It is possible to get a college education without loads of debt. Learning scholarship application tricks that work is a key ingredient.

The last time it snowed more in NE Wisconsin was March of 1888. That’s a long time ago.

My oldest daughter, Heather, was home from college when the storm hit. It was so bad they closed the college so she stayed with us an extra day. Our family bonding time consisted of shoveling wet, heavy snow a good part of the day. Such is the way of things in the Northwoods.

April snowstorms melt fast. The days are long and the sun is high in the sky. Cold temperatures fight a losing battle.

But when record snow falls it takes time to clean the roads and melt the piles. We should have the last of the piles melted by May 1st.

Heather’s car had to stay outside because the garage is full. With modest coaxing I got the AGCO tractor started and started moving most of the snow out of the way. Heather’s car was the last thing we dug out.

The next day the roads were plowed and it was time to head back to college. On the way back her car died for no apparent reason. The car was towed to a shop south of Neenah for repairs. The bill came to nearly $500, a princely sum for a college student.

As bad as Heather’s luck was, it could have been a lot worse. She saved and invested for several years before committing to college full-time. Still, she is determined to finish college without a penny of debt. (So far, so good.)

But that isn’t the reason why car problems were nothing more than a hiccup along her college journey. And her story can help countless others attain a college degree without cost.

 

Slow Start

Heather had grand ideas when she reached adulthood. She wanted to attend Full Sail University in Florida on dad’s dime for an art degree. I’ll save you the damage to your eardrums and refrain from my response.

At the time Heather was selling artwork and stashing it away into investments. She is quite good at a variety of art forms. What she struggled with was scholarships and dad wasn’t in the cooperating mood.

Then she got the idea she would go to college (art again) in Thailand. She got her passport (more on that later) and sent the school $500. The short story is she never went to Thailand. She did get one heck of an education for the lost $500 and the cost of a passport. Truth is she wasn’t ready to be alone in a foreign country. Yet.

Then she looked into a school in Missouri that was affordable, but it wasn’t what she wanted. Then she toyed with Japan and more seriously with South Korea. The only place she didn’t want to go to school was some of our affordable options right here in Wisconsin.

 

Seeing the Light

Dad made it clear he wasn’t paying for any college costs unless Heather found some scholarship money. It wasn’t that Heather didn’t try. She applied to a hundred or more scholarships without a nibble.

The first turning point came when Heather decided the local technical college was an okay place to start her formal education. She busted her tail working to fund her education so dad relented and provided a modest—around $2,500—of financial support. When my kid puts in the effort I’ll do my best to help them.

Choosing a local college and a career she could reasonably expect to earn enough at to calculate a return on her education investment gave dad hope. Heather likes to travel the way I like to nest on the farm. Heather wants to see Asia. She is in love with the cultures and peoples. The only thing missing was some scholarship money to grease the process.

Now that she was going to college close to home she was able to get some small grants and scholarships. Most of it was state or local government provided. Wisconsin chipped in $300 and the Department of Vocational Rehabilitation (DVR) invested around $1,000. (DVR provided support because she has her own tutoring business and she has some medical issues.)

Proud parents posing with their daughter.

Still, scholarship successes were scarce. I read a book by Ramit Sethi (I Will Teach You to be Rich) years before where the author claimed he had so much scholarship money when he attended college he was able to save and invest some of the funds since they weren’t all needed for college expenses. I was concerned Heather was unable to apply the same procedures to her college funding.

Sethi was slamming one scholarship after another while Heather couldn’t get them to open the envelope. Something was wrong. When something isn’t working it doesn’t mean you double your efforts doing the same thing. You just go nowhere twice as fast!

Dad had no solutions. College was a different animal back in the early 1980s. I had my own home (didn’t live on campus) and paid my own way. Scholarships weren’t necessary because $1,000 would cover a semester easily, including books, with a meaningful remainder left over for social activities.

Heather is like her dad: knuckle-headed. She wanted to go to college so bad it hurt and she wasn’t going to be denied. Mom and dad are supportive, but we will not give a free ride. Eighty percent of a college education is getting there. If you want to make it in the business world you better be able to figure out how to get an education without visiting bankruptcy court.

Money was tight her first year. She wanted college to be self funding; no dipping into long-term savings either. She studied hard and has a 4.0. And she never stopped researching scholarships and other college funding opportunities. She also clung to her dream of teaching English as a second language in China.

As Heather approached the first year as a full-time student (she was taking a class or two prior) opportunities she never knew existed were exposed to her. Since she has a tutoring business several organizations were interested in helping her. Her college started a Fox Trap Pitch Contest. (We live in an area called the Fox River Valley and the Fox Cities.)

Heather tackled this contest the way she did everything in school, with unrelenting effort. First prize was $1,000. Want to guess who won first place. Yup! My daughter! All I can say is, “Good genetics. Especially from the paternal side.”

The pitch contest did more than help her promote her business and raise capital. It taught her how to pitch an idea, like maybe to a scholarship. And this is where it gets interesting. In the last few months she finally figured out how to pitch her business and submit to scholarships in a way that works.

 

Unlimited Opportunities

You can’t imagine how proud I am of my oldest daughter. She never quit no matter how down she got or depressing it was to work without results. (My youngest shares the same attributes so I’m proud of her, too.)

The best part is she knows how to do it herself. If dad wrote a check Heather would still be clueless on a good many things. I would have robbed her of the most valuable part of her education!

Remember how I said Heather wants to go to China to teach English as a second language? Well, her degree is for teaching. She is also leaving in a few weeks for China to teach for a month. She has been contacted for job interviews when she gets there. When her month is done it is back to Wisconsin to finish another school year. She will probably tutor via internet during the school year and head back to China for a much longer stay after she graduates. Her passport was a worthwhile expense after all. BTW, China instantly gave her a 10 year work visa.

China and the United States are two very different cultures. But as Warren Buffett has said all along, the United States has the “secret sauce”. In the last week he added China to the list saying China also found the “secret sauce” economically. With two great nations and cultures, with a heaping bowl of sauce bridged by my daughter and her efforts, the human race is destined for glory never seen before. (Yes, dad’s pride is swelling.)

 

Grabbing the Chance

Things were different when I went to school. Higher education is expensive today. Student loans are out of control. School counselors want to help students manage loans. Heather was quick to interrupt when the topic came up to explain she wasn’t interested in loan. God, that kid is smart. Mom had to have done something right because I’m not that gifted.

Scholarships are everywhere. Large numbers of scholarships go unawarded due to lack of interest or quality entries.

Heather was recently elected vice president of the Wisconsin region of Phi Theta Kappa. She gets to do more of that traveling she loves now and is guaranteed another scholarship. This one could be meaningful, if you know what I mean.

As a side note, Heather tried to convince me Phi Theta Kappa means “the smart ones” in Greek. Dad was suspicious and looked it up. Good one, Heather. And yes, I know you’ll be reading this. BTW, it means “wisdom, aspiration, purity.”

 

A Scholarship for Every Wealthy Accountant Reader

Some things I can’t do no matter how important they are. I’m not in the trenches when it comes to college funding.

Heather is getting an education on how to get an education. Therefore, I asked her to write a follow-up article to this post which she promised me in a week. If all goes according to plan I will publish Heather’s post next week on how she discovered how to write killer scholarship applications that work.

I think she will also include other resources she has used. For example, her college has a service called SALT. The SALT program has a massive clearinghouse of scholarships where the college helps you submit a quality application. And it’s FREE! Just be careful when they try to help you with getting student loans. Student loans are the last line of defense when all other options are exhausted. When you stand firm expecting scholarships to pay for your education, the counselors have to up their game to help you. Make it clear you want scholarships, not debt!

My opinion on college has been published before. Education is the most important thing you can do to improve your life. Most education happens outside the classroom! That doesn’t take anything away from a formal education. College is about learning and making contacts.

Next week, if all goes well, you will make a powerful contact with Heather.

Finally, remember Heather’s $500 car repair bill? She discovered there is a program at the college where they will help pay one major expense per year, in Heather case, up to $500. She kept her eyes open for opportunities removing a car repair bill from the budget.

Smart, girl, don’t you think?

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to skyrocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Twin brothers walk into the Wealthy Accountant’s office. One brother is as smart as a whip with an IQ of 147 and a wiz with numbers. The other twin, while looking identical to his brother, is a bit short in the mental category. The less bright brother is hard working, but knows he can’t outthink his twin brother.

Which twin do you think has the greatest financial advantage? Which one is likely to become a millionaire?

Would you believe me if I told you the super-smart twin is orders of magnitude less likely to amass a financial fortune? Yet time and time again I see it in my office: smart people underperforming and average people hitting it out of the park.

Here’s the funny thing. Both brothers are probably equal in intelligence. Life experiences caused one brother to think of himself as average. Perhaps the less intelligent brother preferred working outside with his hands while the high IQ brother pursued a profession.

Doctors and attorneys are awesome at playing financial offense. Many professionals share this quality. But high levels of intelligence don’t correlate well with high levels of financial wealth.

Big Hat, No Cattle

Thomas J Stanley argues in his 2001 book, The Millionaire Mind, that many professionals with a high income don’t have a corresponding level of net worth. Decamillionaires (people with a net worth north of ten million) have a term for people with high levels of income and little to show for it: big hat, no cattle.

These high earning professionals are also extremely intelligent. So intelligent, in fact, they start to believe they can outsmart the markets by timing them. They also have another weakness. Professionals need to maintain an outward appearance of affluence to convince other they are really good at what they do. Who would ever believe an accountant driving around in a bank reposed beater or attorney living in an 800 square foot home?

Average people in average income jobs are more suited to seven and eight figures of wealth! You read that right. The salvage yard owner is far more likely to have a serious level of net worth than a doctor, attorney or (gulp) accountant. Stock brokers and other financial advisors should have an inside track, but spending levels and a high level of understanding of how markets work causes many of these professionals to trade or time the market. The only traders with a snowball’s chance in hell of winning long-term are the market makers and financial newsletter publishers.

My Side of the Desk

Swing around, if you will, to my side of the desk. From my perspective you can see things clearer.

Every day people from all walks of life wander through my office. I have law firms, doctors and even accounting firms as clients. By and large this group enjoys a higher income than average. They also have a low level of net worth compared to what they earn. Worse, I’ve seen more than a few of these professionals pulling in upwards of a half million annually with only a low six figure net worth to show for it.

Before we continue, re-read the last sentence of the last paragraph. For some reason I find it vaguely important to our discussion.

There are plenty of excuses as to why these people are worth only slightly more than their last paycheck. None of them resonate with me.

High spending coupled with high income leaves you just as poor as if you never earned a dime in your life! It’s not the level of income; it’s the level of spending!

Don’t leave my side of the desk yet. I have a few more clients to introduce you to.

Oh, here comes Sam. He worked in the mill his entire life. Not the smartest guy in the world, but a helluva family man. He goes to church every Sunday. His wife died a few years back. Worked in the paper mill his entire life before retiring with $4.7 million. By looking at him (or his car or his home or his . . . ) you would never guess he is rich. (Sam is a real client with a different name.)

Here comes another wonderful client. Jack has a landscaping company. He clips and maintains lawns for businesses and rich people, you know, the doctors, attorneys, financial advisors and accountants. Don’t say anything, but the guy maxes out his retirement accounts before adding more to his non-qualified accounts. Oh, and he is a millionaire too. Didn’t expect that considering the rust bucket he’s driving, did you?

The same pattern holds for farmers (they’re not all poor!), truckers, salvage yard dealers and guys laying concrete.

Reality Check

Don’t bite your tongue so hard. They aren’t all rich. Yes, I know guys in the military (or retired from) who are pretty darn rich. Many are pretty darn poor, too.

Not every doctor and attorney is net worth poor compared to their income. Many people in average jobs struggle. What I’m getting at is the people you expect to be rich are putting on a show. They have a big hat, but no cattle. They spend all their money putting on a façade. There’s nothing left to fund real wealth!

People with average incomes in jobs where there is little to no expectation of wealth have an easier time hiding their financial accumulations. A worn pair of jeans is more than fine to wear to work at the salvage yard or auction house. It’s expected!

When I first started investing in micro-loans on the Prosper platform I was able to see a few details on the borrower. Prosper provided a credit score and income range along with the borrower’s occupation. For some reason accountant’s needed loans in May. This blew me away for two reasons. First, an accountant should be flush with cash after tax season.

Second, some accountant’s work outside the tax field so they could need additional funds. Prosper also listed the reason for the loan request. When an accountant requests a loan to pay bills in May I’m dubious. Online lending platforms are not the cheapest way to borrow money! Any accountant worth his salt would never make such a poor financial decision. I say “his” because no woman would ever do something so foolish. (Yes, that was a joke.)

Prosper confirmed what I suspected from serving my clients. High income professionals frequently are poor handlers of money.

Smarticus

There is a lesson for the wise in this tale. You do NOT need a high income to be wealthy or financially independent! Average people in average jobs with average income can excel financially. The statistics are clear.

Sure, a high income can get you to seven figure net worth status faster if you can avoid the siren call of excessive spending to play the role. Even a below average income can grow into a tidy nest egg if handled properly. Minimum wage is a hard racket, for sure. But once your income climbs to a level even below the national average you have plenty of resources to fund an early retirement!

Excuses will show up in the comments. It goes with the territory on blog posts with this topic. They are still only excuses. Income level plays a role in your net worth. By age thirty you should have at least two years income invested. Once you reach 40 your net worth should exceed at least 10 times your annual income. If you are pulling down a $50,000 annual salary you should have a half mil tucked away in an index fund by your 40th birthday. As each decade passes the net worth report card should grow larger.

This is where the rubber touches the pavement. Really smart people want to trade stocks and bonds. They want to time the market because they did all the research. Of course the market makes a fool of the well educated.

There are only two ways to accumulate money in the market. The first is to drop the money into an index fund, or, if you are so inclined to engage an actively managed fund, a growth and income fund. Forget about aggressive funds and other crazy ideas. Your goal is to be rich!

The other way to get rich investing is to research listed companies for undiscovered value. Buy these gems and hold them for somewhere in the neighborhood of forever. Then go out and find another undervalued business to invest in.

Remember, you don’t want to be the smartest guy in the room. The smartest guy is often broke!

I want to be smart.  Just not that smart.

It’s been a while since I showed you my working papers. Below are my unedited notes for this post. It should also be noted the working title of this post was Attributes of a Wealthy Individualor The Smartest Guy in the Room isn’t the Richest was added at the last minute as a tribute to the Rocky and Bullwinkle cartoon. Hope the insight into my writing style helps you with your writing.

What characteristics are most common in the wealthy? High intelligence doesn’t guarantee wealth, it actually hurts! Smart people think they can outsmart the market and time it. Professionals have an appearance to keep. Doctors and sales people need to look the part. The massive spending required to “look good” reduces savings and all the profits those savings generate.

Average people have a much better chance. The salvage yard owner has nothing to prove so she socks away a massive percentage of her income and puts it into index funds because she know she can’t do better,.

I see it in my office all the time. A recent client picked up his return. He is retired with a serious seven figure retirement account before looking at non-qualified monies or other assets. He is an average guy from an average family retired from a mill job. And he’s rich.

Don’t be so smart to talk yourself into poverty. Intelligence can only dig you out of so deep a hole.

Those little devils are everywhere. Drone fever has swept the country and it has me hopping mad. In the last week my office has been buzzed every workday and the Accountant farm had its privacy disrupted three times.

The animals hate it! Drones buzzing overhead send the chickens running for cover while the steers run the length of the pasture trying to get away. Privacy is the main concern at the office. If somebody wants to invade my privacy on the farm while I water the horse out back there isn’t much to see. (Ah, that didn’t come out right.)

Therefore, I hereby announce The Wealthy Accountant will start selling anti-drone guns for $500 a pop with the beautiful logo of The Wealthy Accountant emblazoned on the side. This is a limited offer! Only 10,000 will be manufactured. When they are gone they’re gone.

To recoup my costs fast I’ll be announcing the anti-drone guns all over social media, especially Twitter.

There are two kinds of people in this world, my friend. Those who love to annoy people with their drone and those who love to shoot’em down. I’m betting you are like me and fall into the latter camp.

One problem still needs to be resolved before shipping starts. It seems UPS doesn’t allow shipping of a package with ANTI-DRONE GUN printed on the side. My solution is to changes the package to read NOT AN ANTI-DRONE GUN.

Get Real

Branding is one of the most important tasks a company undertakes. This blog also needs to brand or it will fall into irrelevance as cobwebs start gracing the corners of the site.

My tax office has built a brand over the previous three decades locally and finds its footprint spreading far and wide as of late.

Many readers here are in the accounting profession looking for ideas to save their clients more money and get ideas on how to grow their business. Other readers have a side gig. In either case you still need at least a bit of branding to turn a profit.

Branding is where the real money is. Most goods and services are commodities. Everybody can sell what you’re selling and everybody does. There is always some schmuck willing to cut corners and offer a discounted price to yours.

President Trump is a master at branding. Whether you like the guy or not you still have to sit back and watch how he has done so well financially. Even if his net worth numbers are inflated he still can teach us a lot. Trump has turned his name into a worldwide brand generating hundreds of millions of dollars.

Trump doesn’t really build anything. He licenses his name so the real builder can slap Trump’s name on the side of the building. Yeah, I know. He does build some stuff. But the big money, the money his fortune is built on, is his brand.

FIRE!

By now you probably realize the opening of this post was a gag. Anti-drone guns exist and the military and police can buy them, but you and I are probably not allowed.

The opening is a play on Elon Musk’s latest attention-getting behavior. Musk is playing a flamethrower stunt for all its worth. In the end he will probably never ship a one, returning all deposits while he keeps all the press.

Musk has flooded Twitter with the sensationalism of his flamethrower sale. To give the stunt some legitimacy he found a loophole in the law allowing flamethrowers that shoot flame less than ten feet. Of course when you make a splash like Elon with a sale of 10,000 flamethrowers, lawmakers get nervous. What could possibly go wrong?

Even with the flamethrowers sold out Musk has played the publicity stunt for all its worth. First he had the sale. Then they sold out. (Lot of pyromaniacs out there, I guess.) Then UPS said “no” so Musk tweets boxes will say NOT A FLAMETHROWER. Then he tweets about the law probably killing the whole idea. Don’t worry, Musk assured. If the law is changed and the idea flames out, all monies will be returned. I think Elon keeps any interest that accrued on the nine mil and all the free PR.

Wait for It

I stand in awe of the skills Musk has at marketing and generating free publicity. The value of the attention (branding value) he gets is immeasurable. I can’t get CNBC, Business Insider or MarketWatch to even mumble my name.

Warren Buffett has a way of catching headlines without the drama. Ryan Holiday went to extremes at times during his career to generate buzz. Musk and Trump are legends.

Then we have respectable family men like Richard Branson. Once upon a time Virgin Atlantic (the Virgin brands belong to Branson) added shiatsu messages to their on-board Upper Class service. Branson is from the UK and British Airways (BA) thought Virgin Atlantic’s shiatsu messages were a joke. When BA didn’t follow suit Virgin bought ad space in a few select locations at Heathrow Airport stating: British Airways doesn’t Give a Shiatsu.

Funny, Richard. Real funny.

Sometimes a branding opportunity falls into your lap. British Airways once again took a thinly veiled jab at Virgin with two-page ads in the New York Times and other newspapers with the message: More people choose British Airways to London than any other airline. Duh!

BA is the largest airline in the UK so they do carry more passengers than any other airline. But the Duh! at the end was an unnecessary jab.

Branson’s team went to work producing a fitting response. Within hours they were ready to go. (It shows their sense of humor is as sick as your favorite accountant’s.) The next day the New York Times had another two-page ad, this time reading: More people switch to Virgin Atlantic from British Airways than from any other airline. Hah!

According to Branson it got heated quickly. My understanding is a lawsuit was threatened. Oh, well!

Branding with Integrity

Branson has written on leadership and building a company from scratch and fighting against the big boys. Branding is absolutely necessary to survive! The cost of building a brand is prohibitive if you use traditional advertising venues. Even social media is expense for a micro-sized firm.

Social media makes it easier to find an audience than ever before. My earlier writing from the 80s and 90s found it hard to find a home. My brand was nonexistent so my work sold for peanuts or worse, tear sheets.

I adopted Amazon and social media relatively early in promoting my brand, but was never real good at it. I’m getting better. Unfortunately, I fell into the sinkhole of time social media demands when you don’t automate and do it wrong. It’s impossible for me to communicate with every reader individually even on social media. With 100,000 page views per month and growing the task would be daunting moving toward impossible.

Branson said it best in his book The Virgin Way: If It’s Not Fun It’s Not Worth Doing when he wrote:

We have always relied on smart, cutting-edge creativity and scads of often quite self-deprecating humour to get ourselves noticed — it’s called getting a bigger bang for a much smaller buck.

Every blogger looking to grow their viewership must read Branson’s book!

The first thing that jumps out of Branson’s quote in my prime problem. He said smart. My challenge just got more, ah, shall we say, challenging.

Humor and self-deprecation are powerful tools when communicating. To the best of my ability I use these tools when writing posts. Growing traffic and an award might be the result of such behavior.

Shootout at the OK Coral

How far do we have to push to be noticed? Branson was lowered from the top of a building on a rope while wearing a dress and did that hot air balloon thing.

If I thought it would work I’d wear a mini skirt and high heels, too, but I’m worried I’d lose the remaining three clients I have left. (To the ladies in the office. NO!)

Ryan Holiday took the extreme measure of vandalizing his own posters and your favorite accountant begged people to steal his stuff.

Warren Buffett uses whimsical country humor.

Musk builds fast electric cars, rockets, and solar panels, plans to go to Mars, and has a Boring Company selling $700,000 of hats and $9 million of flamethrowers.

Will it require even crazier ideas to be noticed? Artists do it. Musicians especially. Getting noticed in a crowded room takes effort and talent.

There is a point where it goes too far. How would Musk feel if he did manage to get the flamethrowers built and delivered and some psycho burned a daycare to the ground killing dozens of children? He’d get more publicity, but this time the kind he wouldn’t want.

Consistent quality work speaks volumes. Getting noticed doesn’t require a massive budget. A well placed Facebook ad for under $100 could generate quality buzz. A free tweet could do the same.

Mild self-deprecation is the best branding you can do. Shouting the loudest or craziest as our current President does isn’t always a good idea. Trump mastered that shtick, but most will fare poorly attempting the same.

I like some of Musk’s ideas and think Branson has hired a team of geniuses when it comes to branding and PR.

My original idea was to claim I was selling nukes stolen from North Korea. After some thought I came to the conclusion a couple percent of my readers might think it was unbelievable or even clickbait.

So I’m left stealing an idea from Branson. If I thought for a second I would triple my page views permanently by wearing a dress all weekend at FinCon, I would.

Ugh! Just had a visual.

Maybe we should stick with flamethrowers.

It started with a simple request for an update to my personal net worth.

Over the years I’ve been mum about the subject, only exposing myself due to the Rockstar Finance Net Worth Tracker. I’m still undecided about discussing my *exact* net worth publically. It’s really nobody’s business and is only public because I write a personal finance blog.

(As an example: Recently I was told point-blank if this blog failed it would be no big deal since I could always do something else and I’m already rich enough. This remark was a jab at the hopeful opportunity to watch something I enjoy crumble. If I really felt that way I would never have started the project.)

The reader kept the emails coming fast and furious when I dodged the net worth question. I had a duty, I was informed, to share my personal life — details and all — since I was a business owner and have a semi-successful blog.

There was a hint of humor beneath the requests so I delayed blocking said intruder. Eventually we started a civil dialog with some serious questions about the current tax law and how it might ripple through the economy.

A week ago I was working in the barn and began formulating a post using many of the questions my intruder asked. I worked myself into a frenzy until it started coming out as a rant. I went to the house and took notes on all the topics I wanted to cover.

So this is it. I promised my intruder a nice post covering a large portion of his questions he had surrounding the TAX CUT AND JOBS ACT. Some of this is tongue in cheek so don’t take this post as hard and fast predictions of the near future.

Then again, I do have a point.

 

Doubling the estate tax exemption is industrial strength stupid. All this worry about farmers and small businesses losing a lifetime of work due to estate taxes is the dumbest thing ever thrust upon the people.

With the old tax law only a few thousand estates were subject to the estate tax in any given year. Now even fewer will pay the tax.

You can count the farmers subject to the estate tax on your fingers with fingers left over! Some small businesses pay an estate tax, but even that is rare.

What the adjustment to the estate tax did was line the pockets of the uber-rich!  Even this blog with a very wealthy readership will not have much to worry about when it comes to estate taxes!

It’s time to stop calling the estate tax a death tax. It’s not a death tax; it’s a welfare tax!!! We keep hearing politicians complain about welfare draining the public coffers. Well, the estate tax is the biggest welfare tax there is.

I see some raised eyebrows. Let me explain. The estate tax is not a death tax; it’s a welfare payment to all the people getting a free ride due to the genetic lottery.

I don’t care what they do to the estate tax personally, but stop calling it what it’s not!

 

No amount of tax cuts will offset the accelerating wealth accumulation at the top. As the top keeps more due to lower taxes there is less available to spread around to the middle class. The middle class pie gets smaller and smaller as the middle class gets squeezed like never before.

Tax cuts don’t trickle down. And stop with the politics. If trickle down worked it should have leveled some of the income inequality by now. Remember, President Reagan came up with the idea back in 1981.

Tax cuts can stimulate the economy, however, and have been used as a tool to spur the economic growth on a regular basis in the past.

The latest tax cut is a bit weird. Normally the government lowers taxes to encourage economic growth when the economy is sputtering or in recession. This time we spiked the Kool-Aid after six or seven years of modest economic growth.

Cutting taxes with unemployment at a 4-handle (unemployment is 4 point something percent) could actually harm the economy as interest rates and inflation could accelerate destroying any gains from the tax cuts.

Time will tell.

The labor participation rate will collapse if a technical corrections bill doesn’t fix the myriad problems with the latest tax bill. Savers will be able to exit the workforce faster and the FIRE (financial independence/retire early) movement will make it easier than ever for people to check out early, further exacerbating the labor shortage.

Also, the tax code now punishes added payroll expenses significantly since if you didn’t spend on payroll the extra profits are barely taxed (big corps) or you get 20% of profits as a deduction without spending a penny (small business and landlords).

There is no doubt in my mind any increase in the labor participation rate will be short-lived. Also, businesses are more incentivized than ever to lay off workers at the first hint of slower demand.

 

Automation is cheaper than ever with bonus depreciation increases. Include the 20% business income deduction and I foresee plenty of staff reductions.

The automation was coming regardless. Now we don’t have time to adjust as the changes will come faster. Once installed the jobs are gone forever.

Major corporations will benefit most as the cost benefit calculations will favor more automation up front. Wal-Mart is a perfect example recently announcing a few bonuses and a higher internal minimum wage while experimenting with over 200 of their stores by replacing all cashiers with automation. Total payroll expenses to Wal-Mart will probably fall. So much for their altruism.

Don’t be fooled by the token pay bonuses either. Many companies are giving a one-time $1,000 bonus to select staff. This is less than a 2% temporary pay increase. If you paid attention, many of these companies announced a few days later layoffs which will reduce payroll by more than the bonuses.

Big business and the very wealthy know exactly what they’re doing (to you).

Now we get to my net worth. Know this, your favorite accountant will do rather well in this environment. Complex tax laws are always good for people with tax knowledge and a pulse.

We came into this story talking about a certain someone’s net worth. Here I confess I might have adlibbed a bit. The issue was net worth, but more to the point, how much was I going to haul home with all the tobacco company shares I own?

It’s true I own a lot of shares in tobacco companies. Unfortunately only my Altria shares will benefit from the tax cuts. Foreign tobacco companies — Phillip Morris International in my case — will not see a benefit from U.S. tax rate reductions for corporations since they derive all their profits outside the U.S.

This led to a discussion on how many shares of Altria I own. Ah, a lot.

Let’s look at what Altria might do to my net worth. The tax reduction could increase their reported earnings by about $2 per share from the tax reduction alone. Assuming a 10 P/E ratio this will eventually be reflected in the stock price increasing $20 per share. Bad news, kind readers. A twenty dollar increase in MO’s share price will get me a bit more than two-thirds of a million only.

Altria also likes to distribute about 80% of profits to shareholders. Currently MO pays 66 cents per share per quarter or $2.64 annually. Eighty percent of an additional $2 profit increase due solely to tax reductions is $1.60 extra per share per year for me (my favorite person) in dividends.

Your favorite accountant expects the tax reduction for Altria to add a bit north of $50,000 per year to his pocket on top of the current dividend. Not bad for a broke farmer in 1982.


On December 26th my net worth crossed the $14 million mark. Here, less than a month later, I reached $15 million. It took 14 years to amass the first million (age 18 to 32). Now I’m bumping off a million in less than a month. I can’t wait for the day I can brag I lost a million between sunup and sundown!

I am sooooo smart! I doubt anyone has seen their net worth climb in the current environment.

(Okay, the last part is total BS. I didn’t add my stuff up the day after Christmas. A back of the envelope calculation says I’m getting close to $15 million, however. Yes, even your favorite accountant can’t resist looking as his stash when it’s growing so fast. I keep reminding myself, “This too shall end.”)

 

This tax cut is different than the 1981 cut. Inflation and unemployment were double digits back then; now we have inflation and interest rates near zero with a 4 and change unemployment rate. Dropping a line of crack will not solve a meth heads issues! Stimulating an economy after 7 – 8 years of modest growth with the labor force fully or nearly fully employed is asking for problems.

At least I’ll be okay. I’m not so sure about you.

I could offer solutions, but there are none I can think of. There will be pain a head. You might want to keep that job for a while and eliminate debt. (Always eliminate debt.) For a few years (as long as the economy holds) it will be easier than ever to build a significant net worth and retire early (if that’s your goal).

Don’t worry. The government will print and borrow enough money to fund the upcoming inflation tax.

This entire post is opinion, of course. Many of these questions have come up again and again so I feel it is easier addressing them here for everybody to enjoy, ahem.

If any of these predictions comes true I take full credit.

If I’m off, let it be known I was only predicting the future and we all know the best we can do is guess at the future.

 

(Note: The light-hearted nature of this post is due to the flu epidemic affecting the nation. Some people are down and out. Your favorite accountant has been only modestly lucky so far. Some days I feel great only to spend several days so tired and exhausted I can barely think. Since I’m writing at a down point I felt it best to leave the serious discussions for a day when my head doesn’t feel like a balloon. There are actually people who follow my advice! Best to assure the advice has a reasonable chance of being right.)

As tax season approaches I start to fall into a familiar pattern I’ve developed over the years to help focus my attention.

Some people like listening to music while they read; I don’t. I prefer absolute quite, huddled in a dimly lit corner while I devour pages of knowledge or embark on an adventure through space and time.

Preparing taxes is different. Plugging numbers as an elegant return is formed requires background noise. I find certain long pieces (frequently an entire album) and repeat the material again and again all day long. It drives the office crazy because sometimes my choices are really out there.

Life requires balance so I try to distract my mind with something intellectually stimulating for at least a few hours per week as well.

With these thoughts in mind, here are some of the things I was doing over the last week:

 

What I’ve Been Reading

The Ends of the World: Volcanic Apocalypses, Lethal Oceans, and Our Quest to Understand Earth’s Past Mass Extinctions by Peter Brannen

Climate change and the extinction of species is a hot topic sure to fire up the political agenda. Strip away the politics and your IQ jumps better than 40 points. The Ends of the World is a longer-term look at life and extinction events on Earth. If you think man is causing the sixth great extinction you might want to think again. You should see what trees did to early life on the planet. If man wants to get serious about creating a mass extinction we will need to up our game.

Before the politically minded become smug, know climate change is real and man is a large part of the current changes. There will be consequences! As George Carlin said, “The planet will be fine. The planet isn’t going anywhere. We are!”

The Ends of the World is must-read material for people interested in how climate change in the past affected Earth along with the evidence from prior mass extinctions. Stripped of political dialog, you might find this a powerful education helpful in your daily life as you choose how to live.

 

What I’m Watching

This week I want to share two YouTube videos I found mentally stimulating.

The Unbelievable Powers of Electricity shocked me. (Sorry, I couldn’t resist.) My understanding of electricity isn’t vast, but still notable. This documentary added to my knowledge base.

How can a documentary about the oldest living thing on the planet be interesting? Well, I’m glad I took a chance. Oldest Tree on Earth: The Curse of the Methuselah Tree proved far more interesting than I ever imagined.  Highly recommended.

 

What I’m Listening To

I tend toward long play music to fill in the background when I’m working numbers. The sounds can get really strange as tax season rambles on. So far I’m on this side of the line of normal with Pink Floyd echoing from my office.

The Wall is the best concept album (double album, actually) ever produced, IMHO. It also qualifies for long play at nearly an hour and a half before the sound ends.

https://youtu.be/S6Ibw-3nlaE

 

Updates and Reminders

Tax season is here and I want to grow the DIY tax preparation part of this blog. Please consider using the same tax software my office uses online when doing your own return. I published on preparing your own tax return recently. It might be worth another read before filing.

 

As a reminder, the forum is a great place to interact with other like-minded people. The more people who use the forum the more vibrant the platform becomes.

 

I’ve added two affiliate programs recently. SoFi is a great program to reduce your student loan interest so you can build your net worth faster. They also offer personal loans and mortgages.

This said, I encourage you to use SoFi (or any lending) in a responsible way. Debt is caustic to wealth! SoFi could reduce your interest rate allowing you faster retirement of the debt. If I find out you added to your debt burden I will find you and give you a very stern look.

 

Personal Capital is a growing platform for managing your net worth. It’s hard to manage what you don’t know and Personal Capital is a good way to visualize and manage your financial empire

 

Finally, don’t forget we have a number of cash giveaways coming up. The first is only a week and a half away from the date of this post’s publication. The drawing dates are reported on the Where Am I page. Click the notice for the rules.

Have a great weekend, kind readers. See y’all Monday.

Back in the 1980s and 90s a company advertised heavily promoting dividend reinvestment plans (DRIPs). The commercial looked like a staged radio show with a woman telling the audience no one has an incentive to promote these great programs to invest in the biggest companies in America.

I don’t know if the companies with DRIPs had an incentive or not to promote them. They were usually a commission free way to invest in dividend paying stocks. All I know is the woman in the commercial had plenty of reasons to promote these programs.

Her company provided the conduit into DRIP investing. DRIPs usually required one share to start. The woman’s company charged $15 or $20 per stock to get you set up. You paid for one share of stock in the company you were interested in plus their fee and waa laa, you were in.

After that you could send money in any amount within the guidelines of the DRIP you were invested. Dividends were also reinvested. This meant you had fractional shares of the companies you invested in. That wasn’t an issue to me. The real advantage was the ease at investing money as I had it.

It’s been a long time since I watched TV so I don’t know if the company I saw all those years ago is still around or advertising. Time has washed my memory of the company’s name handling this.

I ordered their packet with a booklet of all the companies with a DRIP. I did something stupid then. I picked 12 brand name companies without any real research and ordered my one share of stock so I could add commission free any time I wanted.

Trading commissions seem low now, but back then it could add up. Also, buying $1,000 of stock meant a small commission was still a large percentage of the investment so the DRIP idea made a world of sense to me.

I already owned Philip Morris (now Altria) at the time and MO was my first DRIP selection so I could compound those massive and growing dividends. Some choices were good, some not so much. I joke I’d rather be lucky than good any day of the week. Johnson & Johnson, Wrigley (more on this pick in a moment), ITW, Paychex and Alfac were solid choices. Wrigley was special. Every year they not only increased their dividend, but also sent a box of gum each year around Christmas. Then Warren Buffett gave Mars Corporation the money they needed to buy Wrigley for cash. There went my free box of gum each year and juicy dividend stream. If you’re reading this Warren, Go to hell!

I made some bad choices too. I bought General Electric. The stock had a good run back in the day, but underperformed long before the current debacle.

A Blind Sow Finds an Acorn Once in Awhile

While the Hershey’s DRIP investment did well, other languished. My goal was to pick well known brands with a history of increasing dividends. When I say I did no research that is a bit of an exaggeration. I research by default without even trying. I had an idea which companies I’d be buying. All I needed to know was if they had a DRIP.

Prior to the DRIP plan part of my investing life I kept my brokerage account with Valley Bank, a local bank since bought out. I also owned mutual funds at American Funds. I put virtually all my money in Growth & Income. There were other brokerages around, but the local bank has nearly identical commissions and I could walk into their discount brokerage office any time I wanted.

My investments always seemed to do well, especially if you waited out the few temporary market setbacks during the last thirty or so years. A few dogs reared their ugly head, but then it was back to the steady climb higher.

The DRIP put my investing into hyper-drive. Now I could invest anytime I had $25 or $50. I sent checks to several DRIPs I participated in every month; sometimes multiple times a month. It was an addiction watching the share balance grow.

The only problem I saw with DRIP investing was recordkeeping. If a guy started selling and buying often tracking basis would become a nightmare.

I never sold so all I needed to do was track the purchases and reinvested dividends. I entered all the data in an Excel worksheet. I remember days when I highlighted data and created charts with a jagged line trendingupward at an ever steeper rate. Every dividend increase created a jag higher in the number of shares owned. Each quarterly reinvested dividend was a pay increase as the new shares created a slight increase in the total dividend received the following quarter.

This jagged line racing to the moon encouraged me to add money the second it graced my paw. I became so frugal I was spending under $10,000 per year, including my mortgage! It was the 1990s and early 2000s, but that was still some mighty frugal lifestyle. I never let on why I was so tight with my money to Mrs. Accountant, but now that I’ll read this to her prior to publishing I might have a bit of explaining to do. All I can tell you, kind readers, is it was better than sex watching those share totals climb relentlessly.

Some would argue I needed therapy back then. I’d agree. There is ample evidence I need therapy now, too. My living expenses climbed slightly over the years to placate Mrs. Accountant and to stop being “an embarrassment to the family,” as my parents made my lifestyle choices clear to me were.

But, boy did I amass a fortune in the process!

DRIP Drop

Eventually the recordkeeping got old. Some stocks needed to be disposed of so I winnowed the list. Wrigley was stolen from me. (I’m still pissed at Warren. Jesus, guy! Didn’t you have anything better to do with your time?)

Valley Bank and their brokerage arm were long a part of history. I moved a large chunk of money to E-Trade and eventually found most of my mutual fund investments finding fertile ground at Vanguard.

I hadn’t added to my DRIP list in well over a decade, but kept adding new monies to legacy DRIP accounts. The erotic nature of watching my share balance climb still thrilled me if only I didn’t have to do so much recordkeeping by hand. All the DRIPs were moved to E-Trade. Dividends now accumulated in cash. I invested the funds when I felt the right opportunity graced my vision.

I still added excess cash to the deck, but my lazy nature was asserting itself. Cash kept piling into index funds. My guess is Vanguard considers me a quality client.

E-Trade holds several accounts for me. One is a mad money account where I can play with ideas and do really stupid stuff with $50,000 or so. They also hold two minor retirement accounts (it’s a long story). Then I have my serious money in individual stocks.

The market has been so good for so long the mad money account is turning more serious.

The serious money account is disturbing the account balance is so high. My net worth figures floating around the internet from a while back is getting outdated and low. I’m waiting for a nice correction back to reality so I’m not updating my net worth publically for now.

A DRIP of Honey

I miss my DRIP investing days. It also irritates me my Atria, Philip Morris International, Aflac, Wells Fargo and Apple dividends are not reinvested. I don’t get a pay increase four times a year anymore and it hurts my feelings. Kind readers, you have no idea what a spectacle a crying accountant is!

Dividends eventually get reinvested, but there is a small commission to buy stock even at E-Trade. Cash sometimes piles up like currently. (I can’t pull the trigger buying companies when stock prices exceed my valuation of the company plus a margin of safety.)

E-Trade has been redesigning their site lately. They messed around with the Portfolio page a few times this year. The latest redesign has a button near the ticker symbol on the Portfolio page where if you hover over it basic information on the company pops up. It’s an interesting tab if you obsess about every friggen tick of the stock price. Otherwise, it lists the latest news items, a stock price chart and not much else of value.

Or so I thought!

Earlier this week I was checking up on my account and accidentally hovered my mouse over the icon on the Portfolio page. I quickly went to move away when something caught my eye.

There was something about a dividend reinvestment plan!

I went to work checking this out. My guess is this has been available on E-Trade since 1894, but I was too stupid to know about it or even inquire.

On E-Trade the dividend reinvestment plan is commission free(!) on reinvested dividends only. You still pay a small commission for original stock purchases. To be clear, only the reinvested dividends are commission free.

Trading fees are so low nowadays as to be background noise at best on a cloudy day. My excitement isn’t about saving $10 or so. My excitement is over the automated process of reinvesting dividends.

Most people get caught up in their account value. Not me. I collect shares! My share total never goes down unless I make it go down by selling. When dividends are automatically reinvested it turns dividends into a compound wealth machine. And each quarter the dividends are reinvested means I have more shares earning even more dividends the next quarter. It’s like getting a pay increase four times a year!

Now I’m excited again.

E-Trade allows fractional shares with their DRIP, just like the old DRIPs I used. All my money goes to work immediately!

As many of you know, I have a lot of Altria and Philip Morris International. Altria alone coughs up twenty-four and change each quarter. This means the DRIP at E-Trade will increase my dividend with Altria several hundred dollars each quarter without Altria increasing their dividend.

I know somebody in the crowd will tell me to settle down, saying, “Accountant, this has been around since Christ walked the green earth.” Maybe so, but it’s new to me! And I bet if it’s new to me it’s probably new to a few readers as well.

I can feel the sickness returning. Soon I can produce charts again with a jagged line crawling to the stars.

Only this time E-Trade will do all the recordkeeping for me.

I have some good news and some bad news. The good news is a certain unnamed accountant will do rather well over the next several years with the new tax code. The bad news is you will not.

The current tax bill on the verge of becoming law will make an experienced tax professional more important than ever. Worse, you’ll have no choice. You’ll either pay an increasingly overworked experienced tax professional or overpay your taxes. Either way you pay.

As for me, I was busy enough. I didn’t need more busy work. The tax bill is 500 pages with handwritten notes in the margins because it is being pushed so quickly toward passage. You know what they say? Fast is better than good.

The ink hasn’t dried and new ink is still being added as I write, but the tax bill is almost certain to become law now. There are plenty of surprises to discuss. A few issues are still up in the air; I’ll cover those in a future post.

For now I want to provide a guide as we head into the last month of the year. Some issues in this tax bill are effective (if passed and signed by the President) on varying dates in 2017. Since planning is not possible I will skip those items for now.

The Craziest Tax Bill Ever

Over three decades of experience and I had to live long enough to see this. We can debate the merits of the economic benefits of this bill, but the truth is brutally painful.

Pass-through businesses (partnerships and S-corporations) will see tax relief. More than ever small business owners will need to organize as a pass-through. Even taxpayers will smaller amounts of side gig income will need to have a serious conversation with their tax professional to determine if an entity is right for them.

I’ve seen (and heard) a few different versions of the pass-though deduction. Since the hand written notes were not available to me before publishing I refrain from giving exact numbers. Last week Tuesday and Wednesday I was in training and plenty of time was used to discuss the potential tax changes. As crazy as it sounds, one short week later and part of my training (and two days of my life) are obsolete.

The wealthy will benefit the most from this bill. Tax brackets are coming down for individuals at the upper end of the scale while the lowest tax bracket goes up from 10% to 12%.

The standard deduction is going up and exemptions are going away. When you’re done playing the end result is nil. Families with children will see a higher Child Tax Credit. I ran several illustrations on the Senate proposals late last week and many typical situations will result in a tax increase!

Bad for Business and Bad for the Economy

Small business owners might be jumping for joy at their tax reduction. However, it might be wise to delay the celebration.

Yes, pass-through entities will see a tax reduction, but if customers pay higher taxes who will drive sales? That is the catch-22 of this tax bill. High income/net worth individuals will keep more of their income while the middle class and poor are gutted.

The argument goes back to the old “trickle-down” theory of thirty years ago. It didn’t work then and it’s doubtful it’ll work now.

Wealthy people don’t spend more just because they get a tax cut! They’re rich. They wouldn’t be rich if they spent every penny they made.

The middle class and poor spend a larger percentage of their income just to meet necessities. A tax increase for the middle class and poor means an immediate decline in spending!

Your favorite accountant will enjoy more income and lower taxes from this bill. However, I will NOT pay higher wages based on my tax rate! (Sorry to any employee reading this.) I pay higher wages for higher profits! Wages are deductible so profits, not tax rates, drive wages! Congress is wrong, lower tax rates will not increase wages. It’ll just add to the deficit and probably cause higher interest rates.

Most small businesses will have it worse since they are not in the tax services business. In fact, I predict the only two groups of small businesses who will win with this tax bill are tax professionals and businesses who cater to the very wealthy. How can it be any other way?

Don’t be fooled by the news reports. The economy might have a minor upward blip, but it will be short-lived as spending from a serious percentage of the population is pressured by higher taxes. As for me, don’t expect me to spend more based on a tax cut. I don’t spend all I earn already and encourage you to undertake the same habit.

More than ever, a frugal mindset will be needed to navigate the course of the next many years.

Stock Market

The last I saw the corporate tax rate will be reduced to 20%. I also heard there could be an upward adjustment to this.

Investors will benefit from a lower tax rate for corporations in some industries. Tech will not do as well as first thought. My largest investment, Altria, will probably do very well. Pharma will also have mixed results.

The reason the lower corporate tax rate will not lift all large corporate boats equally is because of the lie the American people have been sold for years. We have been told time and again that the U.S. has the highest corporate tax rate in the world.

There is a kernel of truth to the statement. What the lie involves is the “real” tax rate after all deductions and credits. Then the U.S. is decidedly in the middle to slightly below the centerline.

The lower tax rate and bonus depreciation brings back the Alternative Minimum Tax for corporations last I saw, but it looks like an accidental effect and could be resolved in committee before the law is passed.

Some companies, like cigarette company, Altria, will do well under the new tax scheme. Altria pays at the top 35% tax bracket under the old law. If the 20% top corporate bracket holds Altria and other major corporations paying a larger portion of their profits in taxes will see benefits. However, many large corporations already pay a lower rate.

Note: I do NOT buy a stock based on tax rates! This is not a recommendation to buy stocks of companies paying near the highest tax rate under the old law. Any tax benefit will be short-lived. Once the reduced tax cost is digested profits from continuing operations and cash flow will determine a corporation’s value.

The bill also requires first in, first out accounting on sales of stocks and mutual funds. This will make tax-loss harvesting more difficult.

Republicans Hate Jesus!

Never mind the provision allowing 529 plan funds up to $10,000 for private and religious schools. Tapping into a 529 sooner means there is less tax-free gain to accumulate! Since 529 plans are only deductible on state tax returns in a limited way, the only real benefit on a federal return is the tax-free growth. Unfortunately, if you allow withdrawals earlier for primary and secondary education, there is less benefit. It might not even be worth the effort. And the money earmarked for higher education will be diminished.

What surprises me the most in all the proposed bills is the damage non-profit organizations will face. When the standard deduction is increased to offset the elimination of exemptions there will be consequences. Limits will be (likely) placed on the amount of mortgage interest deductible. The same for state and local taxes.

This means Schedule A will be used a lot less in the future and contributions to charity are claimed on Schedule A. Though charitable giving shouldn’t be predicated on tax implications, it frequently is.

Small businesses can promote their favorite charity through sponsorships, but individuals will see less, or no, benefit from their charitable contributions. I expect churches will feel the squeeze as more people discover their tithing translates into a tax increase!

Donor advised funds may allow for a larger charitable gift deduction in a particular year, but the higher standard deduction will always diminish its true value. The same applies to charitable remainder trusts (CRT). There could still be estate tax reasons to use CRTs. But, the estate tax is virtually eliminated.

It will be interesting to see how this plays out when politicians meet angry parishioners at church on Sunday. I don’t think many people have a clue how non-profits will be affected by the tax law changes.

More Good and Bad News

The Child Tax Credit is expanded to age 17. Buuuut. . . it expires in 2024. That is a recurrent theme in this bill. Corporate tax cuts are permanent while individual cuts are temporary.

Kind employers (like me) can’t even be nice to our employees anymore. Employers in the past could have incentive rewards. Small gift card rewards were tax-free. Not after the end of 2017. Corporations with billions in profits see their taxes decline nearly half while employees can’t avoid tax on a $25 or $50 gift card! If you had a warm and fuzzy feeling I bet by now it’s gone.

A Family Leave Credit was added at the last minute. Buuuut, it only counts for certain states. Talk about insane! It seems the family leave provision is only allowed on the federal return if the state doesn’t have a similar provision. My guess is states will adjust so the federal credit applies in their state, too.

This brings up another interesting topic. It seems the Republicans have built a tax code to punish blue states. California, New York, New Jersey and Massachusetts will suffer greatly under the new tax proposals. The problem is these states contain the largest percent of our national economy! California is ~13.7% of the U.S economy alone.

And these states have the highest populations. The tax bill is designed to hurt a large portion of the national economy. What could go wrong? I predict the next recession starts and spreads from these economic growth centers.

SMH

I wish I could offer better news. This tax bill is the biggest mess I’ve seen in my career.

There are plenty of solutions. I’ll wait until the ink dries from the President’s pen before giving advice so I know it’ll stick.

I’m an optimist. I think this tax bill is so riddled with holes I’ll be able to drive a Mack truck through it. My guess is the law will not last long as the deficit balloons out of control and the economy stutters. In the mean time I’ll do everything in my power to help you maximize your results.

Stay tuned.

When you’re born you get a ticket to the freak show; when you’re born in America you get a front row seat. —George Carlin

Cryptocurrencies are all the rage with bitcoin (BTC) leading the pack. As I write, BTC blew past a 1,000% return year to date and posted its first trade above $10,000. Experts claim BTC could increase another 400% between now and the end of next year to $40,000 or more! If that doesn’t make your eyes water, remember BTC traded at a $1 in early 2011. I don’t know about you, but this is nosebleed territory.

Bitcoin will continue growing until 21,000,000 BTC exist. Actually, the programming to mine BTC stops 3 bitcents shy of the 21 million mark, which at the current growth rate could be worth a few million dollars. It will take until 2140 to complete the BTC mining process. On June 1st, 2017 there were 16,366,275 BTC in existence, if that is the right word to use. (It isn’t.) More BTC has been mined since June 1st.

This means the total value of BTC is approaching $200 billion in value. If BTC climbs 400% in the next year, as some suggest, the total value of BTC will approach $800 billion and the market cap of Apple!* When all 21 million BTC are mined, if the price is $40,000 to 1 BTC the total value of all BTC will reach $840 billion. Then it gets absurd.

The Insane Logic

If you bought BTC seven years ago (early 2011) for $1 per BTC I salute you; you are a genius. Unfortunately, schmucks buying today will never see those kinds on return in seven years or a thousand! The starry-eyed fools jumping in today looking for similar returns will need BTC to climb another 10,000 times. Okay. Let’s add all the zeros. BTC is at 10,000. Add four more zeros and you get $100,000,000 per BTC!

Well, it could happen!

Of course when you multiple $100 million by 21 million BTC you get, well, more money than currently exists by a very large margin! ($2.1 quadrillion if I calculated it right.  You have to forgive any errors. Other than my own investment account, I’m not used to playing with such large numbers.)

I can hear you already. It doesn’t have to climb another 10,000 times to turn a tidy profit. I agree. However, name anything that rose so far so fast without ending in tears?

I’ve seen this stunt several times in my short lifetime. As a child I watched the Nifty Fifty crash and burn in the 1970s. The dotcom bloodbath at the turn of the millennium should have provided lessons for today’s investors. The housing and banking collapse of 2008-9 should be fresh in everyone’s mind as it happened less than a decade ago. But memories are short when stupidity runs rampant, I guess.

This Time is Different

As with every bubble, this time is different. The tulip bulb mania of the early 17th Century (1636-7) was different. In all honesty, tulip bulbs always had value and best I can tell are still around. I can pick up a large bag at my local garden center for a few dollars. Tulip bulb prices ended up where they started. There was always value, just not the insane valuations. This is our first lesson. There is a grain (or bulb) of truth in every bubble.

The U.S stock market of the late 1920s is another example of value turning into a buying frenzy at any price.

Just because a volcano is quiet doesn’t mean it’s safe.

Tears. Remember it ended in tears.

The stock market is a favorite vehicle for bubble creation. The Nifty Fifty of the late 1960s and early 1970s were stocks people felt could be bought at any price and held forever without worry. By 1974 there was worry. The only stock I can image did well was Kimberly-Clark, the maker of Kleenex tissues.

The stock market pump was over-primed in the mid-1980s ending in the biggest percentage loss for one day in market history on a fateful October day in 1987.

But this time is different.

Once again as the millennium raced toward the finish line stocks went insane. Dotcom stocks traded for hundreds of times revenue (not profits!) if they had any revenue at all. But many stocks (companies) did have real value so this time is different.

Then came housing in 2008. Fed Chair, Ben Bernanke, said housing prices would continue climbing only at a slower pace. Good call, Ben. And he was an expert.

For some reason people never learn. They go from one hot stock to another. People get killed in a bubble collapse, take a decade to rebuild reserves and go at it again with their battle cry, “THIS TIME IS DIFFERENT!” No it’s not.

Where is the Value?

In most bubbles of the past there was underlying value. Tulip bulbs were worth something. Not much, but something. Stocks (publicly traded “businesses”) certainly have value.

Today we have several expanding bubbles due to the massive money creation of central banks around the globe. Bonds are arguably overpriced. How else can you explain bond yields less than inflation?

We can go into other possible bubbles, but BTC is turning out to be a doozy by historical standards. Boys and girls, you might live through a bubble spike bigger than any other in recorded human history on an item worth absolutely nothing!

Bitcoin’s real value?

Stocks, bonds, real estate and even tulip bulbs have some intrinsic value. But what about BTC? Does BTC really have any value? Let’s examine.

What is a bitcoin? Some call it a pyramid scheme, but it really doesn’t resemble one. Is it a currency? Economists say a currency has three characteristics: a medium of exchange, a store of value and a unit of account. BTC doesn’t exhibit any of these features to any large extent. Yes, BTC is used in a small percentage of transactions, mostly involving nefarious transfers. The massive price fluctuations make BTC more a speculative investment than a store of value or unit of account.

Think about it this way. Why would anyone buy something with BTC? To do so when BTC prices are climbing triple digits or more each year is industrial strength stupid. Only a fool would do that! Using dollars to buy stuff and pay for services because your BTC will be worth more tomorrow seems the smart move when BTC is such an awesome investment. Just read the news, they’ll tell you.

Compare BTC to dollars. Yes, dollars are fiat money, backed by nothing more than faith in the government and the economy to give you value. No physical commodity supports fiat currencies. The U.S. government can tax more to pay back its debts if necessary. And currency IS debt. It says so right on paper currency: Federal Reserve Note. A note is a loan! (Ie. you have a mortgage note.)

BTC has no government or economy supporting it. BTC is fiat money**! No physical commodity backs its value. Scarcity doesn’t imply value as many buying BTC today contend. There might be a limited supply (intentionally) of plaid shirts. That doesn’t mean plaid shirts are worth more and more every day due to this limited supply!

BTC is supported by nothing and is fiat money. When BTC collapses who will want to accept BTC as payment for goods and services? When the price rises who in their right mind would use BTC to buy something; that’s a de facto sale.

There is no government or economy supporting BTC. BTC has value because people say it has value. Just like gold has value because people say it has value. (And because it’s pretty, useful in art and industry.)

When someone decides there is nothing but air underneath BTC the rush for the door will not be pretty. Most will not get out as the building burns. If you think the rush to buy is tremendous, just wait until fear sets in.

This is BTC’s Achilles heel.

Signs of a Bubble

I don’t want to dissuade anyone from investing in BTC if that is their heart’s desire. All I urge is caution.

Here are a few indications the party may be nearing its end. Over the preceding long Thanksgiving weekend here in the States over 300,000 new accounts were opened to buy BTC. BTC jumped over 10% during the long weekend. People are buying BTC with credit cards they are so desperate to get in.

Hedge funds are starting to invest in BTC, not use it as a currency. ETFs and futures contracts are ready to debut in the BTC arena. On December 10th when futures begin trading on BTC it could actually hurt BTC pricing! With a futures market you can play BTC without actually buying BTC. With such an easy vehicle to trade BTC without owning it could be a catalyst for problems. I’m not making a prediction, only offering insight. Like program trading in the 1980s, it might take a few years before BTC has its October 19, 1987. Or it could happen much, much sooner.

Taxes on BTC

This part of the discussion is for U.S. readers and those subject to U.S. taxes.

The IRS has clarified the tax treatment of bitcoin and other cryptocurrencies in Notice 2014-21.

Real money?

Under tax law, BTC is NOT considered a currency! It is considered property. If you pay employees with BTC you still include the amount of U.S. dollar equivalent on their W-2. If a merchant accepts BTC as payment, the amount received at fair market value on the date of receipt is income. A miner of BTC includes BTC received as income and may be subject to self-employment tax.

Here is where it can get ugly. Most people are buying BTC to hold as an investment. If you buy something with BTC you may have a gain or loss on the transaction, technically a sale of BTC to buy said product or service. If you sell BTC at a gain you get either long- or short-term capital gain consideration.

If you sell BTC at a loss you can only claim the loss against other capital gains, plus $3,000 per year against other income. People buying into the hype could face serious losses and those losses may not be deductible for a very long time, if ever. You can carry unused losses forward. However, when you die, the capital loss carry forwards die with you. Ouch!

I’ve been in this business for a very long time. (The first one to leave a comment on my age gets one in the puss.) I remember the mess caused by stock options when the dotcom bubble burst. The Alternative Minimum Tax (AMT) issues were incredible. It took special action by Congress to offer relief to some of the victims. They suffered years before help arrived.

The good news is that this accountant sees no AMT issues (other than normal AMT issues) with BTC. The real issue with BTC is that losses could be strung out on tax returns for decades or longer. People who borrowed money will need to earn money, pay tax on the earned money and use the remainder to pay off debt lost trading BTC.

Coda

I am unqualified to call the future price of BTC.  I could be wrong and this time could be different. Amazon was caught in the dotcom mess and did pretty darn well if I don’t say so myself. However, BTC is not Amazon. It’s not even a currency technically.

BTC has no real value. BTCs entire value is built on faith and faith has a habit of letting people down when they need help the most. At best BTC is fiat money; at worst it’s a fool’s game.

For BTC to continue climbing in price, more buyers willing to pay a higher price, need to step forward. The day will come when nobody wants to pay a higher price. That is the day we find out if BTC is for real or another chapter in the history book of insane bubbles. With no intrinsic value I have a bad feeling where this is going to end.

 

* Remember, more BTC are created every day so the supply keeps going up. If BTC continues to rocket higher, the total value of all BTC will climb faster as more BTC are available at the higher price.

** This isn’t really true. Fiat money is technically “from decree”. In this instance I use fiat as meaning a currency without the backing of any commodity or government taxing authority.