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Dollars and Sense

April 16, 2014

Q:

Your response recently on your people and financial matters indicates kids today are not as smart as they were years ago.  Correct?

A:

This is not correct.  Please read my comments again.  I wrote that they may not be as responsible.  Actually, kids today are probably academically smarter than years ago.  However, most people would agree that a significant portion of society today is less financially responsible.  Some of the blame can be put on our government for creating all the subsidies.  Part of it is because parenting is different today.  Parents are not as strict as they were 50 years ago.  Also, there are more gadgets to distract kids today and parents are more than willing to buy these for them.  Teenagers getting a job in the summer or after school seems to be an option today whereas years ago, it was a requirement.  You were expected to work.  You have probably heard parents say that they want to give their kids and grandkids everything they didn't have growing up.  From a financial perspective, that is probably the worst thing you could do for them.  Doing this just teaches them that you don't have to work for what you get.  I loved my parents dearly but, we were expected to work at least part time.

Q:

It appears that bankruptcy laws have become looser allowing more people to file. Why?

A:

I don't think there is any question that it has become easier to file for protection under the bankruptcy laws.  I would even say that it is being abused more than ever.  The bankruptcy laws were created to protect individuals or businesses who suffered financial loss through no fault of their own such as a catastrophic illness.  Unfortunately, this has changed and they file just because of their own inability to manage their finances by taking on too much debt.  In many cases, they know they can't afford to go further in debt when they take out the loan.  To give you a feel for how abusive it has become, Donald Trump, one of the richest men in America, bankrupted one of his companies a few years ago because the venture did not go as planned.  This is the mind set of society today to let someone else take the loss for their mistakes.  We see  this attitude all the time.

Q:

I heard there are some kinds of banks that don't have to pay income tax.  Which ones don't?

A:

I believe I addressed this once a few years ago but, here is the answer.  All banks pay income tax.  You may be confusing banks with credit unions which do not pay federal taxes.  When they were first created, the idea was that they were to be used by groups of people who had a commonality such as working for the same company.  However, the rules were bent and loop holes were found and now there are no restrictions except they must be called credit unions.  However, they like to act like a bank without paying taxes banks do.  It's a very sore subject with bankers and our lobbyist will continue fighting to get the law changed so they have to play by the same rules as banks.  I believe there will come a day when there rules will change to some extent.  I would be willing to guess that banks pay, on average, a tax rate of between 25 and 35% on income.  Credit unions pay nothing.  Maybe you are someone who says, "Who cares?" Well, you should care.  You pay taxes and your bank pays taxes.  Why shouldn't credit unions?

 

April 9, 2014

Q:

How much influence should we try to have over our kid's finances when they become adults?

A:

Unless they were asking for financial help from me, I didn't feel I should have any influence.  On the other hand, if they are asking you for money, I think you have a right to know if it is due to bad spending habits.  If it is, they will likely be back for more.  Also, you might want to ask yourself how much of an effort you made when they were home to teach them about these things.  Many young adults have bad habits because no one ever took the time to teach them about finances.  This is one of the most over looked in the way of life lessons and it's one they will need their entire lives.  If you have money to lend them, start by saying yes, I will help you but, is there a problem?  Try to find out if this is a one shot deal or is this a sign that it's just the first of several times they will need you.  If it appears that this is a developing pattern, use this opportunity to see if they need some guidance.

Q:

Why don't kids learn more about financial matters when they are in school?

A:

Well, it's better than it used to be.  The state has new requirements for schools in Ohio to teach financial literacy.  Our bank also supports Financial Literacy programs in the school.  However, don't put it all on educators to teach your kids about financial matter. You, as a parent, have more responsibility than the schools do for teaching your kids about money.  My Dad taught us from an early age about working for what we got and managing our money.  My parents could stretch a small paycheck farther than I thought possible.  They led by example.  Some parents are not doing that today.  If you want proof, all you have to do is look at the escalating use of bankruptcy to get out of paying debt.  Then, there is the ever increasing number of welfare recipients.  You wouldn't dream of letting your kids drive a car without some instruction.  Don't send them out into the world without some financial training and knowledge.

Q:

Are young people less financially responsible today than they were 50 years ago?

A:

As a general rule, I would say they are less responsible.  All of us over the age of 50 like to talk about how our parents made us work when we were kids and we are proud of it.  Parents should ask themselves if they worked harder than their kids did  at the same age.  More often than not, if you are being honest, you worked harder than your kids.  Of course, there are exceptions.  I enjoy telling this story.  I was about 14 and my brother was 11.  We set out one day to line up some lawn mowing jobs.  We came back at the end of the day with 13 lawns to mow at $2 per lawn.  We couldn't wait to tell Dad what we had done. He praised us for our effort then said, "Now boys, who's lawn mower are you planning to use?"  I knew from the way he said it that we were not going to wear his lawn mower out on 13 other lawns.  He took us to Western Auto, bought a mower for $29 on credit and we paid it back with first mowed lawns.  I've always said this was my very first business lesson.  Now, will your kids remember the lessons you teach them?  Well, it's been over 50 years and  I sure haven't forgotten that one.

 

April 2, 2014

Q:

A couple weeks ago, you were saying that businesses should report all cash income.  Some wouldn't survive if they did that.

A:

I answered a question about adding unreported cash income to establish the price for selling a business or for getting a loan approved.  My response was that I cannot add unreported income to establish the ability to service debt.  My response is no different than it was before.  I am not passing judgment on those who don't report income but, ethically, I can't be a part of it.  As for your statement that some businesses would not survive if they reported all cash income, I don't think reporting the income would put them out of business.  If paying tax on that income is all there is between them and closing doors, they probably don't have a very strong business to start with.  I suggest you talk to your accountant and get their opinion.  I think I know what the answer will be and it won't be much different than mine.  I know it's a sticky subject but, I don't make the rules for paying taxes. Our government does.

Q:

Why is it that some parts of our state have much higher real estate taxes than others do?

A:

You are correct.  There are significant differences in real estate taxes and there is one primary factor that causes it.  Schools receive the largest portion of our tax dollars.  If you live in an area where there has been rapid population growth, real estate taxes are going to be higher.  There is a school district in Central Ohio that has experienced rapid growth over the past 15 years resulting in at least 8 additional grade schools and 2 additional high schools.  I have twin grandsons in that district who are in the 6th grade.  They have attended 3 different schools while living at the same address.  A home in our area that is taxed $2,500 per year would be $13,000 there. It's all for new schools being built.  Having some knowledge of Ohio tax rates, we are not the lowest.  However, we're probably in the bottom 25%.  That's pretty good considering the beautiful new school facility we have.

Q:

Should the current economic situation influence my decision to buy a home or a new car?

A:

I don't want to sound as though I am contradicting previous comments about the economy but, maybe you shouldn't let it influence your decision at this point.  If you are confident in the continuation of your current income and have a good grip on your financial situation, go ahead and buy that home or new car you want.  While I feel that we should use caution in spending our money, we should not let the economy take control of our lives.  However, if you have reason to believe your job is not as secure as you would like or, if your finances are tight, you might want to be more cautious.  Everyone's situation is different.  I know there are some that take the attitude they are going to do what they want and things will take care of themselves.  I don't subscribe to that way of thinking because it's irresponsible.  It's great to have faith that things will turn out well but, you have to use your brain a little also.  You should not test your faith by buying something that you already know you can't afford.

 

March 26, 2014

Q:

My bank won't loan me money to build a new house if I am acting as general contractor. Why?

A:

Before I answer, I will assume that you do not have any experience as a contractor.  There are valid reasons why your bank won't do this.  You don't have any experience in getting bids for the work and it would be very easy for you to underprice the completion with this lack of experience.  It also takes experience to pick the right sub-contractors you will need to build your home. Lastly, banks like to do construction loans within a definite time period.  It's usually 6 to 9 months.  If you are holding a job, it's not likely you will be able to complete the project that quickly.  Have you ever gone by a half completed house that sat for years in that condition?  Chances are pretty good it was a self-build project.  Your bank doesn't want to disburse all the funds and find out the home is not completed.  A lot of the decisions banks make are based on past experience.  This is one of those things we've learned through experience.  There are exceptions but, not many.

Q:

Sometimes when a business is for sale, they talk about the price being partially blue sky.  What does this mean?

A:

Often, when a business is being sold, the building they operate in is also sold.  The easy part of the deal is determining the value of the real estate and building.  Then, you have the inventory and equipment.  That also is fairly easy to place a value on.  The rest of what is being sold is intangible.  It's the ability of the company to create income.  You can't touch it or feel it but, it's there and there is value.  This value is usually based on historical sales and income.  Smart buyers will take into consideration how much of the business they might lose under different ownership.  If the seller had the business for a long time, some customers might look elsewhere if it is sold.  This is what makes "blue sky" hard to value.

Q:

Recently, you criticized business owners for cheating on their taxes.  Why does it concern you?

A:

I do not pass moral judgment on anyone who decides not to report income.  That's their business.  However, it becomes my business if it involves a loan request.  Don't ask me to include unreported cash income to determine if the business will support a selling price or a loan.  No, I'm not afraid of losing business if you are asking me to do something unethical.  I remember years ago when a customer bravely threatened to pull his accounts from the bank if I didn't count unreported cash income for the person he was selling to.  My immediate reply was, "Do you want your balance in cash or check?"  It's that simple.  There is no room for negotiating on something like this. Don't be stupid and leave your bank because they won't do something illegal.  Do bankers think there are owners that have not reported all the income?  Probably but, thinking it doesn't make them an accomplice.  Using that unreported cash in the analysis might make them one.  We are simply not going to do it.

 

 

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