Advanced Personal Finance

I’ve written before about financial records and what to keep and what to toss. Squarely in the ‘keep’ category is documentation on the purchase of stocks and mutual funds.

Why it’s critical to keep buy order documentation

Keeping buy order documentation is critical because it provides two key pieces of information - date of purchase and purchase price. When you eventually sell the fund or stock, you must know these two things.

Date of purchase is used to determine whether gains are long- or short-term. There are different tax consequences for each. Purchase price, or cost basis, is also necessary to calculate the actual gain (or loss).

What if I don’t have it?

If you don’t have your cost basis, the IRS assumes it to be zero. That’s right. If you can’t provide documentation, the tax man will assume you got the security for nothing. As a result, you tax bill on sale could be much, much bigger than it needs to be.

But there’s a but. If you know the date of the purchase, you can look up the closing price on that day and the IRS will allow it. And if you don’t know the exact date, from what I can tell by reading their site, the IRS will likely allow you to make an ‘estimate.’

This actually happened to me. I lost/threw away/ate a buy order for a stock I owned. I knew from bank records the day I bought it, though. I went back and did some research on pricing and used the closing price that day as my basis. So far no audit.

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One of Suze Orman’s constantly-preached pillars is that you should have a revocable living trust. I was wondering if they’re really necessary for regular people like me. I’m not trying to spend money on unnecessary legal fees.

I’m not a attorney, by my understanding of a living trust is that it is trust that holds an individual’s assets until death, when the assets pass to the trust beneficiaries. The trust remains under the complete control of the grantor (the person who owned the assets). That is, he/she is the trustee until death.

Orman cites the following reasons to get a revocable living trust:

• It allows you to designate a successor trustee to take care of your financial matters should you become incapacitated

• You get explicit direction over how your assets are divided among heirs if you’re divorced and remarried

• It speeds transfer of assets after your death and may avoid fees associated with probate

I’m not convinced. She always gives specific examples that make her point, but the situations are usually pretty esoteric and uncommon.

I’m looking for input from readers. Does anyone have one of these? What do you think of Suze Orman’s urging us to get one?

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A couple of months ago, I posted about paying for household services. My wife had brought up the idea of ‘outsourcing’ some of our domestic jobs. She suggested we hire someone to cut the grass and someone to clean the house (presumably different people - I don’t know a lot of housekeepers who mow lawns).

Everybody’s heard the saw “Time is money.” My wife was turning it around on me and saying “Money is time.” She argued (successfully) that she’d rather have me spend an hour with her and our daughter on the weekend than spend it cutting the grass.

We actually implemented part of the plan.

For over a month now we’ve had a guy coming by once a week to cut the grass for $31 per week. We decided to do three times per month and it would be on a ‘trial basis.’ I initially balked at a new monthly bill of $93. Who needs that?

I’m here to tell you it’s working great. (How is my wife right so often? Dammit!) I’m not one of those guys who loves his yard. As a matter of fact, if it were up to me I’d install Astroturf over the entire property (If you click the link, you’ll see people actually do this! I had no idea). But the yard looks good. And I love not sweating my ass off every weekend doing it.

Is it worth it?

To me, yes. Golbguru from Money, Matter, and More Musings wrote about a technique I’ve used for years about looking at the cost of things in terms of hours you need to work to get them. Here’s how it works out:

Time it takes me to cut grass: 1 hour
Price to have grass cut: $31
Time it takes me to earn $31 after tax: about 1 1/2 hours
Net cost to me: 1/2 hour

The way I figure it, roughly speaking, it’s costing me 1/2 hour of labor (in a nice air conditioned office) to cut the grass. I can live with that.

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Who wins and who loses when inflation shows itself? It’s a question that at first might seem pointless or even stupid. Inflation sucks for everyone, right?

Not so fast. It turns out, inflation is good for some and bad for others. It doesn’t affect everyone equally. People usually focus on the bad, I think, because we tend to focus on the cost of things we buy frequently. When a gallon of milk cost $2.69 a month ago and now costs $2.99 - that’s inflation and it’s bad.

Who wins with higher inflation:

• People with fixed-rate loans. People with fixed-rate loans like mortgages and car loans enjoy a benefit when inflation rises. If you think about it, they’re paying off their loan with dollars that are worth less than the ones they borrowed. Assuming you do something productive (like buy a house) with the money you borrowed, you benefit from higher inflation.

• Companies that produce ‘expendables.’ When inflation rises, it makes sense to spend money as fast as you can. You get more product today than you will tomorrow. So any company that makes a product that is non-durable is going to do better than one that produces something people buy infrequently, especially if demand is elastic.

• The U.S. government. Ah, yes, the originators of inflation. As I explained in an earlier post, the Fed generates inflation through its creation of money. As the biggest borrower ever, it is the ultimate beneficiary of inflation. As inflation rises, the federal government pays less in ‘real’ money to cover its debts.

Who loses:

• Those on fixed incomes. Anyone who is paid a fixed amount of money will get killed during periods of high inflation. Even if their payment is indexed to inflation, the reset typically only comes once or twice a year.

• Lenders and savers. Inflation pinches lending for the reason cited above. And anyone who actually saves money will also be hurt as their purchasing power erodes.

• First time home buyers. Anyone trying to get a loan faces a key obstacle during periods of high inflation. Interest rates will be higher as lenders attempt to get compensation for the inflation risk. This alone can price people out of the market for a new home.

So though at first it seems like a silly question, inflation most definitely affects people differently. The biggest losers are those on fixed incomes and the biggest winner is the U.S. government.

Source: Bureau of Labor Statistics, Consumer Price Indexes

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I was mulling over posting about the use of credit history and FICO score for what I’d consider ‘non-traditional’ uses. Now that I’ve read an excellent post Sun did on credit scores and insurance rates, it kicked me in the butt.

Increasingly in the media there’s been coverage of credit history and FICO scores being used to judge people in non-credit areas. Car insurers, potential employers, and prospective landlords are all using credit pulls to judge people and determine what to charge them.

Some of these might, on the surface, seem to make sense. But I’d argue using credit history in these ways is at best useless and at worst misleading.

What a Credit History Is and Is Not

It’s first important to understand what a credit history is and what it is not.

A credit history is:

• A list of your open and closed credit accounts

• Your payment history on these accounts

A credit history is not:

• An evaluation of your current ability to pay debts

• A judgment of whether your financial situation is tenable or not

• A statement of your personal integrity

Your FICO Score Depends On Who’s Asking

FICO is a score generated by Fair, Isaac using a proprietary formula. It must be understood, however, that this number is not fixed for a given person at a given time. Depending on who is asking, the score changes.

You see, Fair, Isaac sells information about you to lots of different companies. And it tells each of these companies different things about you. That is, the formula used to generate a FICO score varies depending on who is asking. A car dealership pulling your score will get a different view than an insurance company will.

Using Credit History For Non-Credit Purposes

The use of credit history for non-credit purposes is ostensibly because it indicates something about a person - the trustworthiness of a potential employee; how often someone will make an insurance claim; if they’d be a promptly-paying tenant.

I think it does a really poor job of these things for two reasons. First, people can have poor credit histories for a host of legitimate reasons largely outside their control. I’m thinking major illness, job loss, divorce, and errors on the part of creditors and/or the credit bureaus. Second, credit scores don’t capture the vital piece of information many companies fundamentally want - namely, ‘what is this person’s ability to repay me?’ Credit score says nothing about your current income situation.

So it’s my opinion that using credit histories for alternate purposes is really does not make sense.

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