Tucking It Away

The holidays are rough. There are gifts to buy, taxes to pay, contributions to make, parties to throw, ski lodges and tuxedos to rent--not to mention doormen, postmen and newsboys you may never even have seen but whom you must nevertheless appease. (Mine send second greeting cards when remittance is not received promptly from the first.) Indeed, contrary to popular belief, it is financial rather than emotional distress that causes the suicide rate to soar this time (continued on page 178)Tucking It Away(continued from page 145) of year. What most of us need is a whopping windfall profit--any kind will do--or, failing that, some business school type in a pinstripe Santa suit to drop down the chimney with a hot tip or bizarre tax straddle to help us sock something away for next year.

It is a sad predicament and one I have confronted before. "We asked 21 people for their advice," I once wrote, lying through my teeth, "and every one of them, amazingly enough, told us to buy stock in Shoney's Big Boy Enterprises!"

They had told us nothing of the kind, of course, as I immediately confessed--my point having been, simply, that there was no one terrific thing to do with your money, let alone, God forbid, that you should put it all into some el-weirdo stock. I had picked Shoney's Big Boy Enterprises simply by flipping through my stock guide for the most improbable, outlandish company I could find. (What was it, anyway, some kind of stud service?)

Two things happened, and I suppose I should have expected them both. First, I got a letter from the president of Shoney's Big Boy Enterprises. He believed his company to be neither improbable nor outlandish; rather, he predicted great things for his shareholders. Second, the stock did great things for his shareholders. In the four and a half years since, it has about quadrupled.

Actually, a lot of stocks have done great things for their owners these past few years, even though you would hardly know it from the way the Dow Jones industrial average has lumbered nowhere in particular or from the way Knowledgeable People turn away from you, revulsed, when you even mention the stock market.

Anyhow, I recently went back to the same 21 people, explained our problem and asked for their advice. Three suggested marrying well, one mumbled something about cocoa futures (or was it cocaine futures?) and the rest, amazingly enough, told us to buy stock in Shoney's Big Boy Enterprises. Plus Qa change....

Of course, there are other things you can do. You can, for example, agree to celebrate Christmas in January, as some families do, buying gifts for your loved ones at sale prices. Wait a few days and save piles of cash. But you won't do that. Then there's that watch you've been meaning to buy. You could get one as accurate for $29.95, but, no, you have a compulsion to spend $495. You could buy vodka from your kid brother, the chem major, but you will go the extra ten bills for Smirnoff. I know. (Nor will you save the bottle to refill with the economical Mexican brand, as I do, even though that, too, could put the healthy drinker $100 a year ahead.) You have a lust for life.

In fact, about the only thing in your budget you would be willing to cut down on--not that I think for one minute you actually have a budget--is taxes. And maybe finance charges. And here I have a few pedestrian suggestions.

Tax Dodge Number One: If you are one of the many people who have almost, but not quite, enough deductions each year to itemize--or just enough to itemize but not enough to get any real benefit from doing so--try this. Plan to bunch your deductions every second year. Determine here and now, for example, not to give to charity the money you ordinarily would in December--give it in January 1980 instead. Similarly, don't pay your local taxes in 1980 if you can help it--dump them into January 1981. About to pay for a $4500 hair transplant? Wait! Pay it off in January. (Cosmetic surgery is a deductible medical expense.) But in 1980, do make your contributions in December. And try to prepay as much local tax as you can.

That way, you could take the standard deduction in 1980, 1982 and 1984, the years in which your actual deductions are purposely low--but itemize substantial deductions in 1981, 1983 and 1985. The difference, perhaps as much as $2000 in added deductions every second year, could save you close to $1000 in taxes every second year. Just by keeping track of when you write some checks. Right there you save enough money to buy, at current prices, more than 80 shares of you-know-what.

Tax Dodge Number Two: This I am almost embarrassed to suggest, because you've doubtless heard it a hundred times. But hearing it is one thing; doing it, another. I refer to Individual Retirement Accounts (IRA), for people on payrolls but not covered by a pension plan, and the Keogh Plan, for people who have any income from self-employment. There are 10,000,000 or 20,000,000 people who qualify for one or the other of these tax-deferred savings plans--food stamps for the middle class--and have not bothered to take advantage of it. And yet by putting money into either, whether down at the local savings institution, which can provide all the (simple) details, or through a trusteed stock-and-bond portfolio you can direct yourself, you manage to do what we always joke about doing: You make yourself your own favorite charity. Instead of taking the last $1000 you earn, paying Federal and local income taxes on it, and putting the remaining $500 or $600 into some iffy corporate bond that pays 12 percent (you know it's iffy if it pays 12 percent), which is to say six percent or seven percent after taxes--instead of doing that, with an IRA or a Keogh you get to put away the whole $1000 and to have it appreciate at the full (albeit iffy) 12 percent.

Eventually, at the end of 1,000,000 years--when the chief risk is that in your befuddlement you will have forgotten that you even have this by--now fairly sizable fortune--you do have to pay taxes as you take the money out. The assumption is that by then, retired, you will be in a lower tax bracket. But even if you're not, you will have had the use of the Government's share of your money all that time, so you will come out far ahead.

Take a man of 30 who socks away $1500 a year for 20 years, to the age of 50; and then, having put in not another dime, withdraws his fund 15 years later. (You are not required to make contributions to either plan, and you may withdraw the money without penalty at the age of 59 and a half.) Let us assume this man is in the 50 percent tax bracket--that 50 percent of the last $1500 he earns would go to Federal and state income taxes--and that he chooses nothing more sophisticated than the long-term savings-bank certificates that yield around eight and a half percent.

Without the shelter of a Keogh Plan or IRA, paying taxes on the $1500 each year and then on the interest, he will have $42,794 at the age of 65. With either of those plans and the same assumptions, he will have $246,704. And although that latter amount would be subject to tax (with special income-averaging provisions available), the difference is still enormous. All for taking an afternoon to set up a tax-deferred savings plan.

How to Save $10,000 on Your Next Car: Do you think I am going to recommend that you buy a Porsche instead of a Mercedes? (That would do it.) Or that--since I labeled these suggestions, at the outset, "pedestrian"--I am going to suggest that you do without a car altogether? (That would do it.)

No. The first thing I am going to recommend, even in these inflationary times, is that you not finance the car. That you pay for it with cash. Why pay 13 percent to finance a car, when at the same time you may be lending money to a savings association at five and a half (continued on page 302)Tucking It Away(continued from page 178) percent? People who do this lose seven or eight cents on every dollar they borrow, year after year, car after car--hundreds of dollars a year wasted. Unless you have a risk-free way to invest at 14 percent or more the money you borrow at 13 percent, you will not come out ahead. And at the time of this writing, there is no such thing as a risk-free 14 percent return. (When there is, auto loans will cost a lot more than 13 percent.)

Yes, I know the interest on your loan is deductible (though not for the three quarters of American taxpayers who do not itemize their deductions--for them, 13 percent is really 13 percent). But it doesn't matter. You can't make money borrowing at 13 percent unless you can turn around and invest that money at 14 or 15 or 20 percent.

Incidentally, this reasoning applies every bit as much to the 18 percent credit-card interest many people pay and to the financing of any other consumable goods or depreciating assets (unlike a home, which appreciates). Getting off the credit treadmill is as tough as quitting smoking (which would also save you $500 a year)--but, since not having to pay 18percent is as good as earning 18 percent, risk-free, it is the best investment most people can make.

Back to cars. Have you ever toted up just how much extra it costs to drive a tank? If you are really serious about socking something away for next year (and no one said you had to be; there are plenty of other things to read in this magazine), you might consider buying as your next car, not a $9395 horse that gets 16 miles to the gallon financed over five years but a $5395 pony that gets 30 miles to the gallon and that you buy for cash. Over five years, you would save $4000 on the price, another $4000 on the financing (gross, before allowing for tax reductions and the use of the money), perhaps $1500 in lower insurance and maintenance costs (theft and collision insurance cost more on expensive cars, which also cost more to maintain), $250 in car washes (what's the point of having a $9395 car if you don't keep it clean?) and, best for last, a tankerful of gas. Figuring 12,000 miles a year over five years at $1.25 a gallon--though where you're going to find gas at $1.25 a gallon five years from now I can't imagine--the difference works out to a further $2200. Grand total: well over $10,000.

That is an extra $2000 a year to go the same number of miles at the same speed with the same song playing on the same radio but in a heavier, roomier car. Consider that, unless your car is a deductible business expense, you must earn $4000 a year, or close to it, before taxes, to pay the difference.

Now, I happen to be able to earn an extra $4000 with my eyes closed standing on one foot just by buying 100 shares of some stock that goes up 40 points. But for you, it may not be so easy. Are you sure the extra leg room is worth it?

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Well. Having perhaps saved a penny or two on taxes, having just learned you will be getting a well-deserved $10,000 Christmas bonus the first week in January (congratulations!) and having set yourself up to save $2000 a year by driving the kind of car that will leave friends and colleagues questioning your professional competence and your masculinity--must you really dump it all into some strange stock?

There are only three choices that make sense for you, and the following are not among them: gambling, gambling stocks, commodities, cattle, currency futures, interest-rate futures, options, stamp collecting, gold, diamonds, Oriental rugs, publicly offered oil deals, privately offered oil deals, antique cars, Broadway shows, signed-and-numbered lithographs. Pursued with sufficient ardor, the foregoing are likely--not guaranteed, but likely--to cause you acute financial distress and/or expose you to hardships never made truly believable by the brochures. This is very flip, I know, and if your business is trading stamps or cutting diamonds--if you are a pro--it may not apply. But most of us are not dealers in these games but "prospects." For us, I believe, it applies.

Of the three acceptable choices, I have doubts about two.

Fixed-Income Securities: These include short- and long-term deposits at savings banks; Treasury bills and other Government securities; money-market funds (which function as high-interest checking accounts); municipal bonds, corporate bonds and preferred stocks. (Preferred stocks are, in essence, corporate bonds that never mature.) Those are lovely places for your money. After paying off your debts, putting up equity for a home and purchasing adequate life insurance (term insurance, not whole insurance--and neither kind if you have no dependents), it makes sense to stash some money in such safe places. However, after taxes and inflation, you will be growing poorer each year. Also, just as the speculations and hobbies listed in the preceding section are so exciting as to obscure the underlying odds (which are against you) and the underlying values (which get more and more tenuous as prices rise higher and higher), so the fixed-income securities just listed are so boring as to be wholly inappropriate to your psychological profile.

Real Estate: This comes in many shapes and sizes. Your own home is a terrific investment, if only because you can enjoy it so much more than a golden passbook. And it has tax advantages. Raw land is much riskier and not easily mortgaged. Much of the getting rich quick that's gone on over the past decade has been by folks of modest means who bought one property, fixed it up, refinanced or sold it at a profit, using the increased cash to buy two properties, which could become four, eight and, soon, a small fortune. In some areas, like California or Houston or, more recently, Manhattan, it's been impossible to do anything but win--big.

Many people tell you that this will go on forever and that you can never lose in real estate. They will point to appreciation in real-estate prices much as a diamond salesman will point to appreciation in diamonds or a gold proponent to the appreciation in gold. It may be that real-estate prices will keep rising at a rapid clip, but it's worth noting that mortgage costs have never been higher and that, when something has risen dramatically in price for many years, it may no longer be a bargain. The problem with most people's investment strategies (other than the fact that most people don't have investment strategies) is that they invest wistfully. That is, they buy the things they wish they had bought five or ten years ago. It need hardly be mentioned, however, that the best time to buy something is not when it is expensive but when it is cheap.

That is not to deny that I have myself come lately to the real-estate market (it being only lately that I have had anything of substance with which to come); nor to gainsay the highly attractive tax advantages of being a landlord (while your property is appreciating in value, you get to depreciate it in figuring your taxes).

My general uneasiness about the precarious state of the real-estate market--which, of course, varies tremendously from community to community--is perhaps illustrated by the following story; forgive me if you have heard it before.

This rock star's agent, goes the story, calls his rock-star client and says: "You know that home you wanted us to find for you? Well, I've got good news and bad news."

The rock star, contrary to the most basic rules of human nature but conveniently for the effectiveness of this story, asks to hear the good news first.

"Well," says the agent, "we have found you the most fabulous. 14-bedroom house--pool, tennis court, spectacular view, basement discotheque, everything--and it's just $4,800,000."

"Hey, that's great," says the rock star. "What's the bad news?"

"They want five thousand dollars down."

Stocks: The hidden value these days--the thing nobody wants, the thing so woebegone it has actually fallen in price over the past dozen years while packets of Life Savers have gone from a nickel to a quarter and ounces of gold have gone from $35 to $437--is a thing called stocks, the quadrupling of Shoney's Big Boy Enterprises, and others, notwithstanding.

If you have money you can afford to tie up for the long term, one place to put a good chunk of it is in solid but boring, unpublicized common stocks. The kind that pay high dividends and only make the most-active list two years after you bought them, when, suddenly, cement becomes hot and your company, which was selling at half its book value when you bought it(and a fourth of "replacement value"), is being sought by some larger cement company, or some wealthy West German industrialist, at twice what you paid for it. That kind.

Don't buy stories, buy values. (Forbes is as far as you need to look for investment ideas and advice. Don't bother spending money on advisory services.) Don't buy just one stock--diversify. Don't pay full commissions; trade through "discount brokers" at half the price. Don't put all your money in the market, any more than you should put it all in real estate or the savings bank.

If the stocks you buy go up--Merry Christmas. If they go down a little, pay no attention. Sooner or later, they will come back; and in the meantime, you will be getting as much in dividends as you would be earning if the money were in the bank. If they go down a lot, buy more. They are even better values.

That would have been dangerous advice to follow in September of 1929. But in that month, the stocks that made up the Dow Jones industrial average were selling at three or four times their book value, whereas today the Dow sells under book value. In 1929, also, those stocks had experienced a quintupling in price over the prior eight years, and so had attained lofty heights from which to plunge. Fifty years later, in 1979, the Dow has experienced an eight-year run of mononucleosis. How do you plunge from a basement, or at best a second-floor, window?

That is not to say the market cannot fall sharply (as measured by the Dow, it is in the low 800s as I write this). But the value is there. That was not true in 1929 or in 1969, and it makes a big difference.

"Knowledgeable People turn away from you, revulsed, when you even mention the stock market."

"When something has risen dramatically in price for many years, it may no longer be a bargain."