A vulnerability on IRS.gov could let crooks steal your info and your refund; here’s how to stop them

https://flic.kr/p/bcG9r

Gal via Flickr

A few weeks back, I was helping my fiancee complete her taxes and we found ourselves short a couple needed numbers from prior years.

We turned to the IRS website for her old returns expecting it to be difficult, but were surprised at how little information she needed to enter to access very sensitive tax data.

It turns out I wasn’t the only one who noticed.

In a recent article, computer security website Krebs on Security says criminals may be able to sign up as you on Irs.gov and access your personal and tax data, using nothing but freely available Internet search engines.

Sign up for an account at the IRS website

Before you read any further, head to the IRS website and sign up on their Get Transcript page here:

http://www.irs.gov/Individuals/Get-Transcript

After years of bad experiences trying to pay traffic tickets online or access a Thrift Savings Plan account, I was expecting another struggle with a confusing government website. But this was definitely not the case; both my fiancee and I were able to create accounts within minutes.

It was, perhaps, too easy.

Sometimes, too easy is a bad thing

The potential  security flaw lies within how the IRS verifies your identity. As laid out on this page, you’ll need to provide some personal information:

  • Name
  • Social Security Number or Individual Tax ID Number
  • Date of birth
  • Filing status
  • Mailing address

And you’ll have to answer some:

  • Third-party verification questions

If a criminal manages to find, steal, or buy your personal information, the last hurdle are these third-party verification questions — sometimes also called knowledge-based authentication (KBA) — which take the form of questions about your current and previous addresses, the size of loans you’ve taken, and dates you opened those loans.

Krebs’ issue with the IRS reliance on KBA is that it can easily be defeated with information crooks can easily purchase wholesale in the seedy cyber-crime underbelly, search for with publicly accessible websites (similar to Bing), or — if they’re patient — just with random guessing.

To find out just how easy it could be, Krebs put it to the test with the help of Nicholas Weaver, of the International Computer Science Institute at the University of California, Berkeley (Go Bears!), who found that just by searching on Spokeo and Zillow, he was able to accurately answer three out of four questions. And, like he said in the article, for the last question “you don’t need to guess blind either with a bit more Google searching.”

And once a criminal creates an account in your name, they can see your prior W2s, prior returns — in other words, everything they would need to wreak havoc on your personal finances including the ability to fraudulently file your taxes next year with a big refund sent straight to their criminal hands.

So what can you do?

You can sign up at the IRS website here: http://www.irs.gov/Individuals/Get-Transcript.

Sure, no method will ever make your personal information impenetrable, but at least now, you’ll have your password standing in between a criminal and your tax records already available on IRS.gov. Moreover, if a criminal tries to sign up as you after you’ve already done so, they’ll get this error message:

Picture1

And if they click “retrieve your User ID” on this screen, it will only give them the option to send your ID to the email address that you registered with previously.

More generally, you should take steps to safeguard your personal information and use the free sites I’ve mentioned in a previous post to monitor your credit.

Good luck!

Sources: Brian Krebs. “Sign Up at irs.gov Before Crooks Do It For You.” Krebs on Security, 15 March 2015; and the Internal Revenue Service

A big tax refund is still, for most, a very good thing because of the permanent income hypothesis (or breakdown thereof)

https://flic.kr/p/a2Zc4L

Helen Haden via Flickr

It’s April 17 here in the U.S. meaning that the tax deadline has come and gone.

If you’re like most Americans, not only did you get a pretty big refund — $2,800 was the average the last time the IRS checked — but you’re pretty happy about it too. A Bankrate survey found that a majority of respondents would prefer to receive a refund rather than breaking even or having to cut a check to the IRS come tax time.

All this is still the case despite years of advice from journalists — including here and here — and all the finance experts in your life, telling you the rational reasons why a rational taxpayer absolutely shouldn’t want a tax refund.

But perhaps the real problem is that this advice fails to take into account how real people actually act instead of theorizing their shortcomings away.

By looking into the practical effects of an infrequently cited economic concept (exciting!) we might see these refund-seekers to be pretty rational after all.

Why getting a big tax refund is supposed to be a bad idea

The thinking is based on a couple economic concepts.

The simpler of these two concepts is the time value of money.

Read even a bit of the literature on the topic and you’ll almost certainly hear your tax refund referred to as an interest-free loan (Including in the two articles I linked to earlier). The math is pretty simple here; had you adjusted your withholding by submitting an updated Form w-4 to your employer, you could have traded the $2,800 refund you received in April 2015 for $233 every month from January to December 2014. Had you saved every last penny along the way and stuck that in a saving account to earn interest, you would have ended up with an extra $20 come April 2015. Had you invested that money in the market, you might have ended up with hundreds in extra money.

While rarely mentioning it explicitly, this explanation also depends on an economic idea called the permanent income hypothesis (Or the nearly identical life-cycle hypothesis).

Generally, the hypothesis predicts that a rational consumer will base his or her current consumption on permanent income — that is, a combination of their current income and their expectations for future income.

Specifically, because the size of a tax refund is a largely predictable one-time surge in income, a rational consumer would not change their spending habits whether they got all of it in April 2015, or received it in small chunks spread out from January to December 2014.

What the theory gets wrong when it comes to refunds

The problem is that, in practice, taxpayers treat refunds differently from money distributed to them throughout the year.

Expectations of a tax refund may encourage saving

A study by Nicholas S. Souleles found that for each additional dollar of refund received, the average taxpayer increased consumption by the significant, but still pretty small amount of 18 cents, with the overwhelming majority of that added sensitivity being focused on the purchase of durable goods (such as refrigerators and bicycles). Souleles suggests that the reasoning behind this may be premeditated — taxpayers who understand their own limitations with self-control purposefully and rationally withhold too much in taxes so that they might be able to save up. (Source: Nicholas S. Souleles. “The Response of Household Consumption to Income Tax Refunds.” The American Economic Review, 1999.)

Taxpayers who receive large refunds may be more likely to save it than if they received it in smaller flows throughout the year

Richard H. Thaler points to several studies (including Japanese workers who save more of semi-annual bonuses, and Israelis who save more of restitution payments) that imply this outcome, which he explains as mental accounting on the part of consumers, concluding that “small gains relative to income, will be coded as current income, and spent” while “larger gains will enter the assets account, where the [marginal propensity to consume] is lower.” In other words, the larger the windfall a consumer receives, the more likely they are to save rather than spend it. By extension, you’re more likely to save more of one big lump sum you receive in April than smaller flows throughout the year.(Source: Richard H. Thaler. “Anomalies: Saving, Fungibility, and Mental Accounting.” Journal of Economic Perspectives, Winter 1990.)

A super-majority of taxpayers plan to use their refund to boost their net worth

This desire is echoed in consumer sentiment; only 3% of Bankrate’s survey respondents plan to splurge on something similar to a vacation or shopping spree, while 26% plan to spend it on necessities, including food and utilities. Encouragingly, A whopping 67% of taxpayers receiving a refund plan to use it to pay down debt, save, or invest.

Conclusion

Now, let’s be clear; the optimal outcome is to receive no refund (or even to owe money) and to save every last extra penny you get during the year in an interest bearing account.

But if receiving a big refund at tax time helps you spend less throughout the year and encourages you to put more of it toward debt or retirement savings, then that sounds like a pretty solid silver medal to me.

Enjoy your weekend!



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April 2015 net worth update — HUGE life event and I’m FINALLY free of six-figure debt

https://flic.kr/p/6wK5iS

sung ming whang via Flickr

March was an amazing month for me. It was relaxing, adventure-filled, and hugely eventful.

But it’s tough to measure whether those good vibes from a huge life event had the same impact on my personal finance goals. Let’s take a closer look.

The numbers

Here’s what I did with money this past month:

Picture1

What I’m proud of:

The most important number is definitely the change to my net worth. At the start of 2015, I set an ambitious goal to erase my negative net worth of -$47,000 by the end of the year.

By taking advantage of the 401(k) at work, living frugally, and paying down debt as much as possible, I’ve made huge strides toward this goal; Just three months in, I’m already 37% of the way to zero.

change

However, as silly as it may sound, I’m most excited about finally getting my student loan debt to less than $100,000. Yes, it’s a completely arbitrary milestone, but five figures feels a lot more manageable than six figures.

What challenged me:

I spent almost half of March traveling, which brings with it the temptation to spend. Thankfully, I was able to limit my spending by:

  • Buying tickets far in advance and paying with frequent flyer miles whenever possible
  • Staying for free with family or in inexpensive but spectacular AirBnB lodging
  • Eating like a local (i.e. buying from markets and grocery stores rather than defaulting to touristy restaurants every time)
  • Choosing activities that were free or almost free

In the end, I spent about the same amount while traveling as I would have spent if I were home in New York (though this may say more about the high cost of living in New York than how thrifty I am).

Lessons I learned:

I re-affirmed a long-held belief that a journey is often more important than its destination. In two weeks, I went on more hikes than I had in the last two years, and each time, I found that I appreciated the waterfall, volcano, or hidden beach at the end of the route much more for having taken the slow, hard path rather than a shortcut.

There’s a personal finance metaphor buried in there somewhere, I’m sure. Perhaps I’ll find that the collected lessons I’ve learned along the way in paying down this debt will be that surviving through the tough times will feel just as satisfying as reaching that $0 balance.

And perhaps not :)

How was everyone else’s March?

 

 

 

 

 

 

29 ways to earn extra money (Link love)

https://flic.kr/p/4kJM2o

Ron Dunnington via Flickr

On this blog, I’ve spoken at length about what to do with spare money after you’ve already saved it or how to avoid spending money so you can do other things with it.

Now, it’s pretty clear that you can’t choose what to do with savings before you actually save the money. But you also need to earn money to be able to save it. And sometimes, to do more than stay afloat, you need to hustle on the side in addition to your 9-5.

In that vein, here’s an extremely comprehensive list I found on Penny Hoarder:

29 Smart Ways to Make Money on the Side in 2015

Have a great weekend, y’all!



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Surviving an IRS tax audit

Before getting started today, a reminder that you should read my disclaimer.

m shattock via Flickr

m shattock via Flickr

Tax time is not something that anyone looks forward to, but it’s something that can be expected year after year. Some of us may pass off our taxes to have a professional take care of, while others may decide to tackle the task on our own. Once they are finished and filed, we can breathe a sigh of relief.

However, once you’ve finished filing your taxes, there is always a chance that you might be subject to an IRS tax audit. An audit is when the IRS takes a closer look into your tax return due to errors or information that might cause a red flag in their eyes. Fortunately, the odds are in your favor: less than one percent of American taxpayers were audited in the past tax year. But if you reported high income on your taxes or are self-employed, your chances of an audit are higher. The IRS wants to ensure that you have recorded your information accurately.

So, what to do if you’ve received a letter of notice from the IRS for a tax audit? Although each situation is different, here are dos and don’ts to keep in mind to help you survive the audit. Here are a few factors to consider:

Do research help

A tax debt relief service can help with IRS tax issues, such as auditing, and alleviate anxiety surrounding the situation. Industry professionals are familiar with tax terminology and forms. They are well-attuned to the types of tax problems that typically arise and know how to efficiently and effectively find a resolution.

Don’t forget to review the notice

If you receive a notice from the IRS, your first instinct might be to just send whatever is necessary to make the problem go away. However, it’s important that you read the notice through carefully because, believe it or not, the IRS can make mistakes too. Make sure all the information matches, all deductions are accounted for, and redo the math to see if the error is able to be duplicated.

Don’t put off the inevitable

The tax audit will occur no matter if you throw away the notice or not. You can’t ignore the IRS, so the best thing to do is face the situation head on and resolve it. Mark time in your schedule to take care of it and avoid putting it off until the last minute.

Do provide information requested

Again, many times the issue that instigates an IRS tax audit comes down to a single error somewhere that needs to be verified. The IRS will request specific information, which you should provide for them, but resist the urge to send everything tax-related document you have. It can slow down the process and may further contribute to the problem. An expedited delivery will help ensure all important documents reach your agent in a safe and quick manner.

A tax audit can come in three different forms: office exam, field exam, and correspondence. The first two types require an in-person meeting with an IRS representative, either at their office or your place of business. The last type of audit is the most common and it gives you a chance to compare your information to the notice or have a tax debt relief professional take a look at it for you. In any case, make sure that you cooperate accordingly and that you don’t let the fear of an audit overwhelm you.

Use these free websites to monitor your credit for free

https://flic.kr/p/fMHjtX

Christine und David Schmitt via Flickr

After well-publicized, far-reaching data breaches at the health care company Anthem Inc. earlier this year and at the retailer Target last year, the need to keep an eye on your credit has never been more clear.

Vendors, ever innovative, have noticed as well and have stepped in to fill the need created by folks looking to monitor their credit — at a price; credit monitoring services can cost hundreds of dollars per year. Of course, such services have a ready-made sales pitch — watching your credit ruined and not fixing it in time can easily cost you hundreds, if not thousands, of dollars in the long run.

Still, they beg the question: Is there a way to get the peace of mind that comes with credit monitoring without having to spend too much on it?

Why yes, here are the steps that I use to do it for free:

Free credit reports at Annual Credit Report

Before moving along, a quick note explaining what I’m hoping to catch by monitoring my credit:

  • Accounts that have mistakenly gone into collections or that mistakenly report a missed payment, potentially lowering my credit score
  • Charges I don’t recognize on my existing cards, potentially indicating that one of my credit cards has been stolen
  • New credit that I don’t recognize, potentially indicating that my identity has been stolen

Because it’s harder to fix a problem when it’s been on my credit report for a while and because I could stand to lose a lot of money if I don’t know that new credit’s been opened in my name, it’s important to check out what’s on my credit report regularly.

Marvin Gaye and Tammi Terrell once said that there ain’t nothing like the real thing (baby) and as good as some of the sites are that I’ll mention later, there’s no perfect substitute for pulling your credit report directly from the credit bureaus.

Luckily, thanks to the Fair and Accurate Credit Transactions Act of 2003, those three credit bureaus Equifax, Experian, and TransUnion are required by law to provide one free, full credit report to consumers every 12 months.

Because each of the  credit bureaus have their own methods for collecting and keeping data, it’s important to check each one. To make the most of these three free credit reports — available at AnnualCreditReport.com — I stagger them across the year by checking just one every four months.

Picture1

Sign up for Credit Karma

A number of free websites work with the three credit bureaus to provide periodic updates of some or all of the information in my credit file.

The leader of the pack among these is Credit Karma, which gives me access to full reports both from Equifax and TransUnion on a monthly and weekly basis, respectively.

I also find their web interface the most user-friendly toward understanding what all of that information means and their customizable alerts are helpful without being annoying.

Picture2

Sign up for Credit Sesame or Credit.com

Graphically, you can see that all I’d need to complete my monthly monitoring would be a free website that provides access to the data in my Experian credit file. Credit Sesame and Credit.com are two options is the sole remaining option for this access. Both They update their data monthly so there’s no huge reason to pick one over the other, but I go with Credit Sesame[thanks to Joe, Mike, and Natlie for the heads up -Ed.]

Update: It would appear that Credit Sesame now receives credit score and credit report information from TransUnion

Picture2

Sign up for Mint

Mint is an aggregator that lets me keep track of balances and transactions associated with — among many other things — my credit card accounts. By using Mint, I’m able to tell immediately if one of my credit cards has been stolen either by manually checking for new transactions across all my accounts or by receiving an alert when a big transaction takes place. As an extra bonus, Mint also provides a report of the data in my Equifax credit file, updated every 90 days. Also, there are other free credit monitoring websites you can sign up for, which I’ll tabulate here for the sake of completion: Picture4 By using these free websites, I’m able to monitor my credit reports at all three of the credit bureaus without spending anything. Who else has tips for keeping track of your credit?

Sources: Annual Credit Report | Credit Karma | Credit Sesame | Credit.com | Mint | Quizzle

Should 401(k) and IRA limits discourage an aggressive debt pay-off?

https://flic.kr/p/jqswgs

Jacob Spinks via Flickr

Paying off debt quickly is a great idea, but for big savers, paying off debt so aggressively that you neglect retirement saving could leave you with a smaller nest egg when you retire.

The conventional wisdom

On its surface, the choice between paying off debt and investing for retirement is a simple one:

  • Debt often comes with higher interest rates than you could consistently get from your investments
  • Because you have to pay taxes on investment gains and the interest on most debts is not tax-deductible, your investment rate of return has to be even higher for it to become the better choice (Nb. Some of your student loan interest may be tax-deductible depending on your income)
  • The interest rate on student loans is guaranteed; few investments out there can make the same claim

And for these as well as other important but intangible reasons, the right answer for most people is to prioritize debt-payoff over investing for retirement.

The big savers

The numbers get muddled when it comes to a small subset of the population — those people who, through a combination of earning and not spending, have more than $23,000 left over at the end of the year for retirements savings or paying off debt.

You could call folks in this group the big savers.

Being a big saver is great! Cutting down my spending enough to send tens of thousands of dollars toward retirement savings or debt payoff every year has been an important part of seeing my net worth jump in value very quickly!

But there’s one thing that’s not so great for big savers: sooner or later you’re gonna have to put some of that big savings into a taxable account instead of a tax-advantaged account like an IRA or a 401(k) because the total you could contribute to these for the 2014 tax year was $23,000 — $5,500 for the IRA and $17,500 for the 401(k).

(Note that it’s definitely still a good thing to put money into a taxable account; just not as great as putting it into a tax-advantaged account. Also note that the 401(k) limit has gone up to $18,000 for the 2015 tax year, but I don’t feel like changing my math.)

Could slower debt payoff make sense for big savers?

One way to avoid hitting 401(k) and IRA caps is to spread the money I send toward these accounts across as many years as possible.

And one way to spread money to retirement accounts across as many years as possible is by never focusing so aggressively on debt that you don’t contribute up to those caps.

It may make sense to show this as an example.

Example data

Suppose a big saver har a starting loan balance of $120,000, with an interest rate of 7%.

Suppose further that after taxes, she has $40,000 left over each year to either pay off this debt or to invest with a long-term rate of return of 7% — with up to $23,000 of that able to go into a 401(k) or IRA. For the sake of simplicity, let’s assume that she chooses the Roth version of both the 401(k) and IRA.

Finally, suppose that investment returns made outside of a tax-advantaged account would be hit with a capital gains tax rate of 15%.

Scenario 1: Debt-focused pay-off

In this scenario, the big saver forgoes any retirement savings and sends every last penny of that $40,000 toward her student loans until they’re paid off entirely in the fourth year. Here are her payments for the first ten years:

sc1 payments

An aggressive debt pay-off like this means she would pay $9,000 in interest over the life of the loan — not great, but less bad than it could get.

sc1 balance

In this scenario, she wouldn’t start saving for retirement until 2018, but would put every penny toward it from then on. At the end of the ten-year period in 2024, she would have a tax-advantaged savings balance of $204,000 and a taxable savings balance of $137,000 — a total of $341,000.

Even without adding anything else to these accounts, if she were to then let that $341,000 sit for another twenty years until she was ready to retire, she’d be left with a cool $1,225,000 to live out her days. Not bad!

Scenario 2: Tax-advantaged retirement-focused pay-off

In an alternate scenario, the big saver could instead focus on contributing all the way up to the $23,000 retirement maximum right off the bat, and then send whatever’s left over of the $40,000 toward paying down her debt. Here are her payments for the first ten years:

sc2 payments

In this scenario, she would split her money between retirement savings and debt pay-off in every one of the first ten years. Doing this, she would need all ten years to pay off her debt and would pay a whopping $56,000 in interest over that span. However, her retirement savings would look very different at the end of those ten years:

sc2 balance

At the end of the ten-year period, she would have a tax-advantaged savings balance of $320,000 and a taxable savings balance of $15,000 — a total of $335,000. Note that this is a little bit less than the $341,000 total she ended up with after ten years in the last scenario.

However, because much of it is in tax-advantaged accounts, if she were to let that $335,000 sit for another twenty years until she was ready to retire, she’d be left with $1,288,000 to live out her days. That’s $65,000 more than when she focused on her debt first!

Moreover, this result holds even the rate of return on investments is slightly lower than the interest rate on the loans — down to 4% in this case. It’s only when the average long-term rate of return on our investments goes down to 3% that focusing first on debt pay-off becomes the more profitable option.

Want to play with the model yourself? Spreadsheet is right here:

retirement_caps_v_debt

Conclusion

For a very narrow subset of the population who can save enough to exhaust all the available tax-advantaged retirement options every year, they can end up with more money at retirement by not focusing aggressively on their debt and instead focusing on their retirement savings.

And all that said, does this mean that I’m going to stop paying down my debt so aggressively?

Probably not.

 

March 2015 net worth update; we’re up $8,000!

Karen via Flickr

Karen via Flickr

Welcome one and all to March!

We’re now two months into the still-new year and though I remain bundled up under four layers of clothing to keep warm, the new month promises the re-birth of spring and with it, new opportunities to make the most of each day.

But first, a look back at the month that was.

Some numbers

The headline number here has to be the $8,200 jump in net worth. At the start of this year, I set a very ambitious goal of wiping out my very negative net worth by the end of 2015. My change last month is a huge boost toward achieving that.

What I’m proud of about February

I’m proud of the consistency of my debt payoff so far this year. The investment half of my net worth may fluctuate wildly each month according to the whims of the market, so it will be a big help to keep one aspect of my personal finance house predictable.

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What challenged me in February

I took my first visit to Charleston, South Carolina, for a wedding and extended the weekend out on either end to turn it into a mini-vacation. An unfamiliar city and vacation mentality are often a recipe for an over-spending disaster.

Luckily, I was pleasantly surprised to find that a little planning on my part was all it took for Charleston to provide inexpensive options for food and lodging, good-enough public transportation, and historic sites aplenty that were cheap or free to visit — in addition to a welcome respite from single-digit New York temperatures.

If not for airfare and lodging, I would have spent less in Charleston than if I had stayed back in New York for those four days.

Lessons learned for the month ahead

Career. As good as I think I’m getting at spending less, I think it’s high time I took a good look at making sure my career’s headed in the right direction and progressing at the right pace. Plenty of signs in February pointed

Travel. I’ve got another long trip planned in March to Hawaii. The Aloha State may not have much in common with Charleston, but I’m still certain I can apply many of the money-saving tools.
Taxes. I have really got to get a jump on these. I’m just waiting on a couple more documents and I’ll be ready to go.

Goal progress

My big goal for 2015 is to get to net worth zero after starting the year at -$47,300. My progress this past month is a huge step toward achieving that goal. After two months, or a mere 16% of the year, I’m up $12,200, or 30% complete with my goal.

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Huzzah!

How was everyone else’s February?

Do Americans treat lottery tickets and retirement savings as competitive goods? (with data)

https://flic.kr/p/acgx2h

Chris Jones via Flickr

When they’re less confident about retiring comfortably, Americans buy more lottery tickets.

The rational person’s case for playing the lottery

As much of the country was shivering through a cold spell, the Tallahassee studios of the Florida Lottery were a comparatively toasty 50 degrees on February 11 as evening newscasts around the country came to an end. In short order, the staff would get to their bi-weekly task of pulling six numbered balls out of a machine in hopes of turning at least one resident of one of 47 participating U.S. jurisdictions into a Powerball millionaire.

An unusually large number of eyeballs would be watching tonight befitting the unusually large prize being offered; at $564 million,the jackpot had grown to the fifth-largest in lottery history.

A couple days back, Neil Irwin of the New York Times offered an explanation toward why a rational consumer might still buy a lottery ticket that, even with a jackpot of more than half-a-billion dollars, still has a negative expected value — that is, a ticket whose cost is less than the prize payout adjusted for the small probability of winning. His reasoning was fairly simple –the $2 you spend on a lottery ticket doesn’t just buy you a (very small) chance at winning a huge cash prize; it also buys you the opportunity to dream about having real wealth and what you might do with it when you have it.

Though both involve money, many would consider it a stretch to treat lottery tickets as legitimate personal finance tools to use toward wealth building and in the same breath as making regular deposits into a retirement account. After all, lottery tickets requires a whole lot of luck to get rich quickly and the other requires a whole lot of planning, work, and patience (and yes, a little bit of luck) to get rich very, very slowly.

On building “wealth”

Wealth is a tricky, ambiguous word.

To me, it simply means having enough money to comfortably live out the rest of my days. Using that definition paired with Irwin’s reasoning, it makes sense, then, why I’m never tempted to buy lottery tickets; folks with my socio-economics don’t need the lottery to dream of some day arriving at that sort of wealth. Yes, there will be hurdles along the way — big ones, perhaps — but I don’t have too much doubt that I’ll get to a comfortable amount by the time I’m ready to settle down.

Certainly, many Americans aren’t so lucky. As of last year, when asked by the public opinion polling firm Gallup, 45 percent of respondents said, “No,” when asked if they think they’ll have enough money to live comfortably when they retire.

As high as 45 percent is, it’s lower than it has been in many years since Gallup started asking this question in 2002:

All of this led me to hypothesize this question: Do Americans buy more lottery tickets when they’re less confident they’ll have enough money to live comfortably through retirement?

The data analysis

With a bit of thought, the question is not nearly as ridiculous as it may seem on the surface. The majority of studies — including many summarized by the St. Louis Fed — have already estimated the income elasticity of demand for lottery tickets to be less than one. In other words, as someone’s income decreases, their demand for lottery tickets increases. Because lottery ticket revenue is generally earmarked for government programs, some have gone so far as to call the lottery a “tax on the poor.”

Thus, because we can intuit that the poor are more likely to lack confidence about their retirement savings, it should follow that people who are less confident are more likely to buy lottery tickets.

To examine this question, I put that Gallup data in a table alongside the lottery ticket sales for each year taken from the Census, which I translated into base-year 2013 dollars using the Consumer Price Index taken from FRED as follows:

table-595thDesktop

As a scatter plot, the data looks like this:

chart-595thDesktop

After regression testing the data, we find a statistically significant relationship between people lacking confidence about their retirement savings and lottery ticket sales, at a 99% level of confidence. At 0.75, the correlation is a strong one.

In other words, when they’re less confident about retiring comfortably, Americans buy more lottery tickets.

If this trend were to hold, we could predict that with every percentage increase in the number of Americans who say they’re not confident about retiring comfortably, there will be $271 million more worth of lottery tickets sold that year.

Data Sources:

Variable rate mortgages furnish cost-effective alternatives

Happy Presidents Day to those of you reading in the U.S. Before we get started today, please read my disclaimer.

The mortgage industry is bustling to accommodate borrowers seeking to lock-in the lowest interest rates they have ever seen. Fixed interest rates are once again near all-time lows, so a vast majority of home borrowers now embrace attractive, fixed rate loan options. Though it makes sense in many cases, a fixed rate mortgage is not your only option. Some borrowers are finding a better fit with variable rate products, so it pays to evaluate your mortgage options before committing to a standard fixed-rate payback schedule.

Flexible Borrowing Options Serve Diverse Needs

For a large share of home buyers, the consistency and affordability of fixed-rate loan products makes them comfortable choices. Fixed-rates allow borrowers to anticipate payments and make sound budgeting decisions over time. To many home buyers, steady payments are the best way to manage mortgage payback.

On the other hand, some borrowers have greater tolerance for variable payments, which rise and fall according to the Bank of England Base Rate. While fixed rate loans protect borrowers from interest rate spikes adding to the cost of payback, fixed rates can also cancel-out potential savings variable rate borrowers gain when rates stay low. Your best mortgage match depends upon your personal circumstances. As you sort through options, you’ll want to consider your long and short-term financial goals as well as your sensitivity to fluctuating payments.

Current Lending Trends

A sampling of current fixed rate options shows rates near historic lows. Depending upon your down payment, rates are available as low as two and one-half per cent for many borrowers. Among five-year fixed rate loans, those buyers with 40 per cent down, for example, may qualify for an HSBC loan with a prevailing rate of 2.48 per cent. With 25 per cent down, qualified borrowers take advantage of a 2.94 per cent interest rate from Norwich and Peterborough. Even a 15 per cent down payment unlocks an attractive five-year, 3.64 per cent deal through Chelsea BS.

During the fourth quarter of 2014, nearly 85pc of mortgages initiated by lenders were fixed-rate loans. The trend accounts for new buyers, but it also reflects high volume remortgaging by property owners seeking relief from high interest rates on their home loans. Locking-in at comparatively low rates has helped many families correct household budgets, but there is another school of thought operating in the mortgage industry too, drawing some borrowers to variable rate alternatives.

Advantages for Some

Fixed rate mortgages hedge against interest rate increases brought on by changes to the Bank of England Base Rate. The interest rate offered on fixed loans is a prediction of which way economic trends will unfold. Variable rate loans, on the other hand, are directly tied to real-time changes in financial markets, so interest paid by borrowers reflects prevailing conditions, rather than future forecasts. As a result, those willing to bear the potential for variable rate increases also enjoy savings when variable rates remain low. One aggressive variable rate promotion offered by HSBC, for example, offers a .99pc interest rate for borrowers with 40pc equity or deposit. The “discounted” variable rate reverts to “standard” variable rate after two years, and requires a £1,499 fee from borrowers. Of course the loan is variable, so the ultra-low rate is not guaranteed. To certain borrowers, however, it is well worth a go.

Anecdotal reports indicate wealthy clients are choosing variable rate loans more often than less-affluent borrowers. For starters, economists are predicting interest rates will not be adjusted in the short term, opening the door to savings for variable rate borrowers. Of course this can change rapidly, but wealthy borrowers are in a better position to rebound from financial missteps. Their strong credit also allows them to move freely between variable and fixed rate mortgages, so rich borrowers can quickly change their approach as the lending market shifts. In fact, it is the flexible nature of variable rate loans that appeals to some wealthy borrowers, enabling them to pay ahead on loans without incurring early repayment penalties.

Whether you are remortgaging, or financing a new purchase, flexible mortgage options are available to meet your financial goals. Although fixed rate mortgages present attractive funding sources, variable rate loans are an even better fit from some borrowers. Before you lock-in your next loan agreement, investigate various mortgage alternatives for unique benefits each approach brings to your situation.



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