Wise Money Decisions

A few years ago two elderly California ladies concocted a brutal and dastardly scheme to make $2.8 million.  Their plan involved life insurance fraud and homicide.  They implemented the scheme over a period of years in the belief that a statute of limitations would prevent the insurance companies from contesting the fraud. 

Since this is a family site I’m not going to dwell on the details of the scheme.  If you’d like to satisfy morbid curiosity you can read the article (link above). 

Now the 77-year-old woman is in for life without the possibility of parole.  Her 75-year-old co-conspirator faces 25 years to life.  Prosecutors are not seeking the death penalty because both women will have died of natural causes long before the legal system could impose the death penalty. 

A Better Way to Make $2.8 Million by Age 77

Fortunately there are better, legal ways to make $2.8 million by age 77.  Let me illustrate what I believe is the easiest for the greatest number of people.

When you are 27 years old you commit to putting $243 per month in a brokerage account.  You invest your money in a diversified portfolio of low-expense funds with low dividend yields to minimize current tax liabilities.  You achieve an annual before-tax return of 10%.  You invest relatively tax efficiently.

By age 77 you have a portfolio worth nearly $3.7 million.  You sell everything, pay federal and state income taxes at capital gains rates (I’m assuming today’s capital gains tax rates for someone in California), and you have $2.8 million left.

Hmmm…. $243 per month sounds easier than insurance fraud and murder.  It takes 50 years of commitment, but the commitment is not very burdensome (only $243 per month) and doesn’t take a lot of time once you get the hang of it (passive index investing).

Inflation Hurts You….

Of course $2.8 million will not be worth as much in 50 years.  At 3.5% annual inflation it will be worth only $500,000 in today’s dollars.  How much more do you need to invest each month to overcome the effects of inflation? 

The answer is rather sobering.  You would need to invest $1,360 per month to end up with $21 million before tax.  You would pay over $5 million in tax when you sell everything at age 77, leaving you $15.6 million.  After compensating for inflation, your $15.6 million is worth $2.8 million.

Yikes.  $1,360 per month is a lot harder than $243.

I’ve got three tricks up my sleeve to make things easier.  The first involves inflation.

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When I bike to work I pass two gas stations.  One was selling the lowest grade at $4.01 this morning.  It’s the first time I’ve seen the low grade above $4.  The other had low grade at $3.91.  Guess which one I frequent? 

It’s a trick question.  I don’t frequent either.  I go as infrequently as I can.  The weather’s nice and I’d rather bike to work.

A few days ago I pointed out that gasoline accounts for 70% of the average gas station’s revenues, but only 30% of its profit. 

Now I have additional data to offer.  According to the U.S. Energy Information Administration most stations receive only 7 to 10 cents per gallon sold.  That’s their revenue.  After expenses they’re left with a just a few cents of profit per gallon sold. 

Where Does the Rest of the Money Go?

Here’s the breakdown  for a $3.04 gallon of gas, according to the Energy Information Administration:

Crude Oil

More than two-thirds pays for the crude oil.  It’s the reason that gas prices go up when oil prices go up. 

Saudi Arabia can produce a $110 barrel of oil for as little as $1, while a U.S. company drilling in the Gulf of Mexico might spend as much as $70 to produce one barrel.

Taxes

The taxes vary depending where you live.  The average state adds 22 cents of gas tax, while the federal government tacks on another 18 cents. 

Guess which lucky residents of which lucky state get to pay the highest state tax?  Here’s a hint, it starts with ‘C’ and ends with ‘alifornia’.  According to the American Petroleum Institute, California adds 45.5 cents per gallon.  Yikes. 

If you’d like to see your state’s gasoline tax click here.

Ship and Sell

This includes the cost of moving the gas to gas stations via trucks or pipelines.

Refining

Refining is the process of turning crude oil into gasoline.  Refining companies have to buy crude oil at market prices.  Their bottom line is hurt by high oil prices.

Conclusion

When I buy a gallon of gas most of the money goes to the oil producers.  The U.S. oil companies do very well with high oil prices, but it’s the Saudi Arabias of the world that make a killing because of their rock bottom production costs. 

The corner gas station makes a few cents per gallon.  That’s less than 30 cents when I fill up the Accord. 

When I was a kid I filled up my lawn mower a few gallons at a time.  It must have barely been worth the wear and tear on the station’s pump - except it was worth it because I bought so many baseball cards at that station.

It wasn’t so long ago when we could buy two gallons of milk for $4.69.  Now two gallons set us back nearly $7.  That’s a 50% jump in the space of a few years.  It wouldn’t be so bad if my salary would also jump 50% every few years!

I’ve noticed it mostly with milk, but it turns out that many food products have seen big price increases lately.  According to this article from the Dallas Morning News, prices are up for:

• Chicken - up 10% in the last year
• Whole milk - up 20%
• Tomatoes - up 25%
• Bread - up 5.4%
• Eggs - up 30% retail and 60% wholesale
• Pasta - up 30%
• Fruits and vegetables - up 20%

We Spend Three Times More on Food Than Gas

According to the same article, food accounts for 13% of average household spending while gas accounts for only 4%.  Despite spending three times more on food, it seems that people notice the price of gas more than the price of food.  Perhaps we should pay more attention to food. 

I don’t know if my own household follows those averages.  I don’t keep track of our spending at that fine level of detail.  Spending three times more for food than gas strikes me as in the ballpark.  We may spend a little less on gas because my commute is only three miles.  And I bike it when the weather’s nice. 

Why Does Food Cost So Much?

So what’s causing the jump in food prices?  In no particular order, the article blames it on:

• Increasing demand for ethanol has driven up the price of corn.  As farmers plant more corn to meet the demand, they plant less soybeans and everything else, resulting in general price increases.  Cows eat corn, so the higher price of corn means higher meat and dairy prices.
• Increasing meat demand from China and India.
• Drought in Australia.
• Falling dollar.

What To Do?

What’s the wise money decision to deal with rising food prices?  Eat out less?  Shop at Safeway instead of the upscale corner market?  Be a more discriminating shopper?  Skip lunch?

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