Wednesday, January 25, 2012

When You Light A Fire Under Someone, They Move

Following on the heels of President Obama's State of the Union address last night, I spotted this Barron's article this morning:

Barrons: Millionaires Won't Sit Still for Higher Taxes

This dovetails with the article I posted last night about U.S. citizens becoming former U.S. citizens to avoid taxes, though the methods described in the Barron's article are far less drastic. Bottom line: the minority of people being targeted here are a moving target (and they can afford to be very mobile). Unless they think the purpose of an individual human life is to support the whims of government (doubt that), then move they shall: leave New York for Florida, buy municipal bonds, offshore; the list goes on.

I also saw this U.S. News and World Report article: 3 Myths About Mitt Romney and the Rich

This one fits the theme I have going here this morning, too. This is all old hat stuff to people who are familiar with the topic, and it probably won't change the minds of the envy class about anything (it's nearly impossible to convince someone of the falsehood of their religion). The article does contain at least one gem that, old or new to you, is worth repeating again and again: wealth is not a zero sum game. Again: WEALTH IS NOT A ZERO SUM GAME.

Finally, on the SOTU address, read through this article at Zero Hedge: President Obama's State of the Union: Ten Skirted Issues

Good read, but I hope that Prins is wrong about her conclusion.

Tuesday, January 24, 2012

1,024 Became Former U.S. Citizens In First Half Of 2011 Over Taxation

"Rather than deal with the complexities of U.S. tax law, Americans living overseas are increasingly renouncing their citizenship in order to avoid paying their income taxes.

According to National Taxpayer Advocate Nina E. Olson, approximately 4,000 people gave up their citizenship from fiscal year 2005 to FY 2010. Renunciations increased sharply within the past three years, from 146 in FY 2008 to 1,534 in FY 2010. And during the first two quarters of FY 2011 alone, 1,024 Americans ditched their citizenship."

Read more: Tax Evaders Renounce U.S. Citizenship

That headline, it's wrong. Tax evasion is not paying a tax that you are legally required to pay. Tax avoidance is doing something that legally exempts you from taxation of some sort. Renouncing your U.S. citizenship and being in the country for less than the maximum allowable time legally exempts you from a requirement to pay U.S. income taxes.

Tuesday, January 03, 2012

Penny Power 2011: How My Change Jar Stacked Up and Where It's Going

While the New Year's Day tradition of many is to nurse their raging hangovers, my ritual is a bit more tame and a lot less painful. I get up on NYD, make some coffee, turn on my satellite radio, then I dump out my loose change jar and count what's in it.

This jar contains the spare change I come by via whatever means (odd tip money, coins I find in the laundry, on the ground, etc.; the exception is quarters, which go back into the laundry...). I say, "do not pass up free money," which is what finding coins here and there represents. By themselves they're not much, not even added together, which is why I find a productive use for them all once per year: these tiny bits of lost and found capital get invested somehow. In 2011, the change jar ended up with $11.44 in it.

I've taken to plotting my financial moves in terms of whatever will result in the greatest increase in cash flow. I don't pay much attention to my net worth, nor will my future investing be for capital gains. The thinking behind this I'll have to save for a future post, but the basics of it is that I want to widen the spread between what is coming in versus what is going out month-to-month.

Right now I have various debts, one of which is a credit card that is currently at 0%. At first glance it would seem the choice of what to do with 2011's coin collection would be to invest in something paying any amount greater than zero. That would be to ignore the nature of a credit card balance payment, however, which is a percentage of the existing balance, calculated monthly. In this particular case, the percentage used is 1.5%. Thus, any amounts applied to the balance have the effect of reducing the monthly minimum by 1.5% per month going forward, which increases future free cash flow by an equal amount. In terms of cash flow, any alternative must pay at this rate at the least, but preferably more, to be the better alternative. Since most investment returns are expressed annually, the alternative must do better than this:

$11.44*.015 = $0.1716 monthly minimum payment reduction; $0.1716*12(months) = $2.0592 annual free cash flow increase; $2.0592/$11.44 = 18%.

Any alternative has to do at least 18% or better. There's only one dividend paying stock I'm paying attention to these days that can do that, American Capital Agency Corp (AGNC), which at the moment sports a dividend yield that clocks in at 19.9%.

It would seem I should go for some AGNC. I will not do this, however. AGNC's dividend could change. It may go higher, but because that company's returns depend on the Federal Reserve keeping interest rates very low, there's a good chance that their dividend will go down. There's also a very good chance that any cut in their dividend would take the relative yield well below 18%.

Applying these coins to my card balance, however, guarantees an 18% boost to my free cash flow in perpetuity, because once that balance is gone, it's gone forever (changes to other inputs and outputs notwithstanding, of course; I'm focusing on this event in and of itself here).

Had this particular card used the common monthly minimum divisor, 1%, the situation might have been different (the implied yield from applying these funds to such a card would have been 12%, a rate which can be easily and reliably beaten by alternatives). Being what it is though, it is the winner of my 2011 loose change collection.

The 2012 collection is already started, with the first few found coins clinking against the bottom of the jar. Keep your eyes peeled, there's free capital out there on the ground. Don't ignore it, it does add up. Find it, get it, and put it to work for you.

Search Paul E.

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