I don’t know if TreasuryDirect changed their policy or if EmigrantDirect changed theirs, but my attempt to purchase Series I Bonds and take advantage of the potentially awesome new rates was foiled! I received the following message from TreasuryDirect:

Dear JIM,

We’re sorry, but your purchase request IAAAB was canceled. While trying to collect payment from your bank, they returned our debit. Please check the Investor InBox section of your TreasuryDirect account for more detailed information.

Thank you for using TreasuryDirect.

It was entirely my fault. It wasn’t Emigrant Direct’s fault, or the Treasury Direct’s fault, it was Jim Direct’s fault. The only linked account I had was from an Emigrant Direct savings account and I assumed it would still be valid to make another purchase. I had purchased $100 in Series I bonds a while back just to play with the system and assumed everything was still good. Unfortunately, TreasuryDirect now debits the linked account rather than a regular ACH transfer (I think) and so a savings account doesn’t debit! (The other explanation was that there were insufficient funds, but I confirmed I had enough)

So the only solution is to head over to the bank and buy a paper Series I Bond so I can still take advantage of the upcoming favorable rates. I suspect it should be pretty easy, the government always makes it easy for you to give them your money :).

If you weren’t a fan of President Bush and believed he, and politicians in general, only pushed for tax breaks for the rich then you’ll want to pay close attention to a recently Fortune that sheds some light onto the little footnote on the 2008 tax stimulus package. Most people focus on the tax stimulus check they’ll be receiving in a month or two, I know I did because that’s what affects us and most Americans. Fortunately, we have people like Allan Sloan focusing on all parts, including the little piece about raising the “maximum size of a ‘conforming’ mortgage to $729,750 from the previous cap of $417,000.”

What the heck does that mean? A conforming loan is one that Fannie Mae and Freddie Mac can buy. Since they can buy them, the interest rates on the loans are generally lower because they’re less risky. If a bank knows it can sell it to Fannie Mae and Freddie Mac, they can charge less in interest. The spread these days, according to Fortune, is a significant 1.27%.

My friends that share a half-million dollar mortgage, and those who own homes that are worth more than $417,000 but less than $729,750, benefit the most from this. Borrowers have access to lower interest rates and thus are able to purchase “more house.” (Nothing changes for those above the $729,750 amount)

For example, for the monthly mortgage payment of $1,500 can get you a $250,188 loan at 6.00% or a $219,448 loan at 7.27% - that’s a difference in the purchase price of $30,740! And, it obviously gets bigger as your amounts get higher. This makes homes in that range more affordable and thus helps increase their value. That’s stimulus people!

Allan goes on to recognize that the boost will expire at the end of the year, since it was designed to help stimulate the economy, but he suspects it will remain. I just wanted to highlight this piece of the package since very few people discuss it and Allan does a great job. His ending quote is a gem as well - “The one thing I liked about the stimulus package was that the government had enough sense to not send money to people like me. But then it turns around and hands me a housing subsidy. I’ll gratefully accept the gift. But that’s no way to run a country.”

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The 149th Carnival of Personal Finance is now available, I submitted my post on laddering CDs for your emergency fund.

Have you been awaiting word on when you expect your stimulus package? First, check the stimulus calculator located near the end of my original 2008 Stimulus Package Explained article. If you are eligible for a check, when you can expect it will depend on the last two digits of your social security number.

If they have your direct deposit information available on file, then you follow this schedule:

• 00 - 20: May 2
• 21 - 75: May 9
• 76 - 99: May 16

If they do not have your direct deposit information, then this is your schedule:

• 00 - 09: May 16
• 10 - 18: May 23
• 19 - 25: May 30
• 26 - 38: June 6
• 39 - 51: June 13
• 52 - 63: June 20
• 64 - 75: June 27
• 76 - 87: July 4
• 88 - 99: July 11

So if your social security number is 000-00-0034 then you will receive the stimulus package amount on May 9th if you have direct deposit and you will receive the stimulus package check on June 6th. As you can see, you get the money nearly a month earlier if they have your direct deposit information.

How do you give them your direct deposit information? You give it to them when you file your return. Be sure to input your direct deposit information on your 1040 on line 74 (a-d). Once they have it there, you can get your check considerably sooner. Don’t be a fool, direct deposit.

When the Fed drops its federal funds rate, economists across the world shudder as they see the spectre of inflation peer over the horizon. You ever wonder why that is? The answer is quite simple but will come in two parts. First, a brief refresher on supply and demand, followed by how that and the Fed’s lowering of rates may bring on inflation. Before we begin, I want to make note that everything has been simplified from what’s actually going on. Everything is very complicated in reality but you can explain the gist fairly easily if you’re willing to take some liberties. Those who have a background in economics and know all the intricacies will see some inaccuracies, but they are there to make the explanation smoother. A basic understanding is far better than none at all.

Supply & Demand 101

Simplistically, economists believe that supply and demand will dictate price. If you have more supply with the same demand (surplus), the price goes down. If you have less supply with the same demand (scarcity), the price goes up. If demand goes up with the same supply, price goes up, and vice versa. You’ll see this represented with supply and demand “curves” with the price at where the two intersect. There’s far more to it than that but that’s enough to go on. (it’s actually quite cool if you’re interested, google up some more info)

Fed Target Rate

When mainstream media folks talk about the Fed lowering the federal funds rate, what they’re really talking about is the Fed lower its target rate. The Fed is like a puppet-master and the banks are its puppets. When the Fed says it wants to lower the target rate, it’s really saying that it’s going to be putting more money into the market to lower the cost of it. It’s like a puppetmaster putting on a good show, a twist of a finger here, a lift of the wrist there, and before you know it you have yourself a Broadway musical. The Fed’s “twist of a finger” is sending additional funds to banks that may be low on reserves.

Inflation!

Ideally, the target rate drives the Fed to only put as much additional funding as is needed to keep the economy humming along and banks able to fund their work. Unfortunately, there’s a lag between when the Fed begins acting and when the effects take hold. The fear of inflation is founded in the fact that if the rate is set too low and too much additional funding is pumped into the system, banks find themselves with more than they need.

What happens if they have more money than they need? They lend it out at cheaper prices! (more supply than demand) When consumers get more money, they will spend more money. When they spend more money, demand on goods and services will go up. As demand increases, sellers of products and providers of services will increase their rates… which is inflation.

Inflation is not bad. Moderate inflation is normal and expected. It’s a sign that goods and services are in demand, consumers are financially strong enough to support increased prices, and a signal that the economy is strong.

High inflation is bad. It’s bad because it hinders economic growth. When inflation is high, investors will demand higher rates of return for their savings and so borrowers of money, business and such, will have to pay more to borrow money. If they pay more, the pace of growth slows down. The economy slows down, inflation will settle, and we continue the cycle all over again.

That’s (simplistically) why the Fed lowering rates can lead to high inflation.

You may have seen today’s article on how wholesale inflation increased 6.3% in 2008, the largest in 28 years, and remarked how your salary hadn’t increased by that much. Well, part of that reason is because wages aren’t so closely linked to inflation (they’re linked to how much your employer thinks you should be paid!) and part of that is because wholesale inflation is a little different from consumer inflation. In fact, the concept of inflation is so nebulous that there are about a million (okay, maybe only a dozen) different ways to measure and analyze it. You really need to be careful what you’re looking at before jumping to conclusions. The inflation that most people refer to at the consumer side is consumer inflation and that’s measured by the Consumer Price Index (CPI). Wholesale inflation is measured by the Producer Price Index (PPI). Wholesale inflation is most important to investors, than consumers, because it gives you an idea of how prices have increased for producers of products, i.e. companies.

Why do the two values differ? The PPI includes intermediate goods and fuel/energy prices, two pieces that aren’t included in the core CPI. (fuel is included in the total CPI) So, when the statement is made that wholesale inflation increased 6.3%, you can’t accurately compare that to the CPI because it includes one measure that is entirely ignored by the CPI and one that isn’t included in the core.

The CPI is a measure of averages prices for consumer goods and services purchased by the typical household. The CPI is used to index many things that you deal with from wages to retirement plans, it’s a measure of how much you can expect to spend compared to other years. In the US, the CPI is broken up into several measures, as if it weren’t confusing enough. There is a CPI-W for urban consumers and clerical workers plus a C-CPI-U (chained CPI) for all urban consumers. The interesting feature of the CPI calculation, regardless of the type, is that you have the total CPI and the core CPI. The core CPI does not include energy and food. As you probably recognize, that energy piece is what has been fluctuating the most lately (if rocketing skyward counts as fluctuating)

Why isn’t food and fuel counted in core CPI? It’s because of that volatility, it’s hard to get a good year to year comparison if you include food and fuel, which makes sense to me. The increases in fuel and food are in part a component of the other measures because they are a subcomponent of life in general. For example, transportation is a component of core CPI and it clearly will use fuel. Medical care is a component of CPI and clearly those dispensing medical care (and the massive health care industry) will require food and fuel to operate.

I’m by no means an economics expert but I think it’s important to note that wholesale inflation is not the same as consumer inflation, though similar, and that to make an accurate apples to apples comparison you need be sure you’re looking at the right figures.

I went to a real estate auction yesterday at the Howard County courthouse to see how those operations went and to get a feel for it if I ever wanted to get into the real estate investing thing. All in all the whole deal was a bit anticlimactic because I assumed it’d be this big deal with lots of people and all sorts of fanciness, I mean it’s at court right? (I’ve actually never gone to court before)

Well, when the auctioneer said courthouse steps, they actually meant courthouse steps. Like standing outside the door, just hanging out, auctioning off properties. On the list that day were two properties in Howard County and no one bid on any of them. The auctioneer started off by reading the first property, location, terms and conditions (which was standard and that reading was waived for all subsequent auctions), and starting taking bids. $160k was the starting price and so he opened it up for bidding… no bites. Other than a co-worker who went with me, there were two other guys there with clipboards, taking notes, yammering on their cell phones to their investors; it was a pretty small grouping.

The first one closed with the property sold back to the bank and the second one went through the same deal, sold back to the bank. That one started at $210k and, when we looked it up later that day, it had a assessed value of over $300k - wonder why no one bit, soft market probably? Who knows.

Too bad no one bought, it would’ve been interesting to see what happened from there. The auctioneer did talk to some woman who was obviously new, like us, and explained a few things. You buy the properties as-is and you have to go through the process of evicting anyone who lives there (yuck); like tax liens, you’re responsible for researching everything yourself to make sure the government isn’t hiding toxic or nuclear waste in cans underneath the foundation. Also, the sale blows away every lien under the first mortgage, which makes you responsible for IRS liens and things like that.

Overall it was an anticlimactic but interesting way to spend twenty minutes or so by the lovely courthouse.

When people talk about their tax bracket, they are usually talking about their marginal tax rate - that is, the amount of tax on the next dollar they make. Often times people get this confused with their actual tax rate, which is much much lower after you take into account your deductions, such as a 401k contribution, medical benefits, mortgage interest, etc.

For example, here are my marginal versus my actual tax rates for the last three years:

Just some explanation before we continue, in 2003 I started my job part way into the year and so my salary was much less than in 2004 and 2005 and I was aggressive in my contributions to my 401k, which explains the percentage disparity between 2003 and 2004/5 in terms of taxes paid. The percentage fell from 2004 to 2005 because I purchased a home and now had more in terms of deductions, mortgage interest and the like, than before.

As you can see, in all three years my marginal tax rate was far higher than my actual tax rate because of the various deductions you’re allowed to take. Even if you weren’t allowed to take any deductions (not even the standard deduction), someone who makes $50k/yr is in the 25% tax bracket but only pays 18.12% in taxes ($9,057.50). If all they do is take the standard deduction of $5,150, then their tax burden falls to a lucky $7,770, or a mere 15.54%.

Why is this so? It’s because your marginal tax rate isn’t really your tax rate, people just misunderstand what it means. Since your first dollar is truly taxed at 10% (well, it’s really your first dollar after your first 5150 or more depending on what other breaks you’re eligible for) and not at your published tax rate, the marginal tax rate isn’t only important when you’re thinking at the fringes.

Where would knowing your marginal tax rate be important? Let’s say you’re thinking about contributing more to your 401K, if you were Mr. $50k, each dollar you contributed would only decrease your take home pay by about 75 cents. If you feel you can reduce your need for that money this month, you can actually contribute more on a pre-tax basis, about 25% more. So in those types of calculations, marginal tax rate is important, otherwise don’t stress it but do understand how it works.