Wise Bread (Catherine Shaffer)

Please Pass the October Surprise

Catherine Shaffer — Sat, 11 Oct 2008 13:49:49 +0000

I've always believed that mastery of vocabulary is at least halfway to mastery of the subject. Words are power--the kind of power commonly wielded by eggheads with pocket protectors, but power nonetheless. In the past weeks and months, I've seen a lot of new vocabulary thrown around in the media, and most of us are too busy ducking and diving out of the way to ask what all these crazy words mean. So let's demystify the language of the new economics, right here, right now. Here's a list of common terms you might encounter in your newspaper, on television, or even in a blog.

Commercial paper: This is an IOU, good for maybe a month or two. Unlike a regular IOU, it's written for very large amounts, and companies accept them from each other pretty much without question. Apparently, commercial paper is the way that many companies meet payroll and buy inventory. I always thought they used money. Who knew?

Credit default swap: Halfway between an insurance policy and a racetrack wager, this is a way that mortgage lenders made themselves feel safe giving loans to people about whom they otherwise knew nothing. No job? No documentation? No problem. We have a credit default swap.

Subprime debacle: The inevitable outcome of widespread use of credit default swaps to back sketchy loans. The word 'debacle' has somewhat of a Victorian ring to my ear. It sounds like something that might happen in “The Importance of Being Earnest.” This is how the whole mess was described earlier this year, when we were all in an enviable state of denial. Notably, a 'debacle' is nothing that ever happens to oneself. It always happens to other people. Like the time our neighbors, a husband and wife, met each other driving separate cars in opposite directions on our street, and proceeded to have a very loud argument between the two cars. Boy, was that ever a debacle. So glad I wasn't involved!

Liquidity crisis: Until recently, I would have told you that a liquidity crisis is what happened when my sixty-pound puppy wasn't put outside often enough. But apparently, 'liquidity crisis' is actually what happens when you can't borrow enough money to keep going. Next time your buddy asks you for $100, just until next payday, you'll know he's having a liquidity crisis. Let's just hope that his employer is not relying on commercial paper to make payroll, or his liquidity crisis will become yours. Which, when I think about it, is the essential circular nature of this whole mess.

Tranch: This is a silly, made-up word that big investor types use to explain why they can't look closely at the history of individual mortgages bought and sold by their companies. See, it's in a “tranch.” It's meant to evoke bundles, or “bunches,” which are sort of shrink-wrapped so you can't open them up and look in side. Someone once suggested calling them “faggots,” but that idea was quickly shouted down.

Toxic assets: Imagine that pirates Larry and Lunt from Jonah, the Veggie Tales movie, had successfully invested their prize money from the Mr. Twisty's Twisted Cheese Curls Sweepstakes in cheese curls, as they wished to do. And suppose that after they bought those cheese curls, but before they had a chance to resell them at a profit, they learned that the cheese curls had been manufactured in China (not Nineveh), and that they had high levels of melamine...

Mortgage meltdown: This is the same as subprime debacle, but a bit later in history, when everyone is feeling that it is not so funny anymore. It's like those neighbors shouting in the street are suddenly in your living room, and their car is parked in your driveway, and their trunk is full of those toxic cheese curls, and it turns out they are radioactive, not toxic, and they are going into nuclear meltdown!

Irrational despair: This is one half of a very small set of emotions which Wall Street stock traders are capable of (the other being irrational exuberance). Their severely limited emotional range literally controls our economy, while regulators feebly scold them from afar.

Economic collapse: In physics, there is conservation of matter and energy. Sadly, there is no law of conservation of money in economics. Money can simply disappear, and if enough of it does so, you have economic collapse.

Iceland: A small country in the extreme north populated by the descendants of Vikings which has recently experienced economic collapse (see above). If not rescued by other nations of the world, Iceland will have no choice but to replenish its coffers by raiding the coastlines of Europe and America. Guys with names like Sven and Eric Ericson, with Swedish Chef accents, will be burning our houses and raping our women. Also, they will be sending millions of emails that read, “Dear Friend, We would like to offer you a unique business opportunity...” (with Swedish Chef accents).

October surprise: As if having toilet paper in your trees and rotten pumpkins smashed in your driveway were not enough of a surprise, the October surprise is lore believed by stockbrokers and other Wall Street types (see 'Irrational despair,' above). Apparently, people who work in the New York Stock Exchange are among the most superstitious people on Earth. To a man, they take vacations each year in Ireland to hunt leprechauns, and can be found any time clutching rabbits feet, voodoo charms, saints medallions, and all manner of good luck items. Apparently, these denizens of the trading floor believe bad things happen in October, and in the way of many such prophecies, it happens to frequently be self-fulfilling.

So that, in a nutshell, is the lingo. Know it, understand it, use it wisely. And yet, one thing is still missing. We still don't have a comprehensive phrase to describe the whole phenomenon. I submitted my entry, “The Great Economic Shitstorm of 2008,” to Ben Bernanke, but I haven't received a response from him yet.

Permalink | 11 comments | Catherine Shaffer's blog | Channel: Personal Finance, Consumer Affairs

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Financial Peace in Hard Times

Catherine Shaffer — Tue, 30 Sep 2008 15:08:02 +0000

By Catherine Shaffer

Six months ago, I had plans. Lots of them. Career plans. Vacation plans. Financial plans. Then everything fell apart. My mother became ill. She had already been ill, having been diagnosed with cancer in 2005. However, her general health deteriorated drastically in March, and there followed five weeks of hospitalization, followed by a major life change. She moved in with me, and I became her primary caregiver.

One crisis followed another. When we thought we had her other health problems resolved, we learned the cancer was back. For a long time it seemed everything was getting worse, and suddenly we were spending more time in the Emergency Room than some of the people who actually worked there (or so it seemed). I started to feel like I was friends with the security guard who printed out my badge each time. Unlike on television, you tend not to meet the same doctors and nurses on repeat visits—in fact, over the course of maybe a dozen emergency trips, we never saw the same medical staff twice. Only my friend the security guard. In the middle of all of Mom's health problems, my husband fell ill, and also made a couple of trips to the hospital.

I am pretty sure there was a whole month where we had a doctor's appointment or a hospital stay every single day. One day, after a long and stressful summer, I decided that, for once, I was going to take my son to the pool with friends and relax. And so I did. I sat there in a pool lounger, knotted up with tension from my scalp to the soles of my feet, and things seemed slightly better. I told my friend, “I think I am starting to relax.” Then I got home and my neighbor told me that an ambulance had arrived to take Mom away. That's how my summer went.

Where am I going with this? Well, all my plans were dashed to matchsticks. The career plans got put on hold. The vacation plans went down the toilet. Everything was postponed, canceled, or ruined. Except for those financial plans. See, last year, my husband and I got serious about paying off all of our consumer debt, and getting on a robust budget that included savings for many of life's little surprises. I began keeping track of every penny we spent, and aggressively paying off our creditors. I used much of Dave Ramsey's program, and established a $1000 emergency fund. At first, it was difficult. With the increased credit payments, we were barely breaking even every month. Twice within the first six months, I had to dip into the $1000 emergency fund and then repay the fund.

Sooner than I thought, we sent in our last credit card payment, and shortly after that, our last car payment. All of a sudden we were debt free except for the mortgage. That was in March.

And you know what happened in March. So here's the thing. All of that planning and work carried us straight through to today. We've had a couple of automobile breakdowns, a couple of budget overruns, some ups and downs in income, and one very strange pet accident. We've eaten far more restaurant meals than any budget-conscious family should. Gas prices have gone up. Groceries have gone up. But we're okay. I was able to pay in cash for every unforeseen emergency, and focus on what mattered most—my family and my health. All of the sacrifices we made to get on top of our consumer debt were absolutely worth it.

Permalink | 10 comments | Catherine Shaffer's blog | Channel: Frugal Living, Budgeting, Credit Cards, Lifestyle

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DVDs Freer than Free--No, Really, Really Free

Catherine Shaffer — Sun, 06 Apr 2008 03:00:38 +0000

By Catherine Shaffer

I noticed Paul's interesting article (NEVER Pay for a Redbox DVD Rental Again ) about using Redbox codes to rent movies for free, and in theory, I am all for it. But we don't have Redbox nearby, and I would never manage to return a movie in 24 hours with my crazy life. Fortunately, I have a diabolical method of getting movies for free. Even free-er than Redbox free! Nowadays, I laugh as I drive by Hollywood video. Why did I ever pay $4 to rent a movie? Why, God, why?

Here's the secret. I use the library. I know that's not really a secret. It was even mentioned in the comments to Paul's post, but then quickly dismissed and/or ignored. I think the idea deserves to be revisited. See, most people assumed that you can't get the videos you want at the library, especially new releases. But I've been getting just about any DVD I could ask for from the library using the computerized request system. I combine this with my reading wish list, enter my requests, and a few days later, I get an email saying my DVDs are waiting for me. I even put in electronic requests for materials that are not on loan, because I am too darn lazy to go to the shelf and look them up alphabetically. I just walk up to the hold shelf, grab the materials with my name on it, zap them through the self checkout, and walk out without paying a dime.

The library has a full selection of new releases, and also popular television shows. We do maintain a netflix subscription, because there are some things we haven't found in the library. However, lately I have been experimenting with interlibrary loan for books. If the book is not found in the library catalog, you get the option to "search other libraries" and the system will look for your selection in the interlibrary lending system. I wasn't sure if this option existed for DVD's, so just now I went to my local library web page and searched for a DVD I was pretty sure they didn't have. Sure enough, I found it in a library in a neighboring town, and was offered the opportunity to request it.

Since I've been using the library pretty heavily, I've noticed something interesting. A lot of other people are, too! I have one book on request in which I started out as the 135th request. It may seem like, with a month-long loan period, I would never get the book, but when I looked at the record, my library owned 45 copies, and was in the process of acquiring dozens more. That means that the library is not as much of a free ride as we thought. They are a major purchaser of books, DVDs, CDs, and other media, using taxpayer dollars, and there's no need to feel guilty about using it. They seem to keep enough books in stock so that the hold queue is about three deep. So for a book with 140 holds, they owned 50 copies. That seems completely reasonable to me.

As it turns out, the hot books, movies, and cds are perpetually loaned out, and your only chance of getting them is to use the request system. (I always figured that mostly if I couldn't find it on the shelf, I couldn't get it from the library.) Waiting for things really hasn't been a problem, since new requests are coming up for me every few days. My biggest challenge has been keeping up with all the material I have requested. In fact, my Netflix queue has gone rather stale since we got a big batch of DVDs from the library. There is no limit on the number of items you can take out. You can keep DVDs for a week, and if no one has requested them, you can renew them nearly indefinitely. My library sends me an email a few days before materials are due, and I have made it part of my daily routine to pop in to the library web page and check my list of checked out items (up to 35 items right now!). If something is due that day, I try to renew it, or put it on the shelf next to the door to drop off on my daily errands. Often, at the same time, I swipe my holds from the hold shelf. (You do need a good home organization system for library materials if you are going to have a lot of them. I try to keep the DVDs near the TV, or on a shelf by the door.)

I don't know if I've talked you into using your public library more. I may have talked myself in to canceling my Netflix subscription! We already canceled our cable subscription and are frankly not missing it between DVD rentals and the odd iTunes purchase for very new TV shows. To ease the transition, at first we bought some current TV shows on iTunes for our son, but very quickly we weaned him onto older stuff we could get from the library. He is enjoying Looney Tunes now every bit as much as I did in my childhood, and we get them FREE from the library.

But if you're still with me after all of this, here is an extra bonus for Michigan residents. Libraries in Southeast Michigan are loaning out free tickets to area museums now through October. Tickets are available in twos or fours for a long list of museums both big and small, including the DIA and other major attractions.

Now, I expect the next installment in the Wise Bread DVD rental category will be about how to get someone to pay you to rent them. Anyone?

(Life has been pretty busy lately, but I'll be back soon with more entries in my real estate rental series soon.)

Permalink | 30 comments | Catherine Shaffer's blog | Channel: Frugal Living

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So You Want to be a Landlord? Part II: How Do You Actually Make Money?

Catherine Shaffer — Thu, 13 Mar 2008 23:31:35 +0000

By Catherine Shaffer

I know we're not completely done talking about risk in this series (see the first post here ), but Paid Twice, from I've Paid Twice For This Already asks an excellent question with regard to the rent vs. buy debate. Namely, if you can save more money by renting a house than buying, then what is your landlord doing?

So I ask my readers - how does this work? Anyone know how renting can be so much less expensive than buying, yet the home’s actual owners don’t lose piles of money?

You can read the whole post over at Someone Had to Buy the House You Rent.

The truth is that rents sometimes do not cover the monthly costs of owning the rental home, so how is it that these real estate gurus make their money? A lot of people think that it must involve unfair tactics, such as buying investment property at below-market rates from gullible elderly people, but there can't possibly be enough gullible elderly people to keep the whole industry going. Others think it must be because all of the property is fully paid for, or that it was financed for better terms than today's rates. However, economically speaking, rental rates in today's dollars have to somehow make sense with today's property values and interest rates. And remember that not all rental property is residential. There are a lot of investors out there buying office and industrial space to rent out. How does it all work?

What we need here is a calculator and the back of an envelope. The first thing we need to do is identify the two different sources of income from investment property. The first is equity appreciation. This is a primary strategy for some real estate investors, who target undervalued real estate, or real estate in areas likely to increase in value, and then buy and hold until they decide to sell. There are many types of rental property, and even in a down market like today's (or especially in a down market) you can make money this way.

The second income stream is rents. A lot of landlords buy up properties and hold onto them indefinitely, living off the rents, which will increase proportionate to the finance expenses of the property the longer you hold it. Although some landlords may focus on one strategy or the other, the truth is that both are in play for any given property.

Getting out the envelope, let's make some assumptions (and remember the back of our envelope is small, so we are not going to to be excessively detailed about this).

We are buying an investment property today for $200,000, with a $60,000 down payment (30%) and financing it for 6.75% for thirty years. The going rate for a mortgage on your primary residence today is 6.13%, so 6.75% should be about right for an investment property.

First, the monthly expenses.

Monthly mortgage payment (principle and interest): $908.04
Taxes and insurance (50 mills): $483.33
Water utilities (typically renters don't pay for this themselves): $50
Maintenance (sinking fund*): $166
Total: $1607.37

The rent you can charge is determined both by market demand and costs. This particular house is a two bedroom, one bathroom starter home, and $1100/month is all you can get for it.

Your monthly cash flow for the house is -$507.37. Ouch!

Why would anyone do this? Well, let's look at things a different way, by checking out your profits.

First, there's your equity appreciation. Let's go with the doomsayers for now and assume you can barely keep up with inflation on your investment, so it's going to appreciate at a modest 5% per year. (Feel free to play around with different numbers on your own time.)

Market value up 5%: $10,000
Rent collected: $13,200
Interest Payments: -$9450
Property taxes and insurance: -$5800
Maintenance: -$2000
Net profit: $5950

That's a 9.9% annual return on your investment of a $60,000 down payment. Not bad!

Now, this doesn't "feel" like a profit to the landlord because much of it is tied up in unrealized capital gain, and the monthly payment includes principle, so some of the monthly "cost" is money he's paying toward his debt liability. In other words, the small principle payment ($1492.05 the first year) is not really "cost." That is money paid back to himself.

There are also income taxes on the $13,200 in rents to be considered. However, the IRS gives you a lot of deductions for owning rental property, including the ability to depreciate the entire property (the structure of the building, that is, not the land) and appliances or equipment you use for your rental business. For that reason, the effect on your bottom line at tax time could actually be to reduce your tax liability. (I am deliberately avoiding a full discussion of taxes here. That's another post.)

Although we could decrease that 9.9% annual return further by taking into account income tax, when looking at comparable investments, such as the stock market, it is customary not to deduct what you expect to pay in income or capital gains tax and so we won't do that here, but simply note that a 9.9% annual return compares quite nicely to what you can expect from stock market investments and mutual funds. Most people should be glad to get around 10% per year on any investment, before taxes, brokerage fees, and inflation.

And this is why landlords lord lands. It doesn't require dishonesty, just a healthy tolerance for risk (which we'll talk about next time) and occasional conflict. Oh, and about $60,000 cash.

*This assumes you are replacing your roof, furnace, and exterior paint or siding and windows every thirty years, and you are doing some miscellaneous repairs each year.

Permalink | 16 comments | Catherine Shaffer's blog | Channel: Personal Finance, Entrepreneurship, Investment, Making Extra Cash, Real Estate and Housing

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So You Want to be a Landlord? Part I

Catherine Shaffer — Mon, 10 Mar 2008 16:50:24 +0000

By Catherine Shaffer

With dropping home prices, a long term investment in real estate is looking pretty attractive. Whether you want to buy rental property outright, or renting is your plan B when your house doesn't sell, the most important thing you need to think about before you become a landlord or landlady is risk. The concept of risk in renting property tends to draw blank stares. After all, you have insurance on the property. You have a lease. What's the problem?

Understanding the answer to that requires a shift in your thinking. Most of us are renters at some point in our lives, whether in college, or while we are working that first job, saving up for a down payment, or in a transitional period in life. When you are renting, it seems like the landlord has all of the power. He chooses the the paint color on the inside of the house, what trees or shrubs you have in your yard, when your lawn gets mowed or your driveway cleared of snow. When your toilet breaks or your roof leaks, a repairman shows up, paid for by your landlord. When your rent is late, even a teeny tiny bit, that landlord is on your butt like white on rice. And when your lease is up for renewal, the rent goes up as inexorably as the rising sun.

And yet, when you trade places, and suddenly you are the landlord, as in a horror movie, you realize the tenant has all of the power. The tenant physically occupies your property. They can damage the structure or the appliances. Their pets pee on the carpet and chew up the woodwork. If they sell drugs, the police could literally seize your property. And the tenant controls that ultimate item of power, the rent check, which you desperately need--on time--in order to pay the mortgage each month. In fact, unless you are very lucky, the rent check probably won't cover the mortgage. Worst of all, if your tenant suddenly turns deadbeat, it can take months to evict them from the house, and all the while that mortgage payment has to be made, on time, every month, or you could lose the house to foreclosure. A myriad of laws and advocacy organizations protect the rights of the tenant, but as a landlord or landlady, you are always the bad guy, and if things get ugly, you will be pretty much on your own.

Are you scared yet? You should be. If you decide to go ahead and become a landlord or landlady for the first time, here are some tips for controlling that risk.

1. Screen your tenants. You will be tempted to rent to the first non-scary person or couple that puts in an application, but be choosy. Make sure that you do a credit check and check references on your prospective tenant. If those thing don't check out, don't rent to them! This is no time to be "nice." Don't rent to the person who deserves the house. Rent to the person who can pay for it. Find out what their income is and do the math.

2. Don't rent to section eight tenants. This is not a rule for life, just for your first experience as a landlord. When you have dozens of units, and enough cash reserves to carry you through some unexpected vacancies, then you have my blessing to take on section eight tenants. In fact, please do. But your first time out, you should turn down section eight applications.

3. Get help from a lawyer. Spend a few bucks to get your lease written up by a well-qualified attorney.

4. Avoid situations that seem strange or "funny" to you. Use your spidey sense to weed out applications that seem weird, strange, off, or otherwise not right.

5. Obey the fair housing laws. You are not allowed to discriminate on the basis of race, color, national origin, religion, sex, familial status or handicap. Obey this law scrupulously to reduce your legal risk.

6. Have proper insurance. Don't skimp on insurance for this very valuable asset.

7. Rent to people with pets. Although pets can do a lot of damage to the house, that effect is balanced by the fact that pet owners tend toward "family" values. If you have a Mom, a Dad, a kid, and a dog, you're probably going to get a rent check every month. As a bonus, your pool of applicants will be larger, because most landlords don't allow pets. Think of it this way. Would you rather replace a carpet for $500, or evict someone who was growing pot in the basement? If you've got an applicant with good references, good credit, a steady job, a family, and a pet, take it as a good sign. Obviously, it goes without saying that you should not rent to shady-looking people just because they have pets.

8. Maintain good relations with your tenants. Respect their space. Respond promptly to maintenance calls. Be understanding of the occasional rent check that arrives late. Don't sweat the small stuff, because a bad tenant is so much worse than you can possibly imagine. Remember that they are more afraid of you than you are of them.

Permalink | 18 comments | Catherine Shaffer's blog | Channel: Personal Finance, Entrepreneurship, Investment, Making Extra Cash, Real Estate and Housing

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Longtime Mac Users Punished for Loyalty

Catherine Shaffer — Mon, 18 Feb 2008 14:53:24 +0000

By Catherine Shaffer

I'm an unapologetic Mac-junkie. I've got an old, dead Mac laptop that I can't bear to part with from 1996. Our iMac is still up and running, having recently been put out to pasture after a disk drive malfunction. I eagerly bought one of the early iPods, and still use it all the time. And I'm writing to you now from my G4 Cube, which was a gift from a friend years ago. I've watched other Mac lovers fall away from the True Faith, one-by-one, but I never thought it would happen to me. However, yesterday when we brought home the newest addition to our Mac family, an 80 Gb iPod Classic, it would be my turn to be disillusioned. After you pay the hefty $249 price tag, plus an extra $30 for a wall charger (they used to bundle those in for free), plus $55 for the composite AV cable for your TV, plus any other little extras you may need, there is a hidden cost that blows up in your face when you get it home.

In short, the new iPods are not compatible with any operating system before OS 10.4.8. There's a good discussion of the problem here. Basically, if you don't have a newer operating system, you have to buy it before you can use your iPod. If you can't run the newest OS, Leopard, you need to call Apple tech support and they'll graciously sell you the outdated and obsolete Tiger for $129. You can imagine what I said to this gracious offer, after plunking down $350 for the device.

In a way, I should have seen it coming. I had recently spent several hours trying to get my brother-in-law's two new iPods (shuffle and nano) to sync with his PC. But I assumed that it was a Mac/PC thing, and that it could never happen to me. And yet it did. My computer stubbornly refused to recognize the device.

Now, I've seen the criticism that some of those True Believers have directed at those of us disillusioned ones, left behind by the shiny new OS's. We should have read the system requirements on the box.. I admit it. I didn't. There are two reasons for that. One is that after so many years of being able to count on my computer to handle a variety of devices without complaint, it simply never occurred to me. The iPod is a standalone device. All I need my computer to do is exchange data with it. And since my computer has no problem running the newest versions of iTunes and Quicktime, I never expected that there would be any compatibility issues. Moreover, it's become standard and expected for all of these handheld devices to connect to any computer via USB cable. I would never think to check for system requirements for my digital camera or my cell phone.

The other reason is more practical. I never got my hands on the box until I paid for it. We had extensive conversations with the salespeople, in which compatibility never came up, then they unlocked a cabinet, took a box out, and carried it to a cash register. I don't blame them for this. I think they were under the influence of the Mac "it just works" mind-control field as much as I was. Neither do I blame them for not handing me the box and letting me wander around the store with it.

Ultimately, Apple has failed to provide a technical justification for this. The technical support representative made it sound like it was a law of nature or something. "You can't make a device be compatible with an older computer," she said. Sort of like you can't make a zebra be friends with a crocodile? Huh? Wtf? This is obviously just an old-fashioned wallet grab. I can see the marketing execs, in their board room, poring over numbers representing people who were still using older versions of Macs and operating systems. "What if we could force them to buy a new operating system with their iPod? Better yet, maybe they'll decide after all that trouble to buy a new computer. What a slam dunk!"

In fact, I suspect not merely a failure to support the older OS, but some kind of deliberate cloaking of the device, forcing it to be invisible to the older OS. Why else would the computer not even be able to see that there is something plugged into its USB port? And if that's the case, perchance this nasty little easter egg is also turning on accidentally with certain other computers and operating systems, which might explain why my brother-in-law's children were unable to use the iPods they received for Christmas on their PC.

What all of this comes down to, for me, is that I am tired of the platform wars. Enough is enough already. I'm tired of manufacturers trying to force me to buy equipment I don't want and need, or pointless "upgrades" (I shudder to think of my old cube trying to run a bloated newer operating system), just so that I can listen to a song, or download TV shows from iTunes (which, by the way, I was planning to do extensively). I'm tired of trying to exchange text files with people who have some subtly different document format, and seeing all of my formatting turned into gibberish. I'm tired of declaring loyalty to one manufacturer or another just because I bought their product.

When I take my car in for repairs, the mechanic never tells me that my older model car is "no longer supported," or that my new tires are incompatible with my older chassis. I am not forced to stop using my refrigerator because my new food is suddenly incompatible with it. And while I'm on the subject, I don't understand why I need a desktop or a laptop computer at all to use my iPod or my other smart devices. Has no one ever thought of making an ethernet or wireless adapter so that we can download our tunes directly from the internet? Of course not! Because then people might decide they don't need a $2000 laptop just so they can listen to music in the car. Slam dunk!

We ended up connecting the new iPod to a truly ancient PC that we have in the basement, then transferred the video files through our home network so that my son could finally watch his favorite cartoon on it. But we are not pleased.

This is a message to all of you entrepreneurial geeky types out there. I want a smart, hand held device that "just works--really." I want it to be platform agnostic, so that I can use any file type with it. I want it be robust, long-lasting, and durable. I want it to do a lot of jobs for me, but be ridiculously simple-minded to use. I want it to come with a decent warranty and be totally independent so that I never have to connect it to my computer unless I want to. You give me this, and you've got a customer for life. And I have a feeling there are a lot of other folks out there who feel the same way.

Permalink | 49 comments | Catherine Shaffer's blog | Channel: Personal Finance, Shopping, Technology

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Do You Need Health Insurance for Your Pets?

Catherine Shaffer — Sat, 16 Feb 2008 00:14:00 +0000

By Catherine Shaffer

In my previous post about the hardships of life on a six figure income (queue strings), I mentioned in passing that we had a $4000 veterinary bill for our dog. A couple of people mentioned veterinary health insurance. Nala was actually too old to have qualified for insurance at the time she died. We would have had to have signed her up when she was younger. After Nala died, I checked out veterinary health insurance plans, hoping to save ourselves the same ordeal with our new puppy, Chewie. When I studied details of several plans, I concluded that these insurance programs are not a good deal for pet owners.

Nala died of idiosyncratic liver toxicity from a drug called metacam that we were giving her for arthritis. Dogs and cats instinctively conceal injury and sickness, so we had only vague clues that anything was wrong with her the day before I left for a cross-country business trip. She was an elderly dog, and we weren't sure we wanted an elaborate medical care for her if she was sick (how ironic). The day after I arrived, my husband called with terrible news. Nala had vomited up half her blood volume all over the living room floor. She was a one hundred pound dog, so you can imagine how dramatic and upsetting this was. It was the middle of the night, so my husband had to drag our child out of bed, carry the dog down a flight of stairs, and throw both in the car to go to the emergency clinic. By the time the vet returned with a possible diagnosis and recommendations, the bill was already over $1000.

Let's stop a minute here to talk about veterinary expenses. I used to work for a veterinarian, and I could not believe what an attitude people had when it came to paying for health care for their pets. They seemed to think that it should all be dirt cheap, or that the doctors should provide care out of the goodness of their hearts. So when I say that the initial workup cost $1000, I can pretty much predict someone is out there, already writing a comment, probably without even finishing the article, to complain that $1000 is too much. Well, I'm here to say that for one thing, that is much less than the real cost of the same care in a human emergency room, and for another that veterinarians are highly educated professionals who deserve to get paid well. If you feel that the right way to deal with that situation was to dig a hole in the back yard while she finished bleeding out, then this post about the cost of veterinary care for your pets is probably not the best use of your time.

So we are already $1000 underwater, and in order to get Nala through until the next day and figure out what is really wrong with her and whether she can be saved or not, she needs two units of blood. That's another $800. And we are trying to make this decision over the phone, with me sitting in a hotel room San Francisco, crying hysterically. (In fact, I need to take a little break as I write this, the memory is so intense.) We go with the blood transfusion, and I try to change my flight to come right back home. This is where I learned that if you book through Expedia, you can't change your return flight once you have already departed. (I will never book anything with Expedia again.) The next day, Nala was slightly improved, and so we decided that I would finish my trip.

The next couple of days were a roller coaster. We knew her liver was failing, but the veterinarian (a brilliant, triple-board-certified expert in everything) could not give us any clear answers. At times, she seemed to be improving. She was in intensive care, getting medicines all day long, daily blood draws. The bills were racking up. Would she pull through, or not? And the whole time, I was in California. I finally got home, after a nightmare flight that left me stranded overnight in Denver, and got to see my dog and say goodbye. Six hours later, she took a clear turn for the worst, and we put her to sleep together, as a family. Our final bill was $4000. Of that, the drug company eventually reimbursed us about $1100, for the diagnostics which they were glad to have as part of their post-market monitoring program for adverse events. We put the rest on a credit card.

The most heartbreaking aspect of this, for me, is that in her post-mortem exam, evidence was found of liver regeneration. If we had kept her going longer, maybe she would have made it. But how long? The size of the bill was a part of our decision-making process. As we watched the charges mount up every day, we hoped against hope that the bleeding would stop (for us all), and we would be able to take her home. But it didn't. The bill was like a waitress, pouring your coffee, inviting you to say "when." We reached our limit and had to pull the plug. I'll never know what would have happened if we had been able to afford more care. Then again, she was clearly suffering, and ...and...well, we did what we did, and there's no going back.

Could veterinary insurance have helped in this situation? Many people think it would have. If I had enrolled Nala in one of the more popular plans, VPI, at a younger age, I would have paid about $35/month for the "Superior Plan." However, when I looked at the schedule of benefits, I found that drug toxicity is reimbursed at a rate of $258 per incident. Kind of inadequate, huh? Possibly we could have gotten an extra $236 for "stomach ulcer" as a secondary diagnosis, and maybe $150 for her ultrasound, although that test was included in the drug company reimbursement.

Ultimately, this seemed to me like chump change. To start Nala at birth and pay $35 premiums until she died would have cost $4650, and we'd still have been out $2256 for that incident alone. And that's not taking into account the time she got pancreatitis and nearly died from eating half a bag of kitten food. I see VPI's reimbursement for pancreatitis is $388. That's not even close to how much it really cost. Going back even further, Nala had heartworms when we first got her. I don't remember how much the treatment cost, but it involved a week of hospitalization. Parasites are excluded outright from VPI's plan. So we would have been out of luck, there.

There are a couple of things going on here. One is that the reimbursement schedule doesn't seem realistic compared to what the medical bills actually cost. Another is that there is progress in veterinary medicine parallel to human medicine, and that many more treatments, tests, and procedures are available now than in the past. Back in my veterinary assistant days, nobody got an ultrasound for their dog (unless maybe they went to the big veterinary college down the road), and I never heard of a dog being in intensive care. That made end-of-life decision-making somewhat simpler. Nowadays, they have chemotherapy for pets, and joint replacement surgery and MRI's and lots of other high tech treatments. The next step in Nala's care, if we had not euthanized her, would have been total parenteral nutrition (nutrition via IV drip), because her digestive system was not working. That would have been obscenely expensive. Health insurance is the reasonable and logical way to deal with the risk of being faced with these huge costs. Unfortunately, the major pet health insurers are themselves not prepared to pay those costs. Until that changes, at our house, we will be paying our veterinary costs out-of-pocket. Eventually, I would like to create a fund for pet health care, and put money into it regularly so we don't get steamrolled the next time this happens. And it will happen.

Permalink | 27 comments | Catherine Shaffer's blog | Channel: Personal Finance, Budgeting, Lifestyle

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Is Six Figures Really That Much?

Catherine Shaffer — Wed, 13 Feb 2008 16:08:48 +0000

By Catherine Shaffer

There's a fascinating discussion going on over at Free Money Finance about families who are struggling to get by on six figure incomes. The overall tone of the discussion is wincingly critical. And I can understand why. For a very long time, the term "six figure" income was used to indicate that someone was very well-off. But the buying power of a six figure income has been eroded quite a bit by inflation, since my childhood, when only basketball stars and corporate CEO's made six figure incomes. Nowadays, six figures is still above average, but its buying power in terms of lifestyle may have eroded even more than the value of a dollar, as those of us within striking distance of six figures have learned to our regret.

My husband and I earned $96,000 from our respective jobs last year. This is our best year, yet. But this year, like every year, we are looking at that number and wondering where it all went. We aren't profligate spenders. We're both lifelong tightwads who live in a modest 1300 square foot home and drive two older vehicles. One is ten years old, the other five years old. We send our child (he's in the "middle" between the two cars in age) to public schools, and we buy most of our clothes either on extreme clearance or at resale shops. When we make a major purchase, we do research and look for great deals.

Are we struggling? Far from it. We contribute to retirement accounts, give to charity, enjoy one or two modest vacations per year, and have made good progress paying down some debts from previous, leaner years. We are not living paycheck to paycheck. But barely...

See, this six figure lifestyle isn't all it's cracked up to be. My minivan has a rust hole all the way through one of its doors. And right now I am wearing a sweater that is fraying at the cuff. Where is my Mercedes Benz? And why can't I afford to shop at The Gap or Eddie Bauer for all our clothes?

If the American dream is living in a nice house in the suburbs (3 bedrooms, 2 baths, finished basement rec room with "man cave," swimming pool in the back yard), driving two newer cars, taking family vacations to the Grand Canyon, having a "date night" once per week, cell phones for each family member, flat screen TVs, buying your clothes, furniture, and appliances brand new--well, I'm sorry but $100,000 year doesn't cover it. Not even close.

If I have to shop garage sales, clip coupons, and rinse out ziploc bags to afford my modest, working-class lifestyle on just under 100 grand, how the heck would I be able to send two children to college? This is the stuff of nightmares. We are working hard right now to pay off old debts (we are almost done), to build up emergency savings, and try to get a tiny bit ahead. But it's hard. Every time we think we're making progress, we get knocked back by something like a major car repair, a leaky roof, a sidewalk assessment, or a $4000 veterinary bill (yes, that actually happened to us). I'm just hoping that between whatever we can scrape together for a college fund, and what we can earn when the time comes, that we can keep up with those bills. Maybe by 2018, colleges and the government will no longer consider families that earn $100,000 to be "rich," and will make some financial aid available. I'm not betting on it.

Here are some amusing suggestions from FMF's comment thread:

Move to the inner city for less expensive housing.

Get rid of your cable TV and/or premium channels.

Move to another area of the country.

Drive cheaper cars.

These are all perfectly reasonable suggestions for cutting your costs, but why should someone who is making six figures have to live in the ghetto and drive old cars? And if premium cable television is not intended for six figure households, then who is it for--those who make $1,000,000/year or more? If new cars aren't for middle class Americans with average or above average incomes, then why are all those commercials showing up on my favorite TV shows?

Something has changed since the 1970's when Mike Brady was able to support his wife, six kids, the dog and the housekeeper on a single income in relative style and comfort. Instead of criticizing people in the upper income brackets because they can't afford their lifestyles, maybe we should take another look at our expectations. Why are we all getting poorer? What is a realistic middle class lifestyle? Do we even know anymore?

Permalink | 84 comments | Catherine Shaffer's blog | Channel: Personal Finance, Frugal Living, Career and Income, Budgeting, Lifestyle, Making Extra Cash

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How I Grocery Shop

Catherine Shaffer — Mon, 11 Feb 2008 15:10:40 +0000

By Catherine Shaffer

Being Frugal asks how we grocery shop, and I thought it was a pretty interesting question.

First, I will commit heresy by saying that I no longer write a full weekly menu. Pause for stunned silence. Yes, that's right! Instead of writing a menu each week, as I have done for several years, I recently switched to using the "pantry principle," an idea from The Complete Tightwad Gazette (affiliate link). The concept is that you fill your pantry with foods that you use frequently, then plan meals out of the pantry, rather than the newspaper fliers.

For quite a lot of years, I wasn't such a good meal planner. Being a Busy Mom, I would go to the store, often without a list, and buy stuff that looked good to eat, sort of putting together meals in my head. You can actually do okay with this, and I always tried to shop sales. However, I had a lot of trouble getting meals on the table in the evening, and it happened quite often that I was missing some crucial ingredient for a meal I wanted to make.

The next step in my evolution was being a meal planner. I planned a full week's worth of menus at a time, then shopped for what I needed for that week. I saved money by buying only what I needed, and by using the weekly sales to plan my menus. It also became easier to get dinner on the table each day, especially when I came up with the concept of the regular rotating menu. For example, Sunday was "chicken day," Monday was "spaghetti day," etc. One pitfall was that I tended to overplan. I would carefully plan seven meals, and then we would end up cooking and eating four or five of them. Sometimes that meant wasting fresh ingredients. I tried to compensate by leaving "leftover days," but the truth is you never know whether you're going to have leftovers until you have them, so it's hard to plan ahead for leftovers unless you are psychic.

Eventually, I wanted to save more money, and I had encountered by then Amy Dacyczyn's pantry principle. Frankly, I was kind of skeptical at first, so I continued planning weekly menus while making a bigger effort to shop loss leaders, use coupons, and stock up on frequently used items. It took a couple of months to fully stock the pantry and freezer, but we eventually got to the point where I had a good selection of foods on hand, it was all organized, and I was rotating stuff so that things did not go bad or get wasted. At the same time, a different thing happened. I started making much more of an effort to use up everything--everything--rather than throwing food away. I learned the art of leftover cuisine and began improvising and substituting lots of things in recipes. And it worked! When you are being very careful about using every bit of food, you don't need a lot of "de novo" menu ideas, because 3/4 of your dinners will be made with leftover bits of this and that. And that's when I converted to the pantry principle. Nowadays, I plan my dinner the night before or the morning of, based on ingredients we have in the house. If my family wants something different, or if I want to try a new recipe, I put the extra ingredients that I need for it on my grocery list and get it next time I go to the store. So, in a sense, I've come full circle. Except now I am "shopping" from my home pantry, refrigerator, and freezer, instead of from the grocery store.

One neat thing about this method is that it's a double bonus. Firstly, whenever I find something in the freezer or pantry that I forgot about, that's almost too old to keep, it's like getting food for free! Secondly, it takes some of the pressure off in terms of meal planning. I just rummage around and come up with something like spinach, mung beans, and mystery meat from the freezer. Okay, it's a meal!

So, with that as a preamble, here is how I'm doing my grocery shopping nowadays. I have a subscription to my local paper, so each Sunday morning I grab the paper and cut out the coupons that I want, erring on the side of keeping ones I'm not sure about. (Lately, the coupon inserts have been pretty lean.) At that time, I look through the Walgreen's and CVS ads, but I don't make any specific plans. I make a mental note of deals that look good. I also check out the Meijer sales. I put all three circulars in my magazine basket and wait for the other grocery fliers to show up later in the week, and I glance through them as they arrive. Meanwhile, I check various online sources to see if there are any really hot deals, especially at CVS or Walgreen's. At some point in the week, I'll make a run to CVS, Walgreen's, Rite Aid, a dollar store, or another store to pick up an advertised sale item or two. It's my personal rule not to go to every single store every week, so if two stores have equally good deals, I pick one and stick to my choice.

On Thursday night, I plan the grocery outing. My favorite way to make a grocery list is to include the prices of the items, either exact prices from my price book or memory, or estimated prices. I find that for me the best way to stick to my grocery budget is if I actually know how much I'm spending in advance. That way, I can do my cutting on paper, rather than getting all confused in the store. I don't always have time for this, though. I pull out coupons I know I'm going to be using, but I also take my coupon organizer into the store with me, in case I see unadvertised specials or clearance deals.

First I go to Sav-a-lot, which is our local low cost grocery, and get produce and some other things at this store. I have mixed feelings about Sav-a-lot, because my hubby once found a cockroach in a package of cream cheese. I decided to give them another chance (roaches happen to the best of us), but if it happens again, we are out of there. After Sav-a-lot, I usually go to Kroger and get sale items, there. Lastly, and this is the step that gives me trouble, I try to go downtown to a butcher that carries locally raised, organic meats and get a couple of chunks of meat. This ends up being pretty inconvenient, usually, especially after I've been to two stores already.

Once every two or three months, I'll go to Sam's Club and stock up on flour, yeast, olive oil, and other select items. A couple times a year, I drive to downtown Detroit, which is an adventure, and buy meat in bulk at Detroit's Eastern market (I promise to blog it next time I do). We get a great deal on the prices, and although I don't know much about the history of the meat, we choose a lot of lamb and goat so that we know at least it's grass-fed, not raised on a feed lot. I also patronize Trader Joe's on occasion (although it's so seductive in terms of impulse buys), as well as some of our nice local markets.

Lately, I'm really feeling like I spend too much time going to multiple stores, so I'm experimenting with limiting myself to two stores per week, and buying more from each one, so that I can be more efficient. I've also joined our local food cooperative, which was a chunk of change up front, but should save us money in the form of member rebates and discounts on the purchase of dry goods in bulk. It will also allow us to add more organic foods without stretching the budget.

Our monthly grocery budget is $350, and our "eating out" budget is about $150 (that includes every trip to the vending machine, every lunch, every pizza, every bag of movie popcorn), for our family of three. The grocery budget also includes about $90/month in dairy products we have delivered from Calder Dairy, which costs a bit more than grocery store prices, but not as much as you think. (About $5/gallon for glass-bottled, hormone free, gently pasteurized, amazingly delicious milk.) Also in the "grocery" category are all of our toiletries, OTC meds, personal hygeine products, soaps, shampoos, batteries, plastic bags and wraps, paper products, beer and wine, etc. So it is a pretty challenging budget.

And that's it! It's pretty complicated, really, but the more I get into the swing of it, the less time consuming it is. How do you shop for groceries?

Permalink | 20 comments | Catherine Shaffer's blog | Channel: Personal Finance, Frugal Living, Deals and Coupons, Budgeting, Coupons, Deals, Food and Drink, General Tips, Shopping

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Marketing Messes With Your Head

Catherine Shaffer — Mon, 14 Jan 2008 18:11:59 +0000

By Catherine Shaffer

A new study out today in PNAS confirms what we always suspected was true. The higher the price you pay for a product, the greater your subjective experience of pleasure in the product. For a tightwad like me, that's a no brainer. Of course people think that expensive stuff is better. Most of the time, I feel a smug satisfaction knowing that I can enjoy the same quality for a fraction of the price, or free. But here's the kicker. That pleasure experience is real, according to Caltech researchers Hilke Plassmann, John O'Doherty, Baba Shiv, and Antonio Rangel. At first I felt that this was clearly the devil's work, but as I was polishing the cobalt blue enamel on my Aga range this morning, I had a change of heart. Maybe, sometimes, pleasure is worth the price we pay for it.

Take for example that Russian caviar I was served at an intimate New Year's soiree by a friend. Sure, I knew that sturgeon caviar from Russia was not something you could find at Kroger for $1/can. But I almost choked when, halfway through the appetizers, the hostess mentioned that the one-pound tin had cost $1000. My first impulse was to protest that this was too much to spend entertaining our humble selves. But the can was already open, and half of it in my stomach. Instead, I did what any reasonable person would. I ate more! Did it taste better after that little revelation? Oh, God, yes.

And consider that Aga range I mentioned above. It retails for over $5000. (Their higher end products cost much, much more.) Even though we've been unfailingly thrifty about most of our purchases, we settled on the Aga because we wanted a quality professional range, and because it was cute. (No, really, it is extremely cute.) Now, it turns out that only one of the seven functions on the multifunction oven works properly, and that apparently you have to wait upwards of two months for parts to be delivered. (Indeed, it is the Jaguar of ovens.) I could have had better function in a $600 range from my neighborhood appliance superstore. In fact, I said as much to the customer service representative, in emphatic tones, when I reported that the heating element in the boiler was literally cold to the touch after ten minutes of “preheating.” It speaks to the degree of mutual self-delusionment of the premium product marketing phenomenon that he attempted to convince me that it was taking an hour to heat up because it was better than other ranges. And that I almost believed him. But do I love that hunk of metal? I sure do, yep.

Or how about that $1500 quality purebred mastiff puppy I purchased last year? Just fifty percent more than a tin of caviar. When I picked him up, the breeder showed me the “old English” bloodlines in his pedigree. The price included a great deal of genetic testing for known problems in the breed, plus some of his early veterinary care. He's a great dog. The best. Could we have brought home a great dog from the humane society? Absolutely. In fact, eight months after we brought Chewbacca home, our neighbors gave us their puppy of the same breed, and he's great, too. Do we feel that our 1.5 G was wasted on Chewie? No, actually. We should feel that way, but we don't. Chewie's our tuxedo dog. Courage our dog in handmedown dungarees. He will always be the object of affectionate joking about theoretical mongrels lurking in his pedigree.

My first impulse upon hearing about this story was to wonder what we can do to defend ourselves from price-point induced mania. But the answer is clear when you think about it. When you've saved and planned for that big purchase, know what you're paying for. And if some of that is not strictly objectively measurable in terms of quality or quantity, is your satisfaction and enjoyment worth the price? That's up to you.

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