender roles.
If I was an Orthodox economist living 30 + years ago when the community embarked upon some of the current practices that permeate the scenery today, I hope that I would have tried to sound the alarm because regardless of the economic climate, many of the practices that are commonplace, certainly aren't commonsense.
Rabbi Wein brings his own touch to the message that you can't have "a free lunch is always present and eatable without later consequences." He touches upon dependency, governmental arm twisting, fraud, dependency, kollel, (lack of) employment, begging, and dysfunction. . . basically all of the Orthonomic subjects we talk about here.
And this story is just so illustrative. Here is what happens when the only "trade" you teach your children is begging:
I am aware of a case where a man who traveled often to collect money solely on his own behalf, when he passed away, the asset that his sons fought about and actually contested in a rabbinic court was his list of donors. A generation brought up to believe that there is no
necessity for it to work in order to make a living for one’s family is doomed to a spiritual and social disaster - and eventual self-destruction. There is no free lunch for anyone in this world.
Classic!
Heed these words and try to spread the wisdom. You can't escape the ills of dependency anymore than you can escape the laws of physics. Of course, there are those in the klal who think frum Jews can escape all of the above.
And, while I'm at it, I can't help but point out another article that relates directly to the subject at hand. The JPost has an article titled "Most haredim want secular higher education, survey finds." The study quoted basically shows that haredim are interested in higher education under certain conditions. Fine and well.
But the interesting part of the article to me is the disparity in desire between men and women: "63% of female respondents said they would, while only 41% of males were interested. "
Hassidim were more open to secular learning, with 59% answering in the affirmative, while only 42% of the Lithuanian respondents said yes.
Note the 22 point difference between men and women answering in the affirmative. I imagine I can't make any scientific declarations as the study did not concentrate on the disparity, but I can't help but think that the men have become far too comfortable with the gender role reversal and dependency. I believe it is a very natural, masculine quality to want to work and support a family. But it seems that normal inclinations have been broken and many men have been emasculated. I can't help but think about the commentary on what the slavery in Mitzrayim entailed. One commentary, as I recall, states that the slavery consisted on having the men do women's work and having the women do men's work.
Also note the difference between Hassidim (male and female inclusive) and so called Lithuanian respondents, a 17 point difference. Here too I believe we are seeing the effects of dependency.
Comment away.
Monday, July 13, 2009
Book Review: The Total Money Makeover
I have to thank my wonderful readers for introducing me to Dave Ramsey, author of the best selling book The Total Money Makeover. Meeting Dave Ramsey by listening to his radio show and reading his books (I have read a number of them) was sort of like meeting my financial twin. Who would ever imagine that my financial twin would be more fiscally conservative, Protestant, male, and bald? This promises to be a short review because someone has put a hold on this book and I cannot renew it and I'd rather someone who might need this book get their hands on it because I've been practicing "Grandma's Finance" for a long time.
This book is, in Dave Ramsey's own words "NOT sophisticated or complicated." It is not academic, nor is it a finance manual, nor does it present ideas that are earth shattering. Rather it is a presentation of a plan that will help individuals and families tackle their finances head on by getting out of debt and building wealth. Simple as that.
You might ask, what makes this book different from the many other books that outline the same concepts? I would answer that this book is both entertaining and inspiring, plus it has a great, easy to read format where ideas are set off for clarity. Unlike yours truly (that would be me), who has always been unsophisticated and risk adverse, Dave Ramsey has a story, or as he writes, "I have been there, done that. I have a PhD in D-U-M-B. So I know what it is like to be scared and scarred. I know what it is like to have my marriage hanging by a thread because of financial stress. I know what it is like to have my hopes and dreams crushed by my own stupid decisions."
As I mentioned above, Dave Ramsey is a Protestant, and a quite serious one at that. Some of the inspiration in his book does come from the Bible. Some might be afraid of his books because he is a serious Christian. I am not afraid of reading lines from Psalms (Tehillim) or Proverbs (Mishlei) because these passages only reinforce a commonsense Torah approach to personal finance, one of simplicity guided by a consistent philosophy. And if anything was quoted from the Christian Bible, it certainly isn't anything that our great sages have not said. If you listen to his radio show, I think you can appreciate his religious background more. One thing he I have never heard him advise is holding off children as a way to solve a financial problem. He considers building a family of great importance, which is not something I sense from other financial authors. His ministry is named "Financial Peace" the goals go far beyond sensible finance and into building strong marriages and families.
The real inspiration in this book I believes comes from the stories interspersed throughout the book of individuals and families that have "changed their family tree" by turning their lives around. Seeing how other people have succeeded is empowering! Additionally, Dave Ramsey has some great quotes and a good sense of humor. The following are some saying to hang your hat on:
The first part of the book tackles some debt myths, namely that debt is a tool used to create prosperity. As Dave [Ramsey] writes: "Debt adds considerable risk, most often doesn't bring prosperity, and isn't used by wealthy people nearly as much as we are led to believe." Another book that I recommend, which Dave references is "The Millionaire Next Door." I was raised in by unsophisticated parents who taught me to save for the next big purchase. I remember sitting through finance class dumbfounded by the idea that people would actually take out loans against their homes to invest in the stock market. I managed to run all the calculations asked of me, but in real life I've seen these calculations destroy marriages.
Dave also recommends against loaning to friends and relatives (see more notes on that below), cosigning loans (guess who is on the hook should your relative default?!), and payday loans. He debunks the myth that "ninety days [is the] same as cash" and that a person will always have a car payment (nope, "the average millionaire drives a two-year-old car with no payments") .
He doesn't like car leases (which he refers to as fleeces), new cars, 30-year mortgages, whole life insurance/cash value insurance, credit cards (most people spend more and few pay them off each and every month), debt consolidation (because it only treats the symptom) and debt-management companies (too much fraud and a great way to trash your credit in addition to treating the symptom via a 3rd party no less), buying gold, get rich quick schemes, gambling, mobile homes (OK, I doubt any of my readers have a mobile home, but you never know), prepaying funeral and college expenses (you can do better by investing, additionally see my notes below), home equity lines of credit, student loans, and bankruptcy (it might be necessary in some situations, but it isn't painless procedures where "you merrily trot off into your future to start fresh").
What does he recommend? Using cash, frugal living, getting on a written monthly budget, saving for retirement ("Ed McMahon isn't coming". . . certainly not without Techiyat HaMetim), being adequately insured and drawing up a will (auto, home, life, disability, health, long-term care for those over 60), having an emergency fund, paying off the 15-year mortgage, putting away for your children's college education, and having FUN with your money (not before you have some solid footing however).
Before delving into his plan, Dave Ramsey outlines some hurdles which cause people to resist changing their financial lives, namely:
There is a story in this section that I think is worth sharing. Although the story involves Christmas, it could be about making a simcha or forgoing social expectations from what you serve or wear on yom tov, to what you do with your kids in the summer, to what you wear on your head:
The Plan
Now that I've completed the (rather lengthy) introduction I will quickly outline the plan that Dave Ramsey recommends for getting out of debt and building long-term wealth which he calls Baby Steps. I am presenting the Baby Steps in brief. Plenty of questions are asked and answered in this section. If this plan is of interest, read the book!
1. Save $1,000 Fast: To inspire confidence you need to get started and focus your efforts. He recommends getting your hands on $1000, the baby emergency fund because "it is going to rain." Whatever it takes to get $1,000 of cash in your hands, do it. Have a garage sale, return stuff, work some extra shifts, cut coupons, etc. Once you've got it, hide it and keep it liquid.
[Shocking States: 49% of Americans could cover less than one month's expenses if they lost their income].
2. The Debt Snowball: Debt is the enemy and the goal is to eliminate all debt with the exception of the mortgage. Dave recommends lining up all the debts owed by amount and start paying them off from smallest to largest, while making minimum payments on all larger loans. I do have a quibble with this (see below), but he bases his method on inspiring confidence in one's abilities rather than on interest calculations which he calls "behavior modification over math." He has worked with many people and has observed that small victories lead to larger victories. The way to get the snowball rolling, of course, entails radical action and a lot of beans and rice.
3. Finish the Emergency Fund: Kick Murphy Out. "Murphy" is a play on Murphy's law. Dave writes, "an emergency fund can turn crises into inconveniences." Dave recommends a three to six month emergency fund of money needed to pay expenses if you lose your income. He mentions that women are more security oriented and that this step will improve many a marriage.
4. Maximize Retirement Investing. Here Dave recommends 15% of income be saved for retirement. First you put away in a 401(k) what your employer will match, followed by the remainder in a ROTH IRA if you quality. He has a nice (but simplistic) chart which clearly demonstrates just how much easier it is to put away small amounts when you are younger.
5. College Funding. I'm going to keep this section really brief. Dave hates student loans, as do I, and recommends figuring out how to do without. Note that saving for college follows saving for retirement. And Dave likes ESA's (Coverdells) over 529s because of the flexibility of investing.
6. Pay Off the Home Mortgage. Here he points out that the tax savings from a mortgage don't justify paying the interest and that leveraging your home isn't the way to make money. We all like to reduce our taxes, but it doesn't make sense to pay more interest in order to pay fewer taxes (a point finance and accounting professors will make which, unlike leveraging your home, is financially sound for those who want to follow Grandma's Money Rules).
7. Build wealth and have FUN. Once you have set up a strong foundation and have built some wealth through investing, there is no reason not to have some fun. It could be a new toy, being super-duper charitable, or a combination while making wealth a blessing, not a curse. Dave notes that wealth comes with responsibility and warns against "affluenza."
All in all, I HIGHLY RECOMMEND this book as a motivator for getting out of debt or just developing a philosphy toward personal finance. I would not use it as an investment manual (see note below). Many readers write me with questions and I am so thankful to my readers for introducing me to this book because I think it presents a simple and healthy view on how to approach finances including the spiritual.
I do have more Dave Ramsey posts coming up, so stay tuned.
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Like I said, I love this book, but I do have a few quibbles, which in the scheme of things aren't anything major which is why I am noting them in small print:
1. I don't like carrying cash, so I have a hard time jumping on that train. That said, I do not recommend taking out a credit card until you have established consistent and frugal spending habits. And I would also say that anyone who has reached the end of the month and found themselves unable to pay their card off in full should immediately start using cash and checks. The same goes for anyone seeing their savings falling in a quarterly period.
2. I think the 15 year mortgage is fantastic, but I can't seem to jump on that train either. A 15-year mortgage would be quite a squeeze for most young people buying into my neighborhood, even if they really have it together. I do recommend budgeting extra each month, but I think the emergency fund wins out over the 15 year mortgage.
3. Dave Ramsey rules against loaning money to friends and relatives as it creates a master/servant relationship and ultimately destroys relationships. (He does not opposed gifting under certain circumstances). This is a tough one to reconcile with what we have been taught about the mitzvah of lending. However, now that I've had time to digest his thoughts and think about some real life situations I know of, I think he brings forward a good point. Certainly that halacha takes into account the changed relationships as you must be careful about not even walking by the home of the person you have lent to unecessarily so as to not badger. Personally I think there is a lot to be said for free loan societies that serve as a middle man between the giver and receiver.
4. Dave Ramsey reminds the reader that over time the stock market averages 12%. While I do believe in investing, I don't ever make my calculations based on such a high return. As such, it is hard for me (a lazy investor) to get worked up about pre-paid college plans for example. I think Dave Ramsey has solid advice, but I look to him more for solving the debt issues rather than the investing puzzle.
5. As a math person, I have a hard time buying into a debt snowball that pays off debt according to the amount due, rather than the APR. But I do understand the reason he recommend this method, but I would probably recommend a hybrid method after building some confidence.
I have to thank my wonderful readers for introducing me to Dave Ramsey, author of the best selling book The Total Money Makeover. Meeting Dave Ramsey by listening to his radio show and reading his books (I have read a number of them) was sort of like meeting my financial twin. Who would ever imagine that my financial twin would be more fiscally conservative, Protestant, male, and bald? This promises to be a short review because someone has put a hold on this book and I cannot renew it and I'd rather someone who might need this book get their hands on it because I've been practicing "Grandma's Finance" for a long time.
This book is, in Dave Ramsey's own words "NOT sophisticated or complicated." It is not academic, nor is it a finance manual, nor does it present ideas that are earth shattering. Rather it is a presentation of a plan that will help individuals and families tackle their finances head on by getting out of debt and building wealth. Simple as that.
You might ask, what makes this book different from the many other books that outline the same concepts? I would answer that this book is both entertaining and inspiring, plus it has a great, easy to read format where ideas are set off for clarity. Unlike yours truly (that would be me), who has always been unsophisticated and risk adverse, Dave Ramsey has a story, or as he writes, "I have been there, done that. I have a PhD in D-U-M-B. So I know what it is like to be scared and scarred. I know what it is like to have my marriage hanging by a thread because of financial stress. I know what it is like to have my hopes and dreams crushed by my own stupid decisions."
As I mentioned above, Dave Ramsey is a Protestant, and a quite serious one at that. Some of the inspiration in his book does come from the Bible. Some might be afraid of his books because he is a serious Christian. I am not afraid of reading lines from Psalms (Tehillim) or Proverbs (Mishlei) because these passages only reinforce a commonsense Torah approach to personal finance, one of simplicity guided by a consistent philosophy. And if anything was quoted from the Christian Bible, it certainly isn't anything that our great sages have not said. If you listen to his radio show, I think you can appreciate his religious background more. One thing he I have never heard him advise is holding off children as a way to solve a financial problem. He considers building a family of great importance, which is not something I sense from other financial authors. His ministry is named "Financial Peace" the goals go far beyond sensible finance and into building strong marriages and families.
The real inspiration in this book I believes comes from the stories interspersed throughout the book of individuals and families that have "changed their family tree" by turning their lives around. Seeing how other people have succeeded is empowering! Additionally, Dave Ramsey has some great quotes and a good sense of humor. The following are some saying to hang your hat on:
"Winning at money is 80 percent behavior and 20 percent head knowledge."
"Ninety percent of solving a problem is realizing there is one."
"It is human nature to want it and want it now; it is also a sign of immaturity."
"We buy things we don't need with money we don't have in order to impress people we don't like."
"The secrets of the rich don't exist, because the principles aren't a secret."
"We have met the enemy and he is us."
"Don't even consider keeping up with the Joneses. THEY'RE BROKE."
"Radical change. . . is required for a money breakthrough."
"Christmas is not an emergency." (I.e. You know it is coming, so plan ahead.)
"Live like no one else today so you can live like no one else tomorrow."
The first part of the book tackles some debt myths, namely that debt is a tool used to create prosperity. As Dave [Ramsey] writes: "Debt adds considerable risk, most often doesn't bring prosperity, and isn't used by wealthy people nearly as much as we are led to believe." Another book that I recommend, which Dave references is "The Millionaire Next Door." I was raised in by unsophisticated parents who taught me to save for the next big purchase. I remember sitting through finance class dumbfounded by the idea that people would actually take out loans against their homes to invest in the stock market. I managed to run all the calculations asked of me, but in real life I've seen these calculations destroy marriages.
Dave also recommends against loaning to friends and relatives (see more notes on that below), cosigning loans (guess who is on the hook should your relative default?!), and payday loans. He debunks the myth that "ninety days [is the] same as cash" and that a person will always have a car payment (nope, "the average millionaire drives a two-year-old car with no payments") .
He doesn't like car leases (which he refers to as fleeces), new cars, 30-year mortgages, whole life insurance/cash value insurance, credit cards (most people spend more and few pay them off each and every month), debt consolidation (because it only treats the symptom) and debt-management companies (too much fraud and a great way to trash your credit in addition to treating the symptom via a 3rd party no less), buying gold, get rich quick schemes, gambling, mobile homes (OK, I doubt any of my readers have a mobile home, but you never know), prepaying funeral and college expenses (you can do better by investing, additionally see my notes below), home equity lines of credit, student loans, and bankruptcy (it might be necessary in some situations, but it isn't painless procedures where "you merrily trot off into your future to start fresh").
What does he recommend? Using cash, frugal living, getting on a written monthly budget, saving for retirement ("Ed McMahon isn't coming". . . certainly not without Techiyat HaMetim), being adequately insured and drawing up a will (auto, home, life, disability, health, long-term care for those over 60), having an emergency fund, paying off the 15-year mortgage, putting away for your children's college education, and having FUN with your money (not before you have some solid footing however).
Before delving into his plan, Dave Ramsey outlines some hurdles which cause people to resist changing their financial lives, namely:
#1: Ignorance or lack of know-how. Somehow when it comes to money, people get defensive. Dave writes: "Ignorance is not lack of intelligence; it is lack of know-how."
#2: "Keeping up with the Joneses: The Joneses Can't Do Math" and they are likely broke.
There is a story in this section that I think is worth sharing. Although the story involves Christmas, it could be about making a simcha or forgoing social expectations from what you serve or wear on yom tov, to what you do with your kids in the summer, to what you wear on your head:
"Radical change in the quest for approval, which has involved purchasing stuff with money we don't have, is required for a money breakthrough. Sara's breakthrough came with family. Her family was upper-middle-crust and had always given Christmas gifts to every member. With twenty nieces and nephews and six sets of adults to buy for, just on her side, the budget was ridiculous. Sara's announcement at Thanksgiving that this year Christmas giving was going to be done with the drawing of names, because she and Bob couldn't afford it, was earth-shattering. Some of you are grinning as if this is no big deal. It was a huge deal in Sara's family! Gift giving was a tradition! Her mother and two of her sisters-in-law were furious. Very little thanks were given that Thanksgiving, but Sara stood her ground and said, "No more.""
The Plan
Now that I've completed the (rather lengthy) introduction I will quickly outline the plan that Dave Ramsey recommends for getting out of debt and building long-term wealth which he calls Baby Steps. I am presenting the Baby Steps in brief. Plenty of questions are asked and answered in this section. If this plan is of interest, read the book!
1. Save $1,000 Fast: To inspire confidence you need to get started and focus your efforts. He recommends getting your hands on $1000, the baby emergency fund because "it is going to rain." Whatever it takes to get $1,000 of cash in your hands, do it. Have a garage sale, return stuff, work some extra shifts, cut coupons, etc. Once you've got it, hide it and keep it liquid.
[Shocking States: 49% of Americans could cover less than one month's expenses if they lost their income].
2. The Debt Snowball: Debt is the enemy and the goal is to eliminate all debt with the exception of the mortgage. Dave recommends lining up all the debts owed by amount and start paying them off from smallest to largest, while making minimum payments on all larger loans. I do have a quibble with this (see below), but he bases his method on inspiring confidence in one's abilities rather than on interest calculations which he calls "behavior modification over math." He has worked with many people and has observed that small victories lead to larger victories. The way to get the snowball rolling, of course, entails radical action and a lot of beans and rice.
3. Finish the Emergency Fund: Kick Murphy Out. "Murphy" is a play on Murphy's law. Dave writes, "an emergency fund can turn crises into inconveniences." Dave recommends a three to six month emergency fund of money needed to pay expenses if you lose your income. He mentions that women are more security oriented and that this step will improve many a marriage.
4. Maximize Retirement Investing. Here Dave recommends 15% of income be saved for retirement. First you put away in a 401(k) what your employer will match, followed by the remainder in a ROTH IRA if you quality. He has a nice (but simplistic) chart which clearly demonstrates just how much easier it is to put away small amounts when you are younger.
5. College Funding. I'm going to keep this section really brief. Dave hates student loans, as do I, and recommends figuring out how to do without. Note that saving for college follows saving for retirement. And Dave likes ESA's (Coverdells) over 529s because of the flexibility of investing.
6. Pay Off the Home Mortgage. Here he points out that the tax savings from a mortgage don't justify paying the interest and that leveraging your home isn't the way to make money. We all like to reduce our taxes, but it doesn't make sense to pay more interest in order to pay fewer taxes (a point finance and accounting professors will make which, unlike leveraging your home, is financially sound for those who want to follow Grandma's Money Rules).
7. Build wealth and have FUN. Once you have set up a strong foundation and have built some wealth through investing, there is no reason not to have some fun. It could be a new toy, being super-duper charitable, or a combination while making wealth a blessing, not a curse. Dave notes that wealth comes with responsibility and warns against "affluenza."
All in all, I HIGHLY RECOMMEND this book as a motivator for getting out of debt or just developing a philosphy toward personal finance. I would not use it as an investment manual (see note below). Many readers write me with questions and I am so thankful to my readers for introducing me to this book because I think it presents a simple and healthy view on how to approach finances including the spiritual.
I do have more Dave Ramsey posts coming up, so stay tuned.
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Like I said, I love this book, but I do have a few quibbles, which in the scheme of things aren't anything major which is why I am noting them in small print:
1. I don't like carrying cash, so I have a hard time jumping on that train. That said, I do not recommend taking out a credit card until you have established consistent and frugal spending habits. And I would also say that anyone who has reached the end of the month and found themselves unable to pay their card off in full should immediately start using cash and checks. The same goes for anyone seeing their savings falling in a quarterly period.
2. I think the 15 year mortgage is fantastic, but I can't seem to jump on that train either. A 15-year mortgage would be quite a squeeze for most young people buying into my neighborhood, even if they really have it together. I do recommend budgeting extra each month, but I think the emergency fund wins out over the 15 year mortgage.
3. Dave Ramsey rules against loaning money to friends and relatives as it creates a master/servant relationship and ultimately destroys relationships. (He does not opposed gifting under certain circumstances). This is a tough one to reconcile with what we have been taught about the mitzvah of lending. However, now that I've had time to digest his thoughts and think about some real life situations I know of, I think he brings forward a good point. Certainly that halacha takes into account the changed relationships as you must be careful about not even walking by the home of the person you have lent to unecessarily so as to not badger. Personally I think there is a lot to be said for free loan societies that serve as a middle man between the giver and receiver.
4. Dave Ramsey reminds the reader that over time the stock market averages 12%. While I do believe in investing, I don't ever make my calculations based on such a high return. As such, it is hard for me (a lazy investor) to get worked up about pre-paid college plans for example. I think Dave Ramsey has solid advice, but I look to him more for solving the debt issues rather than the investing puzzle.
5. As a math person, I have a hard time buying into a debt snowball that pays off debt according to the amount due, rather than the APR. But I do understand the reason he recommend this method, but I would probably recommend a hybrid method after building some confidence.
Monday, June 08, 2009
Better and Worse Ways to Help Adult Children
Yet another gem from the past Yated. It sounds like the father-in-law is trying to give his son-in-law a hint. But the son-in-law, never having managed money, can't really pick up the hint. And, it probably isn't reasonable to expect him to pick up the hint because he really has no concept of how money works. In another publication I read the words of a prominent Rav who mentioned that "support" should not be given with strings or guilt trips attached. Those who read my blog are no doubt aware that there are parents who do use money as a mean to control and/or keep their children "close."
It might come as a surprise to some of my readers, but I am not opposed to parents with the means to provide financial help to their children. But, I do believe there are better and worse ways to provide that help, and I think whatever financial help a family undertakes should be done with a great deal of thought.
Few parents enter into a monthly check arrangement with a formal agreement (that they are ready and willing to enforce) stipulating how much and for how long. Not doing so is to the detriment of everyone involved. Fluid arrangements make it very hard for the provider to turn off the valve, even when the leak is causing havoc, and the receiver has little urgency to get to a certain level of independence by a particular point in time. In Orthodox families that are growing quickly, parents often feel that they can no longer turn off the valve, or in the words of a friend of mine who would like to actually close the value, "what? And my grandchildren should starve!"
Another problem with the monthly check is that it feeds into a lifestyle. Many parents, not wanting to see their kids live anything less than a middle class lifestyle, provide money for certain upgrades. Whether it be a yearly vacation, camp, smachot, or a larger apartment. Chazal tell us just how hard it is to change a "middah" and financial experts talk about how difficult it is to change a "lifestyle."
Another form of support that can be problematic is when parents take on certain bills for their children, such as auto insurance. I think parents might be better off gifting a certain amount yearly (with a firm cut off date), rather than picking up the tab for a particular bill, especially one that strips the receiver of involvement and choice and potentially inflates a lifestyle. It isn't healthy to be uninvolved with certain finances. Learning to budget and having the ability to make choices about each major area is important in the life of an adult (e.g. should I drive an older car to save on insurance? should I bother with a car at all for the time being?).
Working backwards, "better" help would include help that:
Yet another gem from the past Yated. It sounds like the father-in-law is trying to give his son-in-law a hint. But the son-in-law, never having managed money, can't really pick up the hint. And, it probably isn't reasonable to expect him to pick up the hint because he really has no concept of how money works. In another publication I read the words of a prominent Rav who mentioned that "support" should not be given with strings or guilt trips attached. Those who read my blog are no doubt aware that there are parents who do use money as a mean to control and/or keep their children "close."
It might come as a surprise to some of my readers, but I am not opposed to parents with the means to provide financial help to their children. But, I do believe there are better and worse ways to provide that help, and I think whatever financial help a family undertakes should be done with a great deal of thought.
I believe the worst way to provide help is through a monthly check. Somehow, those receiving a monthly check end up in a master-subject relationship, not unlike those on various welfare programs who wonder if pursuing a career will hurt more than it could help. Those who receive financial help through the means of a monthly check, or combination of checks, appear to lose a great amount of confidence in their own abilities, especially as the funds are being used to prop them up in the present, not to help them build an independent future.CHECK - WITH A DRASHA
Dear Editor,
How do I write this brief letter without sounding like a kafui tov? I don’t know, but I will try. Let me first say that I am exceedingly grateful to my in-laws for providing financial support to my wife and me since we got married just under two years ago. With one beautiful child and another on the way, and the myriad expenses, their support is vital and immensely appreciated. I make it a point to express my thanks to my father-in-law each and every time he gives us or mails us a check.
However, each time he gives us a check, I hear a lengthy drasha about how difficult the economy is and how the future looks bleak. Now, as far as we know, and from observing everything going on in the life of my in-laws, there is no reason to believe that my father-in-law is experiencing any economic hardships. He is quite a successful fellow, and the $1,000 a month that he is so kind to give to my wife and me should not be affecting his bottom line in the slightest.
So why the drasha? Why make my wife and me feel like nebach cases? We thank you a million times for your help. We are kind, considerate and thoughtful. We even told you that we don’t take your support for granted and that if the economy is takeh so bad, we do not want to cause any hardships on you and would figure out a way to live without the support if we needed to. We only want to bring nachas, not hardship or disappointment.
So please, to anyone out there, if you are so kind to provide support to someone, whether they are a young couple or a family of married children, don’t make the people feel like shleppers. Don’t tell the people how hard it is for you. It often makes them feel so awful that they’d rather subsist on water and bread than have to take the check given in such a manner or accompanied by such a speech. In our case, we’d rather live in a shack than continue taking support in such a manner, but we know that expressing that would create an even more uncomfortable situation.
I’d like to conclude by saying that we realize that things could be worse for us and that this should be the worst thing in the world. We are indeed blessed. But if people would be a tad more aware of what they say or do, it would go a long way to making life more pleasant for others.
And yes, we are aware that in next week’s Yated, every shver and shvigger this side of the Atlantic is going to write in about how we are young, spoiled and lacking any hakoras hatov. We figured we’d write the letter anyway.
A Young Couple Trying to Do What’s Right
Few parents enter into a monthly check arrangement with a formal agreement (that they are ready and willing to enforce) stipulating how much and for how long. Not doing so is to the detriment of everyone involved. Fluid arrangements make it very hard for the provider to turn off the valve, even when the leak is causing havoc, and the receiver has little urgency to get to a certain level of independence by a particular point in time. In Orthodox families that are growing quickly, parents often feel that they can no longer turn off the valve, or in the words of a friend of mine who would like to actually close the value, "what? And my grandchildren should starve!"
Another problem with the monthly check is that it feeds into a lifestyle. Many parents, not wanting to see their kids live anything less than a middle class lifestyle, provide money for certain upgrades. Whether it be a yearly vacation, camp, smachot, or a larger apartment. Chazal tell us just how hard it is to change a "middah" and financial experts talk about how difficult it is to change a "lifestyle."
Another form of support that can be problematic is when parents take on certain bills for their children, such as auto insurance. I think parents might be better off gifting a certain amount yearly (with a firm cut off date), rather than picking up the tab for a particular bill, especially one that strips the receiver of involvement and choice and potentially inflates a lifestyle. It isn't healthy to be uninvolved with certain finances. Learning to budget and having the ability to make choices about each major area is important in the life of an adult (e.g. should I drive an older car to save on insurance? should I bother with a car at all for the time being?).
Working backwards, "better" help would include help that:
- does not make the receiver dependent on the giver
- does not rope the receiver into an inflated lifestyle
- allows the receiver to exercise independence and make decisions (additionally, allows the receiver to make mistakes and suffer the consequences)
- allows the receiver to use the funds for the future, not just the present
Loans/gifts to start a business, funds to help a student graduate from college debt free, help with a down payment on a home for which the mortgage is in current reach, or a one time lump sum are methods that I find to be less problematic than the monthly check. These scenarios mostly share a theme: the money given is being used not just in the present, but as an investment in the future.
And a final note, parents who extend support, but do not take care of their own needs, I believe do no favors for their children or themselves. I think an argument can be made that this is a form of deception. The receiver imagines the giver to be well-off, and ultimately the receiver learns the truth, perhaps to his detriment.
Your thoughts please.
Also: on a related note, see ProfK's recent post Overlook Us At Your Peril.
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