Education, advice, and evasion

Become a Patron!A few years ago I wrote about one of the curious fixations I observed among the wealthy denizens of the finance industry: the need for "personal finance" education. In this telling, the problems troubling American civilization are not the result of financial deregulation, or corporate consolidation, or employee misclassification, or wage theft, or race and gender discrimination, but rather a simple lack of knowledge. If high school students were instructed in how to balance a checkbook, no other changes would be necessary to usher in the gleaming, gilded, capitalist paradise of Galt's Gulch.I already explained why this conceit is absurd, but I've recently been thinking about how to break down the different layers of communication that are passed off under the mantle of financial education.

Financial education

I consider financial "education" the most elementary layer of personal finance communication. People aren't born knowing what a 529 college savings plan is, what the contribution limits are, or what expenses are eligible for tax- and penalty-free distributions, and many people die without knowing what they are. That makes education the pure transmission of information: 529 college savings plans exist. Individual retirement accounts exist. 401(k) and 403(b) workplace retirement savings plans exist.This information may be interesting, but it's not useful on its own as anything more than dinner party conversation, and we're not allowed to hold dinner parties any more.However, when financiers say personal finance "education," what they usually mean is generic financial advice.

Financial advice

The difference between financial education and financial advice is the difference between saying "there is such a thing as individual retirement accounts" and "you should maximize your annual contribution to your individual retirement account."Financial advice, unlike financial education, is tailored to the individual's circumstances. IRA's exist whether or not your income makes you eligible for deductible contributions, Roth contributions, or non-deductible traditional contributions. But whether or not you, personally, should make deductible, Roth, or non-deductible traditional contributions depends on your personal circumstances — and even worse, it changes as your circumstances change! At the most basic level, the more lucrative your non-IRA investment opportunities are, the less inclined you should be to make IRA contributions.Unfortunately, most financial advisors don't know what they're talking about, because they aren't actually trained in giving financial advice: they're trained in tax evasion.

Tax evasion

I once researched, but never published, a post about the role taxes played in post-war Britain on the global export of British music, as performers were required to spend most of the year outside of the United Kingdom in order to avoid taxes on their worldwide income. There's even an anecdote about a Beatle (or was it a Rolling Stone?) insisting his private jet circle over Heathrow until midnight so that he didn't exceed his allotted days on English soil.This is the category of advice financial "advisors" tend to provide: tax evasion stands in as a substitute for actual financial advice. Without knowing anything else about a person's situation, you can tell them to maximize their IRA contributions, maximize their 401(k) contributions, harvest capital losses during high-income years and capital gains during low-income years, strategically name 529 plan beneficiaries, and front-load contributions to donor-advised funds.But it's absurd to call this financial advice. Someone who tells you how to make more money is offering financial advice. Someone who tells you how to spend less money is offering financial advice. But someone who writes a letter for you to the IRS explaining that actually comparable salaries in your industry are $30,000 so you shouldn't be liable for FICA taxes on your sales of $5 million isn't offering financial advice, they're evading taxes on your behalf.You may think that's a service worth paying for, or you may not, but when financiers promote the benefits of financial education, don't forget they're talking about spending scarce classroom time teaching kids how to evade taxes.Become a Patron!

Affordable Luxuries #2: Filters and Routers

Become a Patron!After almost 6 months of working from home (i.e., bed) in a one-bedroom apartment, I'm about 95% of the way through a move to a preposterously decadent two-bedroom apartment, which means it's time for another entry in my occasional series, "Affordable Luxuries." Unfortunately, the two-bedroom apartment isn't the affordable luxury: housing in big cities is far too expensive at every position on the income ladder, and my new apartment is no exception. But while housing is cripplingly expensive, luxuries don't have to be.

Replace your refrigerator's water filter

I've been making dad jokes so long some of them already have children in graduate school, but one of my favorites is to point out whenever a store has a double glass door that our proud ancestors were allowed to use both doors, while we are sternly instructed to "use other door."I get the same energy from people who own refrigerators with built-in ice and water dispensers but who insist you use tap water because "the fridge water is no good." Invariably, the fridge water is no good because the owner hasn't replaced the filter in 25 years.There are two reasons this unfortunate situation persists. One is that owners may not know their refrigerator even has a filter. It's usually tucked in the back corner of a top shelf, and if it was there when you bought the fridge you may not realize what it's doing there. The other, even more curious reason, is because it's extremely difficult to buy replacement filters. For example, the Sears corporation sells Kenmore brand refrigerators, which come with Kenmore brand filters, but does not sell Kenmore brand filters. To buy a Kenmore brand filter, you have to go to a different Sears-owned website, Sears Parts Direct.Fortunately or unfortunately, depending on your perspective, a vast assortment of companies sell filters designed to replace the brand-name filter that came with your fridge. It's fortunate because it means prices are extremely competitive for these products. It's unfortunate because the companies have inscrutable made-up names, so deciding which ones to trust is largely a matter of faith. I have personally used Waterdrop filters the last few times I needed replacements, but that's not an endorsement: I truly do not know whether they're any more or less reliable or suspicious than the hundred other companies selling interchangeable versions of the same products. I do like to make sure filters are certified for both NSF standards 42 and 53, which you can Google if you're interested in additional details.A new filter should run you $15-20 and last 6 months, or about $3 per month — practically the definition of an affordable luxury.

Get a faucet-mounted filter

The District of Columbia water utility, for unknown reasons, has a mascot, Wendy, who represents, I think, a drop of DC tap water. Wendy encourages DC residents to drink tap water instead of bottled water, a sentiment I naturally share. But what if you don't like the taste of your local tap water? That's right, it's another affordable luxury: a faucet-mounted water filter. I like the Culligan FM-25 in chrome since it matches my fixtures, but the white plastic FM-15A is an excellent choice as well. Either choice will run you $30 or less to start, with even cheaper replacement cartridges every 6 months or so.Now you might ask, why would I need a faucet-mounted filter when I just replaced my refrigerator's filter? Because you need different tools for different jobs! You can use your fridge filter to grab a quick glass of water, but if you want to boil some pasta, you're gonna want to use the faucet. I use filtered water for everything — is that an absurd luxury? Of course it is. But it's an absurd affordable luxury!

Get a new Wi-Fi router

I've been working from home for years, but when my partner was relegated to work-from-home status in the early days of the pandemic, what started as a nuisance became a crisis: our home wireless network did not support even basic audio and video streaming, let alone the 30-person calls that were now de rigueur.I knew I needed to get to the bottom of the problem: was the problem faulty wiring, a defective cable modem, or an out-of-date Wi-Fi router? New Apple computers no longer come with ethernet ports, but fortunately I kept my antique laptop around and was able to quickly determine that the wiring and modem were fine: the wireless router was the bottleneck.Thanks to the constant barrage of coupon codes Staples showers me with, I was able to buy an Archer A7 router for about $50 (I did have to add a couple bucks worth of pens to get my order to the $75 threshold to trigger the $25 coupon). Clicking through a shopping portal and paying with my Chase Ink Plus credit card brought my final cost down another couple dollars. Once installed, my wireless speeds with the new router immediately matched my wired speeds.Given that work-from-home will be the rule for the foreseeable future, this would be worth doing at many times the price, but the fact it was so cheap definitely makes a new router an affordable luxury.Become a Patron!

Three questions to ask as the unemployment insurance fight enters its (abbreviated) endgame

Become a Patron!Back in April I wrote an overview of the state of the federal pandemic response, and said (optimistically, I thought), of expanded unemployed insurance benefits that,

"What happens next depends on both our progress against the virus and the state of the economy. If we’ve beaten back the virus sufficiently, Republicans may allow the federal top-up to lapse on the theory it will encourage workers to accept lower wages. If deaths are still high or even rising, and the economy is still in government-ordered paralysis, I would hope enough votes could be found for at least another 16 weeks of funding."

Well, "deaths are still high or even rising," so as expanded unemployment insurance benefits near their expiration, I want to revisit the question with a narrower focus on what to look for in any eventual unemployment insurance deal.

The size and duration of expanded federal benefits

A somewhat strange decision was made in the March CARES pandemic relief package, which created a $600 federal "top-up" of unemployment insurance benefits: instead of granting each unemployment insurance beneficiary a specified number of weeks of expanded benefits, the federal top-up would be payable to all unemployment insurance beneficiaries (whether or not they began receiving benefits before or after the coronavirus outbreak) through the last full week of July, and then would expire for all unemployment insurance recipients at the end of the July.On the one hand, the logic was obvious: it was widely anticipated, or at least hoped, that the pandemic would have ebbed by the end of July and the economy would have "snapped back," allowing unemployed workers to return to their old jobs or at least easily find new jobs in the resurgent post-pandemic economy.But I call the decision "strange" because it means workers who lost their job at the end of March (as I did) will have received a full 16 weeks of expanded unemployment insurance benefits, while a worker who loses her job today will receive just one or two weeks of expanded federal benefits.So the first thing to look for in the next round of pandemic relief is how, and for whom, will the federal top-up be expanded? There are a number of possible options:

• all recipients, including previously excluded unemployment insurance beneficiaries (the so-called "PUA beneficiaries"), until a specified date;
• all recipients, up to a specified number of weeks of unemployment insurance benefits (so I might be excluded as having "exhausted" my 16 weeks of expanded benefits, or the cap could be lifted to 24, 32, or 39 weeks);
• the federal top-up could be gradually reduced as (or if) the unemployment rate falls from a specified level, either at the national or state level;
• the federal top-up could be mechanically reduced over time without regard to national or state economic conditions, for example falling by $100 per month over the next 6 months until it reaches $0.

Each of these options comes with different costs and benefits so which, if any, of them Congress ultimately enacts will have a dramatically different impact on our eventual economic recovery.

The length of extended benefits

I try to be careful to distinguish between two elements of the CARES Act changes to unemployment insurance: the expanded federal benefits (the "top-up" discussed above) and the extended state benefits. Whether or not the federal expansion is renewed, your state unemployment insurance benefit has already been extended from the typical maximum of 26 weeks to a new maximum of 39 weeks. In my case, since I happened to become eligible the last week of March, my extended benefits will expire the last full week of December (quite a Christmas present, I know).Unfortunately, this means that the economic pressure to lengthen extended benefits will not align with the pressure to extend expanded benefits past July. By early November the Republican-controlled Senate will already know whether it has lost power. If Trump has been re-elected and the economic crisis continues, benefits may receive another extension. If Trump loses, there's no reason to believe the Senate won't pursue the same scorched-earth strategy it used to hobble Obama in the aftermath of the Great Recession.That means the decision whether or not to include extended benefits in the current negotiations is one of the most important decisions Congress will make in the next two weeks. Extending benefits now, while the results of the November election are still uncertain, means their expiration in January won't be the first crisis a potential President Biden has to face.

The reimposition of work search paperwork requirements

Longtime readers already know there are no work requirements, only paperwork requirements. One of the most onerous such requirements is the so-called "work search requirement" to receive continuing unemployment insurance benefits. In the logic of the program, unemployment insurance recipients shouldn't be doing housework, shouldn't be caring for children or relatives, and shouldn't be enjoying their time out of the workforce. Their new full-time job should be submitting job applications.This requirement, for obvious reasons, was suspended nationwide during the initial stages of the pandemic, but some states have tentatively moved towards reinstating it (Texas, Maine). However you feel about the ease or difficulty of meeting work search paperwork requirements, the requirements exist for the sole purpose of preventing people from receiving their unemployment insurance benefits. Many people will be able to meet the work search paperwork requirements — many, but not all. And those who fail to meet those paperwork requirements will lose their benefits, go hungry, miss rent payments, face eviction, and serve as another drag on a devastated economy.How and whether Congress addresses work search paperwork requirements is an essential, but widely-ignored, question about the speed at which we eventually recover from the present crisis.Become a Patron!

Did the Paycheck Protection Program fail, and if so, why?

Become a Patron!While billions of dollars remain available to fund new Paycheck Protection Program loans, and some banks continue to accept applications, at this point it's fair to say that the program is at least entering its final act, and the debate over its success or failure has begun in earnest. I've written about PPP loans (and the sister program, EIDL) in the past, so I want to give a brief overview for those struggling to figure out: what just happened?

What was the Paycheck Protection Program?

Over the course of its brief incubation, florescence, and decay, the PPP underwent many changes: the repayment period for unforgiven loans was lengthened and the required share spent on payroll was lowered, to give two important examples. But the underlying logic of the program always remained the same:

• operating through private banks, the federal government would loan money to employers, with the amount calculated on the basis of their pre-crisis payroll expenses;
• employers that maintained their employee count and payroll expenses at a certain percentage of the pre-crisis level could apply for their entire loan balance to be forgiven.

What was the PPP supposed to achieve?

Much criticism and praise of PPP revolve around competing answers to this question, so it's important to understand the logic of the system as designed. The program was not designed to "subsidize employment" or to "keep people at work." On the contrary, the expectation was that a temporary (the program was only supposed to last 2 months) period of business closure would give the government time to bring the virus under control and allow the economy to re-open. Instead of swamping state unemployment insurance systems with claims Congress knew those systems would be unable to manage, they conceived of the PPP: let employers administer unemployment benefits instead.A closed business that agreed to keep paying its employees for a few months would receive a small additional subsidy to cover fixed expenses like utilities and rent, and would not see their unemployment insurance premiums rise, while employees would not see their pay decrease or be forced to wade through state unemployment insurance systems. Those systems, meanwhile, could focus their efforts on reviewing the claims of permanently laid-off workers, without being overwhelmed by folks anticipating just a few weeks or months of lost income.So what went wrong?

Explanation 1: The Program Worked

This is the strongest form of the pro-PPP (or anti-anti-PPP) argument. In this view, nothing went wrong.After a few early administrative hiccups, the program was successfully implemented, with large national banks, smaller regional banks, and even the smallest community banks and credit unions underwriting hundreds of billions of dollars in loans to businesses forced to temporarily close, either due to regulatory requirements or the simple fact of economic crisis. The program was so successful additional funding was allocated, and a few administrative requirements were eased in order to encourage maximum participation.While it's true that many of those businesses later decided not to retain their employees on payroll, couldn't meet the loan forgiveness requirements of the program, or permanently closed, that shouldn't distract from the fact that many employees did continue to receive stable paychecks, employer-sponsored health insurance, retirement savings contributions, and the promise of a return to normalcy after the first wave of infections ebbed.The only failure, in this telling, is the failure of the government to follow through on its part of the deal: bringing the virus sufficiently under control that two months of federally-funded payroll expenses is all it would take to relaunch January's full-employment economy.

Explanation 2: Communications Failure

This is the most generous explanation that still admits the failure of the program, and suggests that PPP was adequately designed and adequately implemented, but its design and objectives were inadequately communicated to the relevant actors. This explanation suggests a kind of "diffuse" blame: Congress should have been more clear about its intentions, the administration should have been more clear about its expectations, and banks should have reserved loans for employers committed to using the funds as intended to preserve their pre-crisis payroll.How damning you find this criticism depends, I think, on how realistic you find the alternatives. If you believe that the total emergency funding Congress was willing to provide was fixed, then each dollar wasted on PPP logically could have been spent on an effective measure instead, like raising SNAP benefits, increasing the unemployment insurance top-up, or simply providing additional funds to state unemployment insurance offices to train the staff needed to deal with the influx of new claims. If you believe each leg of the emergency response stool rests on its own, then no money was "wasted" on PPP at all, since it wouldn't have been spent on anything else.

Explanation 3: Funding Failure

Here we see a more combative argument: Congress's artificial stinginess was always the program's Achilles heel. In the face of economic ruin, the federal government should have stepped in and said "all payroll expenses up to $8,333 per employee, per month, will be reimbursed in full" (forgivable PPP payroll is already capped at $100,000 in salary per employee). This would be easily implemented through payroll processing companies or, for companies that process payroll manually, advance tax credits, and (just like PPP) would cost a modest fraction of the face value given that FICA, state, and federal income taxes would still be owed on the subsidized payroll.In this telling, it was Congress's ass-covering tendency that suffocated PPP. Each additional layer of bureaucracy and "fraud prevention" excluded more and more employers from the program, making it easy to attack unpopular organizations who eventually managed to navigate the gauntlet. Universal participation, while expensive, would have diffused criticism and much more effectively achieved the goal of the program: to save the American economy.

Explanation 4: Ideological Failure

Each of the preceding explanations has somewhere between a grain and a bushel of truth in it. For employers that were able to receive funding, continued to make payroll, and achieved their loan's forgiveness requirements, the program worked exactly as intended. The failure to clearly articulate the design and intention of the program both discouraged participation and led to a media backlash which has drowned out any success the program did achieve. Inadequate funding, private sector log-rolling and bureaucratic incompetence hobbled the program from the start and have ironically left billions of dollars that Congress did ultimately appropriate to the program unclaimed or refunded.Taking all that into account, I believe the program did fail, and it failed for a much simpler reason: because it required employers to act on behalf of and for the benefit of their employees. No matter how good an idea the waiter, dental hygienist, janitor, or clerk thinks the PPP is, no matter how much they might prefer to receive their paycheck rather than run down their unemployment insurance entitlement, no matter how much they might prefer to stay on their current health insurance plan rather than transition to Medicaid or the ACA exchanges, they never got a say. The decision was left up to their employer.At first glance, this failure should not strike you as quite as bad as it sounds. After all, Congress also extended and expanded unemployment benefits, Medicaid is still available to most unemployed people in most parts of the country, SNAP work search requirements have been suspended, and even certain evictions have been suspended in many parts of the country. In other words, Congress gave workers whose employers "opted out" of PPP alternatives for income, health insurance, food, and housing.The ideological failure is that employers don't want to pay their employees to stay at home doing nothing. This is not because it's unprofitable; after all, Congress is footing the bill. Rather, it's because employers never volunteered to administer the welfare state: they expect their employees to work, no matter who is paying the bill. Congress thought they could "maintain the employer-employee relationship," and ease re-hiring post-pandemic, by bribing employers to continue their payroll, and in one sense, they were right. They were just confused about what the employer-employee relationship entails. It entails work, when what we needed to suppress the contagion was precisely the opposite.

Conclusion

I have tried to be as fair as possible to all four explanations for the success or failure of PPP to date. Feel free to take each explanation in the dosage that seems appropriate to you. But there are two conclusions that I think are irresistible, regardless of your preferred explanation.First, these ad hoc emergency programs are always going to be vulnerable to communications failures, and we need a better, more sustainable solution. Those still capable of remembering more than 3 weeks in the past might recall the Solyndra debacle, an almost perfect analogy to the PPP. In the face of the collapse of the financial system and accelerating climate change, the Obama administration included in its recovery initiative a loan subsidy program for experimental clean energy technologies. The program was an unqualified success, and never lost money, but Solyndra became a poster child for government waste. Sound familiar? If we want the federal government to invest in clean energy, and if we want employers to administer the welfare state, we should communicate that clearly, forcefully, and on a permanent basis — not ad hoc in the middle of an unprecedented emergency.Second, we should have taken into account more seriously, and sooner, the changes to work the crisis would require. Instead, we've sleep-walked into a complete restructuring of the labor force, without enacting any of the required policy changes. White collar employees try to work from home while serving triple duty as childcare workers and teachers, grocery store employees scramble to find childcare and transportation, nurses and doctors get sick and die caring for the virus's victims, while bartenders and servers collect either unemployment insurance or paychecks, depending on their employer's whim. While we shouldn't design our economy around this crisis — the next crisis is sure to look different in important ways — we should proactively design an economy that is capable of responding to those future crises more nimbly than this, or the failures will continue to mount.Become a Patron!

Checking back in on the Long Game savings app

Become a Patron!Several years ago there was a brief flurry of online interest in an app called "Long Game." The flurry of online interest was presumably because of the easy referral bonus (there's still a bonus for referring people, though I'm not sure if the referee gets anything out of it). It also seems there are occasional increased portal payouts for opening an account, so you may want to wait for one of those to come around again.Anyway, it turns out the app is still around, and I've been playing around with it for the last few weeks, so I thought I'd share my impressions.

It's no longer free by default

It seems that Long Game shuffled around their back-end banking partners, and it now costs $3 per month unless you direct deposit $400 per month and spend $100 with the linked debit card. That's obviously not a huge hurdle if your payroll provider allows you to split your paycheck arbitrarily, but if you're going to do that (or pay $3 a month) then you should certainly commit to getting the maximum value from the program.

Banking features

Stripped away from the cartoonish graphics, Long Game is an online checking account, your "Everyday Account," with a linked debit card, and an unlimited number of online savings accounts, or "Savings Jars." Money in your Everyday Account doesn't earn interest, and money in your Savings Jars earns 0.1% APY.

Earning coins

The conceit of Long Game is that in addition to the 0.1% APY earned on your "savings jars," you also receive an in-game coin currency by completing certain tasks. The coins seem to have undergone a massive inflation sometime in the last few years so now rewards are measured in the hundreds of thousands of coins. I haven't gone very far into the Long Game mythos, but the starting goals in my account are, for example:

• account creation (something like 20 million coins for setting up an account)
• deposits (500,000 coins for your "First Jar Deposit")
• debit card purchases (one million coins for your "First Swipe")

You also get to spin a wheel once per day for free and win up to 2 million coins.There's an additional in-game currency called "brains," which I believe are used to unlock additional games in the app, but I haven't earned enough brains to know how that function works.

Spending coins

This is the core conceit of the app: while your savings jars only earn 0.1% APY, you can earn additional cash (or coins, or cryptocurrency) by spending your coin balance on a number of lottery-style games in the app. To start with there are "wheel-style" games, "card flip" games, and "line" games. Each game costs a different number of coins, and has a different maximum payout. There is no skill involved, the payout of each game is determined by a random number generator as soon as you spend the coins, and the games are not "fun" in any sense of the word.However, there is another game, which is the real heart of the app as far as I'm concerned, which is the weekly "Omega Millions" drawing. You can enter this game an unlimited number of times (for 20,000 coins per entry) and there's an option to automatically generate your entries so you don't have to manually select your "numbers" for the drawing, which I gather is held at 6 pm Eastern Time each Thursday.

How I would maximize the app

If you find this all quite boring, don't worry, it was pretty boring for me to research as well. But lots of things are boring, and some of them are still worth doing. If you have enough monthly income and idle cash, and don't mind setting up some automatic debit card transactions, this is how I would go about stripping down the app to its bare essentials:

• Set up a $400 monthly direct deposit, either by splitting your paycheck or using a peer-to-peer payment service like Venmo, PayPal, or Cash.
• Set up $200 in recurring monthly debit card transactions. This does not have to be a single transaction, so you can throw a phone bill, a cable bill, and an electric bill on there as long as the total reaches $200.

This combination gets you Diamond status in the app, which in addition to eliminating the $3 monthly fee also quadruples your daily free spin earning. Next:

• Open the app once per day, take your free spin, and collect your free brains (again, I have no idea how the brain function works but you get 3 free per day).
• On Thursday morning, after taking your free spin, open the Omega Millions weekly drawing game and convert your entire coin balance into randomly-generated drawing entries.

Given the way they hand out coins, I expect this strategy would generate hundreds of entries per week with perhaps 10-15 minutes of work per week. Again, this is not "fun," but if you won a few hundred bucks a year doing it you probably wouldn't care how much fun it was.

There's a back door, but it doesn't sound like much fun either

If you click around a little bit on the website (not the app, which appears to have out-of-date rules hard-coded into it), you'll find that like all such contests, there's a way to enter without jumping through all these hoops: by sending postcards! Each postcard you send gets you 1 million coins, good for 50 entries into the Omega Millions drawing. There doesn't appear to be any limit on the number of postcards you can send, but they do have to be mailed separately, which means $0.35 in postage plus the cost of the cheapest stack of postcards you can find. It's been a while since I've had to calculate the expected value of a lottery entry, but according to my back-of-the-envelope calculation the expected value of 50 Omega millions entries is about 56 cents. If you can find cheap or free postcards, don't mind hand-addressing them (did I mention the postcards have to be hand-addressed?), then over time you might have a slightly positive expected value.

Conclusion

I'm not trying to sell Long Game to anybody, and I'm certainly not going to go all in on it myself. But there's nothing intrinsically unreasonable, in a period of incredibly low interest rates and excessive spare time, to distributing your idle cash around a variety of vehicles with uncertain payoffs. Given that your Long Game balances are FDIC-insured, there is only upside potential to participating as heavily as possible in a weekly free drawing. Hopefully this post at least moves you more quickly up the app's learning curve.And if you do win a million dollars based on this post, don't be too embarrassed to send a cut my way.Become a Patron!

Some time-sensitive thoughts on fall higher education enrollment

Become a Patron!Long-time readers know that one of my earliest recurring themes here on the blog was techniques to bring down the cost of higher education. Not by "applying for scholarships" or "getting good grades," but by manipulating the machinery of the financial aid system.With colleges and universities around the country announcing their decisions about whether students will be allowed to return to campus and attend classes in-person this fall, it's become fashionable to joke about "whether it's worth enrolling" at Harvard if you'll miss out on the excitement of going to parties with the most annoying people in the world, sorry, scratch that, I mean The Future Leaders of Tomorrow.I think this is a very boring question. It's July, so you already know if you've been admitted to Harvard, or Stanford, or even Dartmouth, and there's no reason at all to enroll in "virtual" classes this fall. Dostoevsky will be waiting for you next year. Write the admissions committee a nice letter asking if you can instead join them in 2021. If nothing else, you'll be a year older, your facial hair won't look so scruffy, and maybe you'll have learned to dress yourself a bit better in the interim.Let me frame the boring question as precisely as possible: if you (or, more realistically if you're reading this blog, one or more of your kids) have already been admitted to the higher education institution they want to attend, and that institution is not operating as expected this fall, you should defer admission to next fall.But the existence of a boring question suggests the existence of an interesting question.

What should a high school graduate do instead?

To understand the answer to this question you need to know two things:

• most four-year colleges and universities do not allow students to apply as freshmen (the most common and easiest form of admission) if they have received any college credits after the summer following their senior year of high school.
• most states do not allow students to establish residency for the purposes of in-state tuition if they move to the state "exclusively" in order to enroll in higher education.

The logic behind the first bullet point is that many high schools now allow students to directly enroll at local colleges and receive college credits while they're still in high school. These programs have different names, but they're fairly common and they're all basically ways to offload students who are bored with secondary school work. This immediately created a problem for university admissions, however: systems that are set up to admit students into 4-year programs directly out of high school were suddenly looking at students who might have 50 or 60 college credits between AP tests and community college classes. To square that circle, most top-tier public and private colleges and universities introduced the rule that freshman could bring in college credits, but only college credits earned in high school (or the summer after graduation). If you earn college credits in the fall after graduation or later, then you're shunted into the much narrower "transfer" admissions pipeline.The logic behind the second point is a bit harder to understand, but if you squint just right you can see the idea. States with high-quality public institutions like California, Wisconsin, or Michigan offer lower tuition to in-state residents. You can conceptualize this in different ways: perhaps parents "pay up front" for their children's tuition through income and sales taxes, or perhaps the higher tuition of out-of-state students "subsidizes" the education of state residents. However you choose to explain it, the consequence is obvious: people to want to move to those states and establish residency! But if establishing residency were easy, then the mechanism wouldn't work. Everyone would get the in-state tuition rate, and there would be no discount (or no subsidy). So, through laws, court cases, and rule-making, most states have arrived at a kind of equilibrium: to receive in-state tuition you need to only reside in the state for one year — but you must not have moved to the state for the primary purpose of enrolling in higher education. You can move to California for a year and lay bricks, then receive in-state tuition and a full scholarship to the University of California, but you can't move to California and enroll at Santa Monica College for a year before transferring to the University of California.Once you get your head around these two principles, the interesting answer presents itself: the last thing any high school graduate should do this year is enroll in higher education!

Move wherever you want to go to college, work, and file taxes

Once you understand all of the above, the solution presents itself cleanly. It's July, and you've already graduated from high school. If you've already been admitted to your preferred institution, then you have nothing to worry about, just defer admission for a year. But if you're unsatisfied with your current opportunities, the good news is there has never been a better time to reset them. Just remember, when establishing residency in a new state, documentation is your friend. The day you arrive:

• register to vote;
• get a new driver's license, ID card, hunter's license, gun license, or whatever else suits your fancy;
• sign a lease, and keep a copy;
• switch your bank and credit card statements to your new address;
• file taxes in your new state, even if you don't owe anything (some states may not allow you to file $0 returns online, but you can still mail them a physical return).

Conclusion

A strange thing about the American psyche is the way it is premised on categories that do not survive even the briefest encounter with reality, and one of the best examples of that is state "residency." Residency isn't where you live, it isn't where you work, and it isn't where you study. Residency is a vibe.Establishing residency means getting on the same wavelength as the overworked, underpaid residency cop who has to make 90 residency decisions per hour. So make it as easy as humanly possible for your residency cop to decide in your favor.Become a Patron!

Five profitable things to do with low-interest loans

Become a Patron!I've written many times about my fondness for low-interest, and especially low-fee, balance transfer and cash advance credit cards, which allow consumers to borrow large — sometimes very large — sums of money for a fixed period of time and pay nothing to the bank if the loan is paid off by the end of the promotional period.This is a form of what I think of as "institutional arbitrage," which is possible when different categories of institutions are able to borrow and lend across what should be, but are not, airtight boundaries. This kind of institutional arbitrage is the underlying mechanism for a lot of both travel and personal finance hacking.

My five favorite uses for low-interest loans

1. Swap secured for unsecured debt. A classic example here is something like a car loan that is secured by the vehicle itself. While interest rates on car loans aren't particularly high right now, you might prefer to extinguish your secured car loan with an unsecured, loan-interest credit card loan, so you can keep your car if pressed into default on the unsecured credit card debt. In an even more complicated version of this strategy, you might use unsecured, low-interest credit card loans to pay off student loan debt, which in most jurisdictions is undischargable even in bankruptcy!
2. Make or accelerate "use it or lose it" retirement contributions. I've written before that "use it or lose it" is the most important feature of retirement accounts. When you let a calendar year's contribution deadline pass (usually that year's tax filing deadline), you've permanently reduced your ability to shield dividends and capital gains from annual tax assessment. Taking out a low-interest loan to maximize your annual contribution allows you to lock in guaranteed tax savings, and work out the details later.
3. Meet intermediate financing needs. Some businesses, like resellers, find deep discounts on merchandise while it's out of season or out of favor. Swimming trunks in January, fur coats in August, and so on. They may want to hold onto the merchandise until it's back in season or back in fashion, and low-interest loans are one way of financing that intermediate-term inventory.
4. Meet high balance or deposit requirements. Earning the highest possible interest rate on your cash savings has always required a bit of legwork. I assume back when interest rates were kept artificially low, our ancestors would open bank accounts all over town in order to collect as many toasters as possible to sell to their friends and family. The same principle works today: accounts that offer nothing in interest on your deposit will still offer a cash signup bonus to attract your business. The deposit requirements, however, can be substantial: as high as $50,000 in the case of Citi's current $700 bonus. But if you're playing with the house's money, that's a higher interest rate than you're likely to earn on any other safe investment. Similarly, you might consider funding certificates of deposit with rewards-earning credit cards and then using low-interest loans to pay off your credit balances before any interest is owed.
5. Get cash discounts. I grew up hearing stories, which I choose to believe are true, but have no evidence of whatsoever, that when my father needed a new car, he would walk in the dealership with a briefcase full of cash and make the dealer an offer he couldn't refuse. In the consumer world I don't think there are very many "cash discounts" still available, but in business-to-business interactions I imagine there are still companies willing to accept less, perhaps much less, if you're willing to pay in cash up front. The reason most businesses aren't able to do so is they rely on the lag time between their purchases and sales to finance their operations! But if a low-interest loan allows you to settle immediately in cash, you may find vendors as flexible as my dad (allegedly) did.

Conclusion

Hopefully the above examples illustrate why I call this "institutional arbitrage." If Discover could deposit $50,000 with Citi and earn $700 in interest, they surely would. But Citi doesn't offer $700 signup bonuses to other banks — it only offers them to consumers, so the consumer becomes the intermediating institution. The consumer can take out a consumer loan from one bank, make a consumer deposit in another bank, and earn a return that the lender would not earn and the depository would not offer on their own. Hence, institutional arbitrage.Become a Patron!

Mass death is a supply shock, too

Become a Patron!It became fashionable in the 20th century to distinguish between two kinds of sudden changes, or "shocks" that could impact an economy, for better or worse: demand-side shocks and supply-side shocks. This conceit has played such an important role in economic policy-making, it's worth looking at iconic examples of each kind.After World War II the US government suddenly had far less use for bombs, ammunition, sailors, and soldiers, and the economy entered a brief but steep recession as workers were laid off, factories went dark, and GI's flooded back from the front. Once the nation's manufacturing base was retooled for peacetime production and export, the economy quickly recovered. This shock was a classic demand-side shock: as the economy transitioned to peacetime, folks cut back on their spending, holding onto cars and appliances slightly longer that they might have otherwise, eating out less, making clothes last slightly longer, and so on. Once they were re-hired in peacetime industries (and their war bonds matured), their spending shot straight back up.Supply-side shocks reflect the opposite phenomenon, with the most iconic historical example being the OPEC oil embargo of 1973-4. Dramatically higher prices for imported oil, then a major input into the US economy, caused prices to rise and even led to rationing of retail gasoline in the United States. Those who commuted by car suffered particularly, but all consumers saw higher prices on at least some goods. Again, the economy eventually recovered by retooling to be less oil-import-dependent, through investments in domestic oil production and more fuel efficient vehicles (at first from Japan, and eventually from US factories).

Public health measures create both demand and supply shocks

This very real distinction between demand and supply shocks to the economy eventually evolved into quite distantly-related political beliefs. Political liberals came over the years to believe that most or all economic shocks are demand shocks, and the solution is massive aid to consumers in order to support the demand for products. Political conservatives came to believe that most or all economic shocks are supply shocks, and that supply could be increased by reducing taxation and supervision of companies and wealthy investors.These positions are so well-entrenched that they instantly sprang into life during the debate and passage of the early coronavirus response bills. Democrats demanded and won immediate cash support to offset the sudden demand shock: newly-employed workers with a stimulus check and a federal top-up to their unemployment insurance payment would decrease their spending by less. Republicans demanded and won support to offset the supply shock: a business offering pickup or delivery services might have a fighting chance to stay afloat if its payroll and rent were subsidized by EIDL or PPP loans (or both).Ideally, the next phase of disaster relief would contain a similar logic: if Democrats demand $3 trillion in support for demand, and Republicans demand $3 trillion in support for supply, and the President demands $3 trillion in support for the hospitality and leisure industry, we might someday see our way out of this crisis.

People are an economic resource

The reason I've highlighted the two extremes above, the "pure" demand shock (a sudden cut to military spending) and the "pure" supply shock (a sudden drop in the availability of oil), and the corresponding responses to each, is that it's a model that breaks down immediately when you apply the framework to a pandemic disease that causes human deaths. The reason is simple: human beings are the source of both demand and supply.To understand this requires pivoting entirely away from the idea of people as "consumers" who spend less because of their lower income and "businesses" that experience higher input costs. Here we can consider the classic example of a "human life supply shock:" the Black Death, which helpfully was written up in exactly these terms in the latest issue of Jacobin magazine.The economic history of the Black Death that has come down to us, and reflected in the Jacobin article, is that workers experienced increased bargaining power compared to landlords, given that the amount of capital (land) was fixed while the number of workers available to work it had greatly fallen. That negotiating power was offset, in part, by the landlords' control of the state's machinery:

"At Knightsbridge even the carpenter who made the stocks with which to imprison those workers who refused to swear obedience to the Statute of Laborers was paid at the illegal rate of five and a half pence per day."

This fundamental question, whether the loss of a human life is a supply shock or a demand shock, is reflected precisely in the debate we're having today over the proper response to the coronavirus pandemic. The more deaths that can be assigned to retirees, nursing homes residents, low-wage workers, and people of color, the more we can justify re-opening businesses that serve young, white professionals.Everyone knows this is immoral, whether or not they admit it, but it also doesn't make any economic sense on its own terms. Nurses, doctors, paramedics and orderlies aren't just valuable because of the spending they inject into the economy (the demand shock when they die or are laid off), they also supply care, and their deaths reduce the overall amount of care available in the economy. It takes years to train medical professionals, and each one that dies prematurely reflects years or decades of lost medical care supply.

Conclusion

I do not like and try not to use the expression "human capital." Capital is a distinct concept with a distinct meaning, and labor perfectly describes the application of work to capital in order to produce value. We already have the excellent terms "education" and "training," so "human capital" appears to me to be entirely redundant and unnecessarily confusing.That being said, education and training cost time, they cost money, and they require physical infrastructure like those dangly skeletons in medical school classrooms. I strongly believe we need to be training more doctors, at lower cost, with worse MCAT scores. You may believe we need to be training fewer doctors, at higher cost, with higher MCAT scores. But whichever side of that divide you fall on, killing off our existing doctors, nurses, and home care workers through bad policy is obviously a mistake: mass death doesn't just kill consumers, it kills suppliers as well.Become a Patron!

Thoughts on receiving both EIDL and PPP loans

Become a Patron!Last week I wrote about my successful Economic Injury Disaster Loan experience, and mentioned in passing "the programs [EIDL and PPP] are very different, and while not technically mutually exclusive (you can take out loans from both programs, under certain conditions), most businesses will only take advantage of only one or the other."Overall I thought it was a good and useful post, but that sentence kept coming back to bug me, since if I read it on anyone else's blog, or in a newspaper's "Business" section, I would immediately ask, "under what conditions?" In other words, who can and who should take out loans through both EIDL and PPP?So, in this post I'll ease my conscience by exploring that precise question.

EIDL and PPP loans cannot be spent on "the same" expenses

Let me say up front, from a business perspective, this rule makes no sense. Money is, famously, fungible, so there's no meaningful sense in which any individual loan is being "spent" on any individual expense. What this rule seems to mean is simply that you cannot borrow more money combined through the two programs than your actual expenses: if you have $100,000 in expenses, you cannot borrow $75,000 from EIDL and $75,000 from PPP because that would mean $50,000 was spent on the "same" expense.In practice, since PPP loans are forgivable when 75% of your loan is spent on payroll, you should "allocate" your PPP loan to payroll, rent, mortgage, and utility payments, then "allocate" your EIDL loan to any remaining eligible expenses up to your total expenses. Since this is all an accounting fiction, all I can recommend is to keep your receipts!

Remember: EIDL advances reduce PPP loan forgiveness

The amount of your PPP loan forgiveness eligibility is reduced by the amount of your EIDL advance. EIDL loans have 30-year terms, but any non-forgiven PPP balance is due in just 2 years, so you should set aside or plan to save up the amount of your advance to begin repaying your PPP loan 6 months after disbursement and complete repayment in 2 years.In practice since EIDL advances are capped at $10,000 this shouldn't be a huge obstacle for a firm big enough to be interested in pursuing both loan types.

Who should pursue both EIDL and PPP loans?

Hopefully at this point the picture is a little clearer: a firm might consider taking out both types of loans if they have both high ongoing operating expenses and high payroll expenses. By "allocating" their PPP loan to payroll and other eligible expenses, they receive two free months of payroll and (at least) discounted rent and utilities, which is especially nice if the firm is able to stay open and continue bringing in revenue.The EIDL loan can then be "allocated" to operating expenses (although not "expansion of facilities or acquisition of fixed assets" or "repair or replacement of physical damages"). The EIDL loan does have to be repaid, but on very favorable terms: 30 years at a fixed 3.75% APR, with no origination fees or prepayment penalties and a one year delay before the first payment is due.

Why I won't be pursuing the PPP option

While researching this post I contemplated the possibility of taking out a PPP loan, but in my case ended up convinced that it would make no sense. Although I do have ongoing operating expenses I could "allocate" my EIDL loan to, after reducing the maximum PPP loan I'd be eligible for (multiply the previous year's payroll by 2.5, then divide the result by 12) by the amount of my EIDL advance, I'd only be eligible for a few hundred dollars in loan forgiveness!And that's assuming I could find a lender willing to handle a PPP loan as small as mine would end up being.

Conclusion

Are any readers pursuing separate EIDL and PPP loans? How have you found the experience so far? Has your PPP lender tried to convince you to convert your EIDL loan to PPP? Sound off in the comments.Become a Patron!

My Unemployment Insurance Saga, or, Not All Heroes Wear Capes

Become a Patron!This is a post I've been looking forward to writing for 7 weeks, and had started to give up hope I'd ever be able to publish: today I found out my unemployment insurance claim has finally been approved and paid.

How unemployment insurance "works"

Until the present crisis, most white collar professionals have only had the vaguest idea of how the unemployment insurance system works. Even now, college-educated workers have seen much lower rates of job loss than non-college-educated workers, due to a combination of factors, like the ability of knowledge workers to work from home and the ability of firms to pay workers while on furlough through forgivable loan programs like the Paycheck Protection Program. Still, college-educated worker unemployment has risen past its previous high during the Great Recession, exposing the middle class, often for the first time, to the system they designed to crush the poor.With that in mind, here's a brief summary of how the US unemployment insurance scheme works:

• employers pay an unemployment insurance premium, set at a percentage of their employees' wages, that is "rated" based on the frequency with which their employees claim unemployment insurance benefits. New employers have their rate set based on their industry classification. For example, there is a ferry that runs between Bayfield, WI, and Madeline Island in Lake Superior, the largest of the Apostle Islands. Since Lake Superior freezes each winter and the ferry does not run, the crew of the Madeline Island ferry spends the winter living off unemployment insurance, which gives the ferry line a high unemployment insurance "rating," a cost they bake into fares during the months when the lake is navigable.
• benefits are set by states based on employees' income in the four calendar quarters preceding the most recently completed calendar quarter of work. As insane as this already sounds, it is slightly more insane than that, as my case illustrates. I lost my job on March 31, and was finally able to submit my application on the 2nd or 3rd of April. However, that meant my last completed week on the job ended March 29, meaning I had not worked the entirety of the 1st quarter of 2020. My last completed quarter of work was therefore the fourth quarter of 2019, and my benefits were calculated based on the four quarters preceding that: Q4 2018 to Q3 2019. Since my salary increased from quarter to quarter, this meant my two highest-earning quarters (Q4 2019 and Q1 2020) were both excluded from my benefit calculation.
• this does not ultimately matter that much because maximum benefits are set so low. In the District, the maximum benefit is set at $444 per week, while I qualified for only $315 per week based on my income. $129 per week is real money, and I would prefer to have it than not, but the fact is unemployment benefits, under normal conditions, are simply inadequate to survive, whether you receive the minimum or the maximum benefit.
• you're ineligible for benefits if you quit voluntarily, are fired for cause, or receive severance pay (technically your benefit is reduced by the amount of your severance pay). My understanding is that this is one of the most important drivers of severance pay for white-collar workers: if your employees are ineligible for unemployment benefits, then your employer "rating" (see above) isn't affected, so you save money on the unemployment insurance premiums for all your remaining employees.

The unemployment insurance application — and my first mistake

The District of Columbia unemployment insurance application, like most states', is broken. This is not news and I won't try to make it more interesting than it is. It was written in a forgotten programming language, never updated or maintained, and can only handle a few users at a time. My great triumph in finally successfully submitting my application was, after entering my personal details, selecting "employer not listed" as my last employer instead of my actual last employer, which was, in fact, listed.On one page of the application, which turned out to be the essential page, I was asked to explain my separation from the job. As I recall, the radio buttons were something like:

• laid off
• furloughed
• discharged
• fired for cause
• voluntary separation

I have come to understand that these terms all have very specific meanings in the world of unemployment insurance, but they meant essentially nothing to me, so I chose "discharged." I was then invited to give a description of the terms of my discharge, and I wrote something generic like "firm could not support my employment."I have come to understand that if I had simply selected "laid off" or "furloughed," my claim would have been approved almost immediately. I think of "laid off" as a trade union term referring to someone whose factory is decreasing production, while a "furlough" is when the federal government can't pay people due to Ted Cruz's antics in the Senate. Neither seemed to apply to me, so I chose "discharged" — and I chose unwisely.

File your ongoing unemployment claims, forever

Once my application had been submitted, I received a barrage of snail mail from the Department of Employment Services, consisting chiefly of my benefit determination (the $315 mentioned above) and my ongoing claim form. This form asked whether I was able-bodied, looking for work, started school, received a pension, basically anything that would make me ineligible for benefits going forward.Each week I would receive a paper copy of this form, with the words printed at the bottom: "An issue has been established with your claim so it cannot be paid at this time. Please continue to file your weekly claim forms. A claim examiner will contact you if additional information is required."I dutifully filed my weekly claims, harassed DOES over Twitter and e-mail, and made half-hearted attempts to reach someone by phone (three hours on hold was long enough for me).

A ray of hope

Finally, at 7:29 pm on May 14, a full 6 weeks after submitting my initial claim, and after filing 6 ongoing weekly claims, I received a call from an unknown DC number. K* explained she was calling because there was an issue on my claim (talk about old news). She just needed a little more information about the conditions of my separation, and she had a few oddly specific questions.K* then said after she submitted my information she needed to give "them" 24 hours to respond. It took me a second to realize she was talking about my former employer, but that based on my information she was recommending approving the claim.I then asked how I could get in touch with her and she, hilariously, said, "this is my cell phone number, and if you need to contact me please call and leave only one voice message, and do not give it to anyone else."It's easy to understand her concern: once you find someone who is able to actually process a claim, you would naturally want to give their phone number to everyone else who is struggling to get their claim approved! But I assured her that the number was safe with me.

A sleepless night

I don't know why, after 6 weeks of calming filing my ongoing claims and receiving no benefits, I suddenly decided to spend all of last night tossing and turning, thinking about how I would proceed if my claim were denied. How I would file my appeal, what I would say, how carefully I would explain my case. Are appeals being conducted in person, by mail, by videoconference?In hindsight, I wish I had logged into my account after midnight last night before going to bed, to see that my last 6 weeks of benefits had suddenly appeared as "paid" in my account, as I belatedly discovered this morning.I point this out specifically to highlight that there are two sources of stress built into our unemployment insurance system: inadequacy and uncertainty. Having a known, inadequate amount of money is one source of stress. But having an unknown, inadequate amount of money is entirely different: the stress of uncertainty is easily capable of exceeding the stress of inadequacy.

Unemployment insurance was a mistake

Since it is one of the only cash benefits available to the working class, unemployment insurance is one of the first programs targeted for supplementary support by Democrats during the periodic crises of capitalism. During the present crisis, benefits have both been extended from 26 to 39 weeks and increased by $600 per week through the end of the July benefit period.It is good that this was done, but hopefully the foregoing makes clear that this system does not work because it was not designed to work: do workers fired for cause have lower expenses than those who are laid off? Do workers who voluntarily leave their employers have lower rent, eat less, or wear out their clothing slower than those involuntarily discharged?Consider an alternative: income insurance is a perfectly reasonable product to be offered by the private insurance industry. If a company entices an employee to move across the country to New York City or San Francisco, they buy a house or condo, settle in, but then don't prove to be a good fit for the job, you can imagine an insurance policy that guarantees their income for 6 months or a year, even if they're no longer employed. A "golden parachute," if you will.But what the working class needs is not a punitive unemployment insurance scheme that checks and cross-checks their every move, demands they report every job application they submit, and cuts them off when they prove themselves unemployable and worthless.What the working class needs is an unconditional, universal basic income. Only then will we see what employers are willing to pay to convince us to work for them.Become a Patron!

My successful Economic Injury Disaster Loan story

Become a Patron!I've been looking forward to this post for over a month, so I'm glad to finally be able to write up the complete story of my Economic Injury Disaster Loan. I know a lot of people are at different stages of the process, so hopefully this will be a useful guide for what to expect, particularly if Congress ends up appropriating additional money for the program in a future disaster relief bill.

The timeline

Obviously this is the issue people are most concerned about: how long should you expect to wait between submitting an application and reaching the end of the loan disbursement process?Here was my experience:

• March 29, 2020: I submitted my initial application within a few hours of the EIDL portal going live. The application was extremely simple, essentially asking for your business structure, number of employees, and your income in either the previous year or previous quarter, which was easy enough to pull up from my records. They warn it can take 2.5 hours to complete but I'd be shocked if it took me 10 minutes.
• April 13: received e-mail from the Small Business Administration confirming that the EIDL "advance" grant would be limited to $1,000 per employee. This had been left ambiguous in both the underlying legislation and on the EIDL application, with both saying only that the advance would be "up to $10,000."
• April 15: received $1,000 advance by direct deposit.
• May 8: received an e-mail invitation to create an account at covidrelief1.sba.gov, created the account and confirmed my identity.
• May 9: received approval and e-mail invitation to complete my loan documents.
• May 11: completed my loan documents.
• May 12: received my loan proceeds by direct deposit.

The mystery of the EIDL "advance" — solved!

All things considered, this was an extremely simple and painless process, although obviously it would have been nice if the money had gone out a little quicker. The one source of universal confusion about the EIDL program relates to the co-called "advance," in my case the $1,000 I received on April 15.In ordinary life, if someone gives you an advance on a loan, the amount of the advance is part of the loan. Sometimes it's the entirety of the loan, as in the case of a "paycheck advance loans," for instance.It was widely known and reported that the EIDL advance doesn't have to be repaid if you aren't ultimately approved for a loan. The obvious question was, would an EIDL advance have to be repaid if you are ultimately approved for a loan?In my case, I received a $1,000 advance and was approved for a $3,000 loan. What I wanted to know was, if I accepted the loan, would I only receive an additional $2,000, having already received $1,000 of my $3,000 loan? In that case, I'd turn down the loan, since there's no reason to elect to repay $1,000 that would otherwise be free and clear.To get a definite answer, I called the Small Business Administration, where someone immediately answered the phone (on a Saturday afternoon, no less) and assured me that the EIDL "advance" has nothing to do with the loan: it's free money. I'd receive the full $3,000 loan, and only have to repay the $3,000 loan. That was reassuring, but I wasn't completely convinced, given how new the program is. Ultimately, to get a definite answer, I'd have to complete the loan documents.Fortunately, the agent was right, and the full $3,000 loan was deposited this morning.

EIDL and Paycheck Protection Program loan interaction

If you're happy with the terms of your EIDL loan, that's all you need to know: a 30-year, unsecured loan at 3.75% APR, with no origination fees and no prepayment penalty sounds pretty good to me!Larger business, and those with more employees, do have another option to consider: converting an EIDL loan to a 2-year Paycheck Protection Program loan.Why would anyone convert a 30-year loan into a 2-year loan? The reason is that unlike EIDL loans, your PPP loan balance is forgivable if the money is spent on eligible expenses, principally maintaining your pre-crisis payroll (hence the "Paycheck" in "Paycheck Protection Program").Here's where it gets tricky: if and only if you pursue a PPP loan after receiving an EIDL advance, then the amount of the EIDL advance reduces the forgivable amount of your PPP loan. An employer that received a full $10,000 EIDL advance, then decided to switch over to PPP and borrowed an additional $30,000, would only be eligible for $20,000 in PPP loan forgiveness. On the one hand, you can see the logic here: the employer didn't "really" borrow $30,000, they only borrowed $20,000: the extra $10,000 can be repaid from their EIDL advance. On the other hand, this design choice leaves employers with a complex decision between the two programs.Let's illustrate this with some numbers:

• Company 1 receives a $10,000 EIDL advance and a $30,000 EIDL loan from the Small Business Administration. The $30,000 loan has to be repaid over 30 years, with the first payment deferred for 1 year. The money can be spent to "meet financial obligations and operating expenses that could have been met had the disaster not occurred."
• Company 2 receives a $10,000 EIDL advance, then decides to proceed with a PPP loan application and receives a $30,000 PPP loan from a private lender. Within 8 weeks of receiving the loan, Company 2 spends at least 75% of their loan on maintaining their number of staff and level of payroll, and the rest on mortgage interest, rent, and utilities payments. Company 2 then requests loan forgiveness from their private lender, and receives $20,000 in loan forgiveness: the amount of their PPP loan, reduced by the amount of their EIDL advance, which they can use to repay the remaining $10,000 loan, or to meet other expenses.

Deciding between the programs: easy cases and hard cases

A lot of people are struggling to decide between EIDL and PPP loans, and rightly so: the programs are very different, and while not technically mutually exclusive (you can take out loans from both programs, under certain conditions), most businesses will only take advantage of only one or the other. That being said, let's get the easy cases out of the way:

• PPP: labor-intensive business that remain open. Consider a dog-walking service that pays out virtually 100% of its expenses for labor, and continues to see similar demand during the pandemic; PPP loan forgiveness makes 8 weeks of payroll the government's problem, and turns the firm's entire revenue into pure profit. You can also include here less labor-intensive businesses that nonetheless have a lot of payroll expenses, like independent grocery stores and co-ops, local gas stations and convenience stores, liquor stores and takeout pizza parlors. Labor may not be the biggest cost center for these business, but it's a large expense that can be wiped away with a PPP loan, giving the business temporarily expanded profit margins.
• EIDL: capital-intensive, low-margin businesses. Obviously the biggest problem with PPP loans is that the forgivable amount is contingent on your pre-crisis payroll. If you don't plan on pursuing PPP loan forgiveness, then the program simply offers a low-interest, short-term loan. Most low-margin, part-time, and hobbyist sole proprietors will be better off with an EIDL loan, with its free advance, low interest, and long repayment period.

If the world were composed of only easy cases, our work here would be done. Unfortunately, most businesses don't fall into those two buckets. Consider a harder case:

• Closed businesses that rely on specialized labor. An example here is something like a high-end sushi restaurant that has recruited or trained skilled sushi chefs, but relies entirely on customers dining in, and has closed for the duration of the crisis. Taking out a PPP loan allows this business to maintain its payroll for free, but only if ongoing mortgage, rent, and utility payments represent less than 25% of their total expenses. If those expenses exceed 25%, the loan will be ineligible for forgiveness, or the investors will have to pay them from other sources, like savings or new capital. The less certain they are of reopening, the less willing they should be to do so, and the more attractive an EIDL loan becomes.

Conclusion: these are business loans, not worker loans

Since these loan programs received an enormous amount of the money made available in our pandemic recovery laws so far, they've naturally received a lot of attention from the media, which have unfortunately tended to treat them as designed, in different ways, for the benefit of employees.This is a mistake, because neither of these programs is designed to benefit workers in any way: workers simply don't get a say in which program their employer participates in. On the contrary, an employer's decision to pursue one program or the other can materially harm the worker's interests: a low-wage employer who chooses to maintain payroll makes their employees ineligible for expanded unemployment insurance!Here's a simple rule of thumb I like to keep in mind: the working class is not the beneficiary of systems that are not designed and led by the working class. Or even more concisely: "nothing about us, without us."Become a Patron!

"Use it or lose it" is the most important feature of retirement accounts

Become a Patron!I consider it an inevitable misfortune that conversations about investing begin and end with "what should I invest in?" An unsophisticated questioner might mean "what stocks do you think will go up?" while a sophisticated one means "what should my allocation be to low-cost stock and bond ETF's?" but both questions skip over the much more important question: how much are you saving?

Pre-tax savings are cheap

You can pay a financial advisor to game out different tax regimes and withdrawal scenarios, but there's nothing complicated about calculating your tax savings when you make traditional 401(k) and IRA contributions: every dollar you save reduces your taxes by your marginal federal and state income tax rate, and this is true in every marginal income tax bracket.In the 10% income tax bracket, putting $6,000 into a traditional IRA saves you $600 to do with as you please. You can then save the $600, if you like, but you don't have to: you can use it to pay down credit card debt, pay rent, buy a Nintendo Switch, whatever you please!When I talk to people about their 401(k) or 403(b) contributions, they often balk when I say they need to set their contribution to $1,625 per month in order to maximize their annual contribution. How are they going to get by with $1,625 less per month in salary? They're going to get by because a $1,625 contribution doesn't cost them anything close to that much. In the 22% federal income tax bracket and with a 10% state income tax, it barely costs them $1100.And, to return to the point, this is true regardless of what they invest in.

There is no such thing as a catch-up contribution

I detest imprecision in speech, which is why I call the Retirement Savings Contribution Credit the RSCC and not the Saver's Credit and why I call the Earned Income Credit the EIC and not the EITC. The way I see it, imprecision in speech usually reflects imprecision in thought.One of the most offensive such imprecisions is the conceit of the "catch-up contribution." In 2020, people over the age of 50 enrolled in either employer-sponsored or individual 401(k) plans can contribute an additional $6,500 per year in employee contributions, for a total of up to $26,000, and an additional $1,000 to IRA's for a total of up to $7,000. If able, they should certainly do so.This bonus pre-tax savings capacity for over-50's is referred to universally as a "catch-up contribution," on the premise that those who failed to save enough earlier in life should be given a chance to make up their missed savings opportunities.But this is absurd, since the amount of the "catch-up" contribution has no relationship to the amount by which a saver has "fallen behind." For those wealthy enough to save the maximum amount in pre-tax accounts throughout their working life, it's a windfall, while those who struggled to save anything at all are unlikely to find an extra $7,500 per year in income to defer in their last few years before retirement.

Use it or lose it

Personal finance gurus love to talk about giving your investments as much time as possible to compound, with their smoothly rising charts that inevitably look silly in the midst of capitalism's periodic crises.Forget all that for a moment: the reason to contribute as much as possible each year to retirement accounts is that once that year's contribution deadline has passed, you have permanently lost the ability to shield that year's contribution from taxes.

If you don't know what to invest in, save anyway

In recent years there has been a half-hearted movement to channel savers into simplified, lower-cost investing vehicles. I don't hold this movement in very high esteem, but it has certainly had some successes: allowing auto-enrollment into 401(k) plans, allowing automatic increases in contributions, and allowing automatic allocation into so-called "target retirement date" mutual funds.But fortunately, it doesn't matter very much. In constant-dollar terms (i.e., removing annual inflation adjustments), someone saving $19,500 per year between age 22 and 50, and $26,000 per year between age 50 and 67, will have accumulated $988,000 in savings even if their savings do not earn any interest at all.

Conclusion: hitch the savings horse before the investment cart

At the end of the day, investing for high-income, white-collar professionals is pretty boring: the only question is, how rich do you want to be when you die? If you want to be really rich, you can take on a riskier investment portfolio, and if you're content with being only somewhat rich, you can happily dial back your risk. The stakes are essentially non-existent.My point is that even poor, low-income people like me, with no advice whatsoever, and taking no risk whatsoever, can also die rich, not by maximizing their investment performance, but by maximizing their savings performance. Invested entirely in cash (not an allocation I would recommend!), a pre-tax saver will still see their 401(k) and IRA balances steadily rise over the course of their working life, while happily taking advantage of both an annual tax deduction and, for low-income savers, the RSCC.Become a Patron!

Personal finance during the plague: self-employment (2)

Become a Patron!Earlier this month I wrote about some of the advantages of replacing work lost to the coronavirus pandemic with self-employment. I want to continue that discussion today with some questions to ask before and as you get your self-employment up and running.

Is your self-employment a business or a job?

This question confuses people in the United States due to the unfortunate terminology used by our tax code: technically all self-employment income is reported as business income, whether on Schedule C or on the K-1 issued by an S corporation. A surprising number of people are even tricked by this sophistry into believing they own and operate a small business when they deliver groceries or walk dogs, just because their income happens to be reported on a 1099 instead of a W-2.I prefer a simpler distinction: will there be any residual value left if you personally stop working? If so, you may have a business. If not, you definitely have a job.Take two simple examples from the world of reselling, or retail arbitrage. In the first case, a reseller drives around the region buying up bleach wipes and hand sanitizer, then lists it for sale on Amazon. In the second case, a reseller buys a warehouse in a state without sales tax, hires employees, and trains them to find good resale opportunities.From a tax perspective, the two cases are very similar, if not identical. But in the first case, as soon as the reseller stops reselling, the company is immediately worthless, while in the second case, the business retains assets that can be sold on to a buyer (for example, if the reseller's employees wanted to buy out the founder and run it themselves).Likewise, renting out a second bedroom on AirBNB is a job: part housekeeping, part marketing, part photography, part hospitality. As soon as you delist the bedroom, your job disappears.On the other hand, buying a bunch of condos and renting them out on AirBNB is a business: even if the units are delisted, the business retains assets that can be held for some other purpose, or sold on to another buyer.Of course there are some situations which fall somewhere in the middle: if you buy a new car, drive for Uber for a year, then stop driving, you technically have an asset (a year-old car) that can be sold to another driver.The point is not to make a hard-and-fast distinction, but to help guide your decision-making. If all you want is a job, then you can worry less about things like incorporation, insurance, and payroll. If you're building a business — something that you think you will or may sell on to a buyer in the future, then you're going to need to focus earlier on things like business processes, company policies, titling of company assets, etc.I've only ever been self-employed in jobs, rather than businesses. When I lived in a two-bedroom apartment by myself, I rented out the second bedroom. Then my lease ended and I moved; my job ended. I track my self-employment income and meticulously report it (as I recommend everyone does), but if I decided to stop blogging, my business assets consist in their entirety of an internet domain and the copyright on an out-of-date book. In other words, it's a job.If you decide to build a business instead, then think about what kind of assets you can build or invest in that will retain their value under a new owner:

• Real estate. If you want to build a hospitality empire, it's better to own real estate rather than sublet year-to-year leases, and if you want to build a reselling empire, it's better to own a warehouse than use your garage.
• Intellectual property and trade secrets. Of course you can file for patents and copyrights, but also consider other kids of intellectual property, like business practices, algorithms, and other trade secrets. 
• Client information. This is extremely common in the case of medical practices, lawyers, and financial advisers, where often the only thing that makes them businesses instead of jobs is their client list, since if the firm is sold many clients may stay with the practice even under new management.
• Equipment. There's a small chain of middle eastern restaurants in Cambridge, Massachusetts, called Clover, which has no distinguishing characteristic (the food isn't even that good, although it's good for Cambridge) except that they imported authentic Israeli pita ovens to bake their bread in. It's those ovens that give Clover value above and beyond the fact they occupy extremely valuable commercial real estate in one of the world's wealthiest cities.

Capital structure: borrow or sell?

Another reason the distinction between a job and a business matters is that it can help you decide how you want to finance your self-employment: by borrowing your startup costs, or by selling a share of the business's value. Alternately, this is the difference between self-financing or raising capital from outside investors.I say these are alternate ways of expressing the same idea because even if you don't need to actually borrow money, and are instead able to finance your self-employment entirely from savings, you should properly account for that drawdown in savings as a loan from yourself to yourself — you should only "loan" money to yourself if you expect your self-employment to have a higher return than your savings!If you are creating a job, then self-financing or borrowing money might be more appealing, since a lower percentage of your annual income will go to paying down the debt.If you are creating a business, then selling a share of the business's future value to outside investors may be a better option, especially if it allows the business's potential final value to rise faster.Finally, this introduces the question of risk. Different industries have acquired different norms for capital structure, partly due to nuances in the tax code, and partly due to real or perceived risks. For example, residential real estate has historically been viewed as a relatively safe business model, which increases the willingness of lenders to lend and decreases the appeal of selling shares (setting aside commercial property conglomerates like REIT's). After all, the more certain you are in the outcome of your investment, the less willing you should be to split the proceeds with outsiders.Conversely, new restaurants have historically had very high failure rates, which decreases the willingness of lenders to provide cash they're unlikely to see repaid, and leads outside investors to demand a relatively high stake in future earnings (this is why top restaurants are invariably owned by LLC's ending in "Group." Celebrity chef José Andrés is the face of the Think Food Group, for instance; it's a group of investors, not a group of restaurants).Your own decision whether to self-finance, borrow, or raise outside capital should certainly be informed by these norms, but not determined by them. There's an unfortunate tendency to believe that the only reason anyone should consider becoming self-employed is to become fabulously wealthy.But this isn't a law of nature or economics; if Danny Meyer wanted, he could have kept selling burgers and shakes out of a cart in Central Park. This isn't a criticism of Danny Meyer or the Shake Shack empire, it's merely to point out that how you decide to build and grow your job, or your business, is a choice, and there's no rule that says you have to make the decisions that leave you with the highest net worth on your deathbed.Become a Patron!

Personal finance during the plague: what I'm watching for

Become a Patron!As we near the end of the beginning of our public and private response to the coronavirus pandemic, there's obviously a lot to keep track of, and as we saw with the quickly-exhausted Economic Injury Disaster Loan and Paycheck Protection Program funds, waiting to act can be an expensive mistake.With that in mind, I thought it would be useful to organize what actions I'm watching for from state and local governments in the short-, medium-, and long-term.

Short-term: Pandemic Unemployment Assistance and new EIDL and PPP funding

These programs should be coming (back) online by the end of this month, so if you're interested and eligible for them you'll want to watch out for them.Pandemic Unemployment Assistance is short-term extension of unemployment insurance to populations that have traditionally been ineligible. This benefit was included in the last pandemic relief legislation, the CARES Act, so no additional federal legislation is needed. Like regular unemployment insurance, PUA will be administered by the states, so you won't be able to apply until your state makes its application available. Some states, like Massachusetts, have already launched the program, while others may not be operational for several more weeks. The three most important groups covered by PUA are the self-employed, workers who have their income reported on a 1099 instead of a W-2, and employees whose work history would otherwise make them ineligible for unemployment insurance.PUA recipients will receive the $600 federal top-up to their weekly benefit through July, 2020, in addition to the basic benefit calculated according to their reported income, and benefits are paid retroactively, so it will almost certainly be worth filing even if you have very low self-employment income. Since the benefit is paid by the states with federal money, I expect them to be extremely lenient when processing PUA claims.Next up, while it's not quite over the finish line, Congress is widely expected to appropriate additional funding in the coming weeks for the Economic Injury Disaster Loan and Paycheck Protection Program. It's safe to assume the funding will again be quickly exhausted, so you should be ready to apply as soon as applications are again being accepted.In case you missed it the first time around, the EIDL is essentially a grant of $1,000 per employee (include sole proprietors), up to $10,000. The application takes just a few minutes to complete, and the first tranche of payments was deposited very quickly — within a week or two in my experience. A typical sole proprietor or gig economy worker is probably only eligible for a single $1,000 grant, but be sure to think hard and claim any and all employees when you file. Lots of sole proprietors employ their spouse or kids, for example, even if all the income is ultimately reported on a single tax return.The Paycheck Protection Program is slightly related to EIDL, in that an EIDL grant can be converted into a forgivable PPP loan. The advantage of PPP loans is that they can be much larger than the maximum $10,000 EIDL grant. The drawback is that applications are processed by private banks, rather than the Small Business Administration, and many people found banks were unwilling to work with them unless they had an existing business relationship. Now that the banks have some practice processing these applications, hopefully people will find the process easier to navigate once more funds are made available.

Medium-term: Medicaid expansion, unemployment insurance extension, SNAP eligibility changes

These are changes that I don't yet see any momentum for, but that I think are likely to happen in one form or another as the crisis drags on.Most people under the age of 65 are covered by workplace-based health insurance: either their own, their spouse's, or their parents' (in the case of children under the age of 26). Most of the rest are covered by Medicaid, with the remainder either uninsured or covered by an Affordable Care Act marketplace plan. Nobody particularly likes this system (except private insurers), but it theoretically makes most people eligible for some form of health insurance, with one big exception: low-income people in states that have not expanded Medicaid. A few months ago, this was a fairly small, politically marginal population. But with a plague sweeping the country and millions of people thrown out of work and off their workplace plans, that population just got a lot bigger and a lot less marginal. There has been some emergency funding for coronavirus testing and treatment, but even during a plague people still need treatment for high blood pressure, diabetes, cancer, and all the other indignities of mortal flesh. Medicaid expansion funds are already available to the holdout states, and I suspect there will be enormous pressure to take the money as the uninsurance crisis develops in parallel to the pandemic crisis.Next, I'm keeping an eye out for future changes to unemployment insurance. In the CARES Act, Congress already provided funding to extend coverage from 26 weeks to 39 weeks, and provided roughly 16 weeks of the $600 "top-up" money I mentioned above. That means sometime beginning in August unemployed workers are scheduled to see their benefit cut by as much as 75%, depending on the basic benefit calculated by their state (my benefit is scheduled to fall by about 66%, for example). That is going to throw a lot of people who are just about managing to get by under quarantine into desperate poverty overnight. What happens next depends on both our progress against the virus and the state of the economy. If we've beaten back the virus sufficiently, Republicans may allow the federal top-up to lapse on the theory it will encourage workers to accept lower wages. If deaths are still high or even rising, and the economy is still in government-ordered paralysis, I would hope enough votes could be found for at least another 16 weeks of funding.Finally, we'll need to see what changes are made to SNAP eligibility and benefits over time. SNAP is the largest and most effective anti-poverty program in the country, since it provides "cash-like" benefits to low-income workers. However, under normal conditions it has an extremely punitive eligibility structure: low-income people who are out of work (or work less than 20 hours per week) are only eligible for 3 months of benefits every 3 years. That restriction has been suspended for now, so unemployed people can receive benefits without working during the crisis. As with unemployment insurance, the political battle to allow benefits to continue to flow will depend in large part on the progress of the struggle against the virus and the state of the economy.

Long-term: temporary, semi-permanent, and permanent changes

Here are just a few of the long-term possibilities I see emerging from the present moment. They aren't the only ones, and I'm not trying to prophesy the future, but merely suggest the kinds of changes I expect to see over the next, say, 1-5 years.First, the CARES Act included a one-year suspension of required minimum distributions from pre-tax ("traditional") retirement accounts. The purported logic here was that it's "unfair" to "force people to sell" after a market crash. I say "purported" because the supposed explanation doesn't make any sense: you don't have to "sell" anything to make a distribution, since you can use the distribution to buy the same assets in a regular brokerage account. What is true is that you have to pay taxes on the distribution, and any future dividends and appreciation will be taxable. In other words, the RMD suspension is simply a tax cut for high-income people with large IRA and 401(k) balances. After enjoying their one-year suspension, there's going to be enormous pressure from this powerful constituency to continue it, on a temporary or permanent basis. In 2021, they'll argue that the markets haven't recovered to their previous peak. In 2022, they'll argue that while the nominal value has recovered, that's not taking inflation into account. In 2023, they'll argue that really they shouldn't be forced to make withdrawals until the market recovers to its previous trendline. And finally, 4, 5, or 6 years from now, they'll argue that they made financial plans based on the suspension of RMD's and they would have invested differently if they thought the suspension would ever really end, so it's unfair to start requiring them now. Trust me: this is how rich people think.Second, on a more hopeful note, tens of millions of formerly middle-class people are encountering the welfare state for the first time, and it's hopefully making an impression. On the plus side, new Medicaid enrollees are going to discover how much better it is than their employer-based insurance: no premiums, no co-pays, no deductibles, and comprehensive dental and optical coverage. It's hard to imagine many of them wanting to go back, which will hopefully create additional pressure for Medicaid for All, or at least an optional Medicaid buy-in for employers. On the negative side, people are discovering that the back-end systems which process welfare claims have been starved of resources for decades (something the poor could have told them, if it ever occurred to them to ask). Hopefully that will lead to some kind of consensus for modernization and streamlining. For example, my state uses three different, totally independent systems to process Medicaid, SNAP, and unemployment insurance enrollment, even though the exact same information is required for all three programs.Finally, brand new programs have been introduced on a temporary basis, and workers have had the chance to experience what a fully-functioning welfare state might look like. For example, the Families First Coronavirus Response Act introduced workers to the idea of paid family and medical leave for the first time, on a temporary and limited basis: it primarily benefits workers who are forced to stay home to care for a child whose school or childcare center has been closed due to the plague. But there's obviously nothing special about the coronavirus in this respect: people have to stay home to care for children for all sorts of reasons, and some people will surely come to realize paid family and medical leave needs to be a permanent fixture covering a much broader range of life events. Obviously not everyone caring for a child at home is going to become a paid leave advocate, but equally obviously some of them will.

Conclusion

Reading over the above, I realize that I might come across as optimistic, which is totally wrong. The virus is deadly, the pandemic is severe, and I am not at all optimistic that we will have effective treatments or a vaccine anytime soon. I am not optimistic that the virus will recede during the summer, and if it does I am not optimistic it will not surge back into an unprepared population in the fall. If Democrats win the Senate and presidency in November, I am not optimistic that Republicans will not sabotage virus preparedness in order to increase the death toll. In fact, I am certain they will.But what I am is hopeful. I think people eventually respond, sometimes frustratingly slowly, to their material conditions, and the plague has exposed to more people than ever a rot in our material conditions that was allowed to fester too long. The urge to slap a coat of whitewash on the rot will be incredibly strong, there will be enormous, well-funded political pressure to do so, and it's certainly possible that we succumb to it.So I am not optimistic, but I am hopeful.Become a Patron!

Personal finance during the plague: self-employment (1)

Become a Patron!I've been self-employed for a long time now, and loyal readers know I'm a relentless advocate for self-employment. As I never tire of saying, not everyone should be self-employed because not everyone wants to be self-employed, but a lot more people should be self-employed than currently are. Since I'm writing this series on personal finance during the plague, I want to take the opportunity to recapitulate some of my typical arguments, and make a few more, in the context of the present crisis.

Your job is gone and it's not coming back for a long, long time

The speed and scale of job loss in the last month has been staggering, with no historical precedent I'm aware of. Even during the Great Recession professors continued to teach, civil servants continued issuing marriage licenses, librarians continued filing books (or in my case, archiving Civil War-era sheet music), restaurants kept preparing meals, and bartenders kept mixing cocktails. Last month, all those jobs disappeared.Of course, jobs are lost all the time, and most people who lose a job find a new one relatively quickly. Even in a city with a thriving restaurant scene, some restaurants are always closing and their employees lose their jobs. The difference is that most of those employees, most of the time, are usually able to find relatively similar work relatively quickly. Even in industries that have steadily shrunk their overall employment over time, like manufacturing, most laid off employees will find new work fairly quickly, while others who are already near retirement may choose to accelerate their plans and retire at age 62 instead of 65 or 70.When today's emergency restrictions are lifted, the situation will be totally different. Some furloughed employees will be able to return to work relatively quickly, while a huge amount of economic activity will be permanently displaced. Do not confuse this for pessimism; my preference would be for an enormous amount of economic activity to permanently disappear. Of course there will still be work for the best fine dining chefs, the best servers, the best sommeliers, the best mixologists, and the best hosts (or at least the ones with the best connections). But statistically, that's just not very likely to be you.In other words, waiting for "your" job to come back is a fool's errand, and just puts off making the decision about what you will do next.

But unemployment benefits have been extended and expanded!

Time for the good news: if your work history makes you eligible for unemployment benefits, you'll receive a $600 weekly bonus payment (as soon as your state gets its act together) until July 31, and are eligible to receive your standard unemployment insurance benefit for 39, rather than the usual 26 weeks. If the crisis persists, I suspect the federal top-up payment will be extended as well, although that's just speculation at this point.Additionally, the weekly work search requirements to continue receiving unemployment insurance have been suspended in most, if not all states.In other words, you've got between 4 (with federal top-up) and 9 (excluding the top-up) months to figure out what to do next. My suggestion is: self-employment.

Self-employment lets you earn income without threatening your benefits

Here it's important to understand a few different moving pieces of the US welfare state.First, health insurance. There are essentially three ways people below age 65 can receive health insurance: employer-sponsored insurance, subsidized ACA exchange plans, and Medicaid. The most important thing to keep in mind is that if your employer offers health insurance meeting certain minimum requirements, you are categorically ineligible for ACA exchange subsidies and Medicaid. That means every time you move between employers that offer health insurance, your income can fluctuate much more wildly than the difference in your pay: earning $60,000 per year at a company that covers the full cost of health insurance and earning $60,000 per year at a company that requires you to pay $1,000 per month for a plan with a $13,500 out-of-pocket maximum is the difference between earning $60,000 per year and earning $34,500 per year in take-home pay. This is the primary reason people overestimate the difficulty of becoming self-employed in the United States: they want to match their self-employment income to their employment income, without taking into account that their employment income was actually much, much lower than the number printed on their paystub.Second, the Supplemental Nutrition Assistance Program, which old people still call "food stamps" for the same reason they call the Czech Republic "Czechoslovakia." SNAP benefits are based on monthly income, starting at about $194 per month in benefits for single adults, and decreasing as monthly income increases. This functions as a base income of $2,328 for unemployed single adults, and is the most important remaining anti-poverty measure in the US toolkit. But SNAP benefits come with an important restriction: while those working 20 or more hours per week are eligible for indefinite SNAP benefits, you're only eligible for 3 months of benefits every 3 years while working less than 20 hours per week. That means it's essential, in order to continue to qualify for SNAP benefits, to work for 20 hours per week or more. For this purpose, hours spent on self-employment count as hours worked. Here, the so-called "gig economy" is illuminating. I'm on the record that the idea of classifying Uber drivers or delivery personnel as "independent contractors" is an absurd violation of federal law, and I'm glad that states have ever-so-tentatively started to crack down on the practice. But when it comes to SNAP benefits, the gig economy is your friend, since every hour you spend on self-employment is an hour worked, whether or not you're being paid for it. You don't need to be logged into any app in order to be working, if you're working for yourself. When you're washing your car, you're working. When you're getting gas, you're working. When you're on private forums encouraging drivers to organize for better pay, you're working. This makes it easy to trigger the weekly work requirements of programs like SNAP. I cannot stress enough, this is not fraud: this is the gig economy. If your boss says you're self-employed, you better act like you're self-employed.

You're gonna like the way your taxes look

The final piece of the self-employment puzzle is benefits administered through the tax code. The most important of these are the Earned Income Credit, the Retirement Savings Contribution Credit, and contributions to individual 401(k) plans.The Earned Income Credit famously phases in along with income, plateaus, then phases out as income rises past a certain point. Importantly, self-employment income counts as earned income. That means if your income year-to-date is below the phase-out point, and especially if it's below the plateau point, you don't suffer any penalty by earning additional income, and may actually increase the amount of your refundable credit (depending on how much you earned so far in 2020).The Retirement Savings Contribution Credit is not refundable, but can be used to offset any tax owed, including the repayment of ACA subsidies. For low-income self-employed people, this is a brilliant strategy, since it turns Roth IRA contributions into turbo-charged traditional IRA contributions: the Roth IRA permanently shields your contribution from dividend, capital gains, and income taxes, and also generates a credit to offset ordinary income taxes.Finally, self-employment gives you access to individual 401(k) accounts, which allow you shield the usual $19,500 in annual income from taxes, while also making "employer" contributions much more generous than any employer you've ever had.

Conclusion

Self-employment is a vast subject, and self-employment during the plague is self-employment on steroids, so I'm going to leave it here for now. There is, of course, much much more to come on this subject.Become a Patron!

Personal finance during the plague: real estate

Become a Patron!Assuming you've already read my March 22 introduction to personal finance during the plague, you're already well on your way to getting approved for unemployment insurance, SNAP, Medicaid, WIC, and any other welfare programs you might be eligible for.So in today's edition of "personal finance during the plague," I want to take a look at an issue that should be on everybody's mind, in one form or another: real estate.

Renting

I'm a renter, and it so happened that in the weeks leading up to the plague I was looking for a larger apartment. We looked at quite a few units, but didn't end up making a decision before we were put under quarantine and the search ground to a halt.The most recent analogy to our present economic crisis is the Great Recession, which featured devastating job losses while leaving the country's physical infrastructure intact. If you were lucky enough to keep your job in 2008-2009, you had your pick of deeply discounted rental units as vacancies stretched from months into years.For a variety of reasons, landlords have historically been extremely reluctant to actually lower the monthly rent they charge. Discounts instead often take the form of some number of months of "free rent" at the beginning or end of your lease, or in waived application fees. In my city those application fees, which can include credit check fees, "move-in fees," "key fees," etc., can stretch into the many hundreds of dollars.Unless you track rents closely, you'll probably see higher vacancy rates first appear in the form of those discounts. As unpaid rent mounts and evictions begin in 2-4 months, many more units should come onto the market. If you're planning to move only opportunistically, then you may want to hold out for at least 2 months in free rent, or a comparable (~15%) drop in monthly rents. If your need to move is more urgent, then you might look for landlords offering discounted short-term leases, or who are willing to waive application and move-in fees.It's never been clear to me why tenants are expected to pay those fees in the first place, except that housing is so scarce that they can be coerced into doing so.

Owning

If you live in your own home: congratulations! Your situation is a little less parlous than your renter comrades. But you've still got some important decisions to make. There are three main issues to consider.If you have a mortgage on your home, lost your job, and are unable to make your payments, then stop paying immediately. Every payment you make after the last one you can afford is a total loss; in foreclosure, your property will receive much less at auction than you owe, and your equity will be wiped out.Obviously there are exceptions. If you're one payment away from paying off your loan, you should make that last payment even if you have to rob a bank to do it. But most people, most of the time, will simply be throwing good money after bad by making mortgage payments they can't actually afford.If you have a mortgage, kept your job, and are able to keep making payments comfortably, then consider refinancing your mortgage. It's true rates have been low for a long time, but if you shop around you might find they're even lower than the last time you checked, especially if you have good credit and a well documented income history.Mortgage finance is extremely boring so I have endeavored to learn as little about it as possible, but as a rough rule, the closer to the beginning of your mortgage you are, and the bigger the difference in interest rates is since you borrowed, the more you'll save refinancing your mortgage. The closer to paying off your mortgage you are, and the smaller the interest rate difference, the less you'll save, due to the fixed costs lenders charge when originating loans.If you own your home outright and kept your job, you're in the best position to maximize the opportunity offered by the plague. In the simplest form, you can simply take out a low-interest home equity line of credit in order to maximize your IRA and 401(k) contributions this year. Since the $6,000 IRA and $19,500 401(k) per-person contribution limits are based on the calendar year, they're "use it or lose it;" once the calendar year ticks over, you'll never be able to shield those assets again. That's why borrowing — at a sufficiently low interest rate — as much money as you need to hit those limits is a no-brainer.

Buying

Buying during the pandemic is much like renting, but with additional complications. On the one hand, properties that were already on the market are likely to see large discounts as sellers become even more motivated. If the depression lasts long enough, owners who need to sell due to job losses will also be flooding the market with new properties. The flip side of that is owners who might have considered selling at the previous high-water mark will likely shelter in place and feel no urgency to move if it means accepting anything less than the highest Zillow score their home ever received.In our area, we've seen home prices drop far more than rental prices so far, as sellers become more motivated, more quickly than landlords. As the depression wears on, I believe rental prices will drop further; home prices remain an enigma for now.Finally, keep in mind that while your lender or title company might be willing to make accommodations to avoid in-person inspections and appraisals, you're the one who is going to have to live in the home: if you can't get a house thoroughly inspected, you shouldn't pay as much for it as a house that has been thoroughly inspected!

Landlording

If all the foregoing hasn't been clear enough, if you're a landlord, you need to be giving your tenants a break right now. However much personal financial angst you're feeling, your tenants are feeling much more, and you need to do whatever is in your power to give them peace of mind that they're going to have a safe place and roof over their head as they ride out the plague.This is also a good opportunity to consider converting short-term AirBnB or VRBO rentals into actual housing. The logic of buying cheap properties and renting them at high nightly rates might have made sense when you were able to rent them at high nightly rates. Since that's not going to be an option for the foreseeable future, you might consider simply renting them to long-term tenants at competitive rates. It's not particularly sexy, but I don't see anything sexy about owning a bunch of vacant apartments, either.Become a Patron!

After the plague: an economy of addition or subtraction?

Become a Patron!I got a nice response to my first post on personal finance during the plague so, as long as we're trapped inside together, I'll be sharing some more thoughts on what the pandemic means and how we can choose to respond to it.Over the past few months, a lot of people have stumbled into an uncomfortable truth: as Mindy Isser elegantly put it in Jacobin, Workers Are More Valuable Than CEOs. Doctors are essential, hospital billing departments are not. Teachers are essential, charter school lobbyists are not.When our our sclerotic Congress finally authorized universal cash transfers and expanded unemployment benefits they were making the ultimate concession: money is essential, work is not.I call this the ultimate concession because it betrays the lie at the heart of the capitalist order, which is that the only economy possible is the economy of subtraction. The economy of subtraction is expressed in its purest form by the concept of "full employment." Full employment is when everyone is doing something (the high priests generously excuse students and prisoners from their calculations), without regard to whether what they're doing has any value. Everyone who could be doing something, but isn't, is thus both a personal failure and a systemic failure: you can blame fiscal policy, monetary policy, education, the family, the quality of video games, but you must find someone to blame for the failure.The plague has forced on a reluctant population, and even more reluctant lawmakers, the opposite scenario: an economy of addition. Since the nature of the virus means as many people as possible need to isolate themselves until the threat has passed, instead of asking the welfare-state, means-tested, work-requirement question "is there something you can do?" we're asking the human question, "is there something you must do?" Farmworkers must work so that food is produced. Truck drivers and train conductors must driver and conduct so that food can be delivered. Utility workers must maintain our infrastructure so that we can communicate. Grocery workers must stock shelves so that people can find what they need as quickly and efficiently as possible.The present moment is proof, if you needed it, that the economy of subtraction is not the only economy that's possible, and whether or not you and your work have been deemed essential, you're now experiencing what the economy of addition looks like. Less driving, more time with your family, pets, and sourdough starter, more chores getting done on time, more long walks, more time with your neighbors and less time with your coworkers, and less driving (I know I already mentioned that, I just really hate driving).There are also things you're no doubt missing: travel, sports, dining in restaurants, conventions, festivals. But the economy of addition doesn't preclude any of those things. It merely says that if they are worth doing, they are worth paying for. The economy of subtraction blackmails people into unnecessary work with the threat of poverty, homelessness, loneliness, and an early death. But we are now living proof that we don't need those threats to survive, we've simply chosen to use them in order to enrich a tiny class of wealthy perverts.Today's most fashionable cliche is that we've put the economy "on pause" and are waiting for the plague to pass so we can enjoy a "snap back" or "v-shaped" recovery. If the economy of subtraction worked for you before the arrival of the plague, you're properly eager for its return as well. But this interlude shows that we have had a choice all along: a universal basic income, Medicaid for all, a living wage, paid family and medical leave, tuition-free higher education, and a Green New Deal won't be easy to win. But don't let anyone tell you they're impossible: you're living proof that they're just within reach.Become a Patron!

Personal finance during the pandemic

Become a Patron!As you may have heard, the world is in the throes of a new, as-yet-untreatable, easily-communicable, fairly-deadly virus. I'm not going to tell you to wash your hands, stay home, maintain physical distance, etc. You already know that, unless you're a dedicated OANN viewer. Instead, I want to share a few suggestions about how I'm thinking about the pandemic from a personal finance point of view.

Don't rush to buy

I am what you might call an indiscriminate buyer of stocks: I contribute to my IRA every week, on the same day (it's Wednesday, if you must know), and receive that day's price. When the market is overvalued and doomed to decades of sub-par returns, I buy. When the market is undervalued and prepared for a huge run-up, I buy. In every market cycle, there will be times when the absolute peak falls on a Wednesday, and I get screwed. In every market cycle, there will be times when the absolute bottom falls on a Wednesday, and I look like some kind of genius. On average, over the next 40 years, I figure my returns will look like the market's: I'll get my share of the profits of publicly traded companies. Definitely no more, but hopefully not too much less.The markets have fallen a lot in the last few weeks — stocks are on sale! But if I max out my IRA contribution today, and the markets fall another 80% by the end of the year, I'll have missed out on 9 months of lows. So, I'll just keep plugging along.

Do rebalance

That being said, if you have a well-diversified, long-term target asset allocation, it's definitely out of whack by now. All but your safest, shortest-term bond funds have likely fallen somewhat, while your stocks have been gutted. That means it might be time to take a look at your portfolio and rebalance your holdings. But remember, you're not trying to "buy low," you're trying to bring your actual asset allocation in line with your target asset allocation.This is true even if both your stock and bond funds have lost value: a 60/40 stock/bond portfolio where the stocks have lost 35% and the bonds have lost 10% is now a 52/48 portfolio. That's not your target allocation, so it makes sense to rebalance back towards stocks. You can think of this as "buying low" if you absolutely must, but that's not the point: the point is to bring the actual risk exposure of your portfolio back in line with your target risk exposure.

If you kept your job (or at least your income)

If you have a job that has to be done during during the crisis, are able to telework, or work for an employer that has been bullied into paying employees while they're stuck at home, congratulations! The good news is, as you've no doubt already noticed, you're spending a lot less money. You're saving money on commuting costs, putting less wear and tear on your clothes and vehicles, and shopping, eating and drinking out less (takeout and delivery only, please!).There is some hope that in the emergency bill forthcoming from Congress we may see unconditional cash transfers to some, if not all, adults and children; the most prominent current suggestions are in the range of $600 to $2,000 per adult. The most ambitious proposal, from Rashida Tlaib, includes recurring $1,000 monthly transfers until the crisis is past.The first, most obvious suggestion in these conditions is to build up a cash cushion, if you don't have one already. You may have dodged the first bullet, but that's no excuse to tempt fate. You may know, in the abstract, you need 6 months of living expenses in safe, liquid assets. But think about what that means: what are you going to use to pay your bills if you don't have any income until November 1? If you don't have an emergency fund already, your first priority should be using the money you're saving to build up that fund. I'd suggest a high-interest rewards checking account, but I'm already a broken record on that front. Keep it under your mattress if you insist, just keep it.Second, support local businesses. I promise you that Amazon, Walmart, Target, and CostCo will still be around in a year. It's not clear that many local restaurants and retailers will be. I'm not suggesting you splurge, and I'm not suggesting you buy gift cards you'll never use as some weird kind of charity (depending on the gift card issuer, the store may not even receive the cash until the card is redeemed). I'm just saying, if you like your local Thai restaurant, see if they're still offering pickup or delivery, and eat some Thai food. If you like your local bookstore, see if they'll deliver or arrange special social distancing hours like Capitol Hill Books here in DC.Third, consider taking out a low-interest or no-interest loan as a supplementary emergency fund. As the economic crisis unfolds, there's going to be a credit crunch, which means the right time to take out a loan is before you need it (and while you still have verifiable income). Lots of credit cards offer 12-15 month 0% introductory rates (I personally like the Chase Slate for this purpose), and home equity lines of credit can still be obtained with very favorable rates. With rock-bottom Federal Reserve targets, interest rates themselves are unlikely to increase, but underwriting standards will grow more and more strict until the credit markets seize up completely. It's better to take out a 0% APR loan you don't need now than a 25% APR loan when you do.

If you lost your job

Whether you're "furloughed," "laid off," "fired" or "made redundant," losing your job sucks, plain and simple. If you lose your job in the face of this crisis, you need to very quickly evaluate your options.The most important, basic assumption is that you're going to be unemployed for at least 6 months. Even in a healthy economy, there's plenty of job turnover: dental hygienists move from one practice to another for better pay, hours or benefits. Construction workers have a few weeks off after one job ends and another starts. Adjunct professors may or may not pick up a class or two between Spring and Fall semesters.This isn't like that. If you are newly unemployed, plan on being unemployed for a while.File for unemployment insurance benefits immediately. Our unemployment insurance system is designed to be deliberately slow, on the assumption that most laid-off workers will receive one or two more paychecks (for the last few weeks they worked), and most unemployed people will be rehired within a few weeks. That means you need to file for unemployment insurance immediately. You still won't receive your first check for 2-4 weeks, but the sooner you set the process in motion, the sooner you'll receive your benefits and be able to develop a plan.Apply for Medicaid immediately. If you have an ACA marketplace plan, or employer-based insurance, you should apply for Medicaid the second you know you're being laid off. Medicaid is premium-free health insurance with no deductibles and no co-pays; it's the insurance all Americans deserve. Fortunately, once you apply you're usually eligible for retroactive coverage, but applying and qualifying can be tricky, and the sooner you start the process the sooner you're likely to complete it. So-called "COBRA" coverage is often suggested as a stop-gap measure, because of its optionality: if you use your COBRA coverage during the period after unemployment, you can pay for retroactive coverage; if you don't, you don't have to pay. Under the present circumstances, this stratagem is absurd: apply for Medicaid immediately.Apply for SNAP immediately. The Supplemental Nutritional Assistance Program is the most comprehensive welfare program remaining in the United States — but the requirements are even more onerous than for Medicaid, and you may need to submit documents multiple times before your state or territory accepts them. Once you're approved, you'll receive a debit-style card that can be used to pay for unprepared food at most grocery and convenience stores.

Conclusion: figure out what you owe to whom

So far, so good, right? Lots of paperwork to fill out, but you've got lots of free time, and most of the documents can be filled out online. Now we need to talk about the serious stuff.If you're a singer, or a dancer, or an orchestra performer on Broadway, you're not going back to work anytime soon. But if you're a singer, dancer, or orchestra performer on Broadway, you're also probably renting an apartment somewhere in the greater New York metropolitan area you can't afford anymore. You do not owe your landlord rent you cannot afford to pay.I want to be as clear as possible: the problem is real. The problem is your newly-limited financial resources. The solution cannot be paying the people who harass you the most at odd hours, or the people who have the most control over your credit report, or the people who threaten to shut off your water, or electricity, or internet, or phone service.You have real obligations to real people: if you have roommates, they might not be able to cover your share of the rent if you bail. But you also have obligations to yourself, your friends, and your family. And as the crisis progresses, the tradeoffs between those obligations are going to require a real moral sensibility.I'm not here to tell you which obligations, to whom, should command your newly-limited resources. That's a question you need to answer for yourself. But I am here to tell you that your new job is to figure out what your moral sensibilities are, so you can fulfill as many of the obligations that matter to you, whether that's to your family, your friends, your roommates, your landlord, or your bank.Become a Patron!

The Danger Is Still Present In Your Time

Become a Patron!The other day I saw an amazing tweet by someone who had turned the famous "long-time nuclear waste warning message" into an iconic "Live Laugh Love"-style etched board:Every line is funny and poignant in its own way, but the one that keeps coming back to me is, "the danger is still present in your time," because this is the most important warning while also being the warning it's hardest to actually believe.After all, the world is full of sacred, forbidden spaces. But today, they are typically sacred and forbidden to "someone else." The chief rabbinate of Israel teaches that it's forbidden for Jews to walk on the Temple Mount in case they accidentally set foot in the Holy of Holies. But access is permitted to Muslim and gentile visitors.So how do you convey to future generations that you are not expressing superstition, or paranoia, or religious fervor, but conveying a concrete, material, ongoing fact about the world? How can you convince people the danger is still present in their time?

The Danger Is Still Present In Your Time

A lot of people are paid a lot better than me to think and write about risk. The importance of taking risk, the danger of taking risk, the rewards of taking risk, an unfathomable amount of digital ink has been spilled on all these topics.But I'm not certain any of it has done a lick of good. If you tell me you want to invest in a conservative 60/40 stock/bond portfolio, I can tell you that means the value of your portfolio will drop by 48% at least once in your lifetime, and by 30-40% at least two or three times. That simply describes one 80% fall in the stock market and two or three 50-66% falls in the stock market, assuming that the bond portion of your portfolio maintains its value during those downturns (no sure thing, of course!).But just because I know that it will happen doesn't mean I know when it will happen. And the fact is, it might happen the day after you make your investment. It might happen the very day you make your investment! Imagine that: you deposit $1,000 in your account at 9 am and at noon it's worth $520. The fact that it was carefully invested precisely according to the risk you thought you could tolerate at 8:59 am is awfully cold comfort.

Risk tolerance is real

I don't mean to come across as overly pessimistic: risk tolerance is real. I have an extremely high risk tolerance and I've taken advantage of the present market excitement to very gradually shift out of my rapidly appreciating put strategy ETF into newly-cheap stock market mutual funds, and if the market falls further I'll buy even more. That's because I'm basically indifferent to the value of my portfolio, since I don't have any intention of drawing on it for another 25-35 years.When the next, inevitable crisis of capitalism comes in 8 or 12 years, I hope I'll face it with the same good humor, but I'm not sure I will. My retirement accounts will be worth two or three times as much, so the same 50% drawdown will hurt three times more. A $10,000 drop caused by COVID-19 doesn't seem like much, but a $30,000 drop caused by COVID-20 will surely sting. That's a year of college tuition, a new furnace, a kitchen renovation, or whatever else it is people ten years older than me spend their money on.

Conclusion

Nobody is intolerant of upside risk: an investment with a 90% chance of returning 6% per year and 10% chance of returning 100% per year is a no brainer, despite its extreme unpredictability. The only risk tolerance that matters is the tolerance for risk you demonstrate when markets eventually turn against you.What everyone needs to, but no one does, understand is that "eventually" might be a lot sooner than you think: the danger is still present in your time.Become a Patron!

Three approaches to cutting federal bonds out of untaxed accounts

Become a Patron!Last month I wrote about the curious fact that mutual funds designed to be held in retirement accounts, where their distributions are generally untaxed year-to-year, nonetheless hold federal bonds that are exempt from state income taxation. I suggested that it should be possible to optimize your retirement account holdings by replacing those federal bonds with taxable corporate bonds.Once I get an idea in my head it's hard for me to let go of it until I follow it to its end, so I decided to see if there was an easy way to make the swap.

How to think about your federal bond holdings

As I wrote in the previous post, if you own virtually any target retirement date or target risk fund, or a total bond market index fund, you probably own a lot of federal bonds simply because they constitute such a large share of the US bond market: about 43% of Vanguard's Total Bond Market Index Fund, for instance, is in federal bonds, and about 35% of its income is attributable to federal sources.What this means is that when you own the Total Bond Market Index Fund, either as a separate mutual fund or ETF or in a packaged target retirement date fund, you're saying you are willing to accept the interest rate the fund pays, given the volatility of the fund and the safety of the fund.When you hold the fund in a tax-advantaged account, however, you are also "paying," in the form of a lower interest rate, for a benefit the fund offers all shareholders, but which you are not using: the exemption from state income taxes of the federal portion of the fund's income stream.Logically, there are three ways you can "cash out" the value of the state income tax exemption you're not using. For these examples, I'll be using the following funds in case you want to check my math or strike your own balance:

• VTBIX to represent the total bond market;
• VCSH to represent short-term corporate bonds;
• VCIT to represent intermediate-term corporate bonds;
• VCLT to represent long-term corporate bonds;
• and VGSH to represent short-term federal bonds.

Option 1: match yield, minimize duration

"Duration" is a term of art that refers to the sensitivity of the price of a bond (or bond mutual fund) to changes in interest rates. A short-term bond has a lower duration because changes in interest rates don't have a big impact on its price: since the bond will mature soon, you can reinvest the principle at the new interest rate frequently. A long-term bond has a higher duration since you have to wait a long time to take advantage of higher interest rates, while if interest rates fall you can happily collect your legacy coupons for years to come.All else being equal, for any given yield, you should prefer your bonds to have a lower duration, thereby reducing their price volatility. As of the time I ran my calculations, you can match the 1.95% SEC yield of VTBIX with a combination of 73% VCSH and 27% VCIT. While offering the same SEC yield, by excluding the long-term bonds present in the total market fund, this corporate bond portfolio has a much shorter duration: 3.57 compared to 6.26.In this option, you're exchanging the unused state income tax exemption for a much lower level of price volatility.

Option 2: match duration, maximize yield

Since we specified at the outset that when you own VTBIX you're implicitly accepting the exposure to changes in interest rates embedded in that fund, another option is to try to match that interest rate exposure while exchanging the state tax exemption for higher-paying corporate bonds.In principle you could achieve this in almost unlimited ways, but I found a simple equilibrium in a corporate bond portfolio of 12% VCSH, 82% VCIT, and 6% VCLT. This portfolio has a duration of 6.24 (still slightly lower than VTBIX) and an SEC yield of 2.31%, about 18% higher than VTBIX.

Option 3: match Treasuries, optimize something else

At this point you might be scratching your head and saying this whole experiment has gone too far. We started with a minor observation about an unused tax benefit, and now we're cutting Treasury securities out of our retirement portfolio entirely? And you're exactly right: remember that Treasuries have not one, but two advantages. The income they generate is generally exempt from state income taxes and they're completely safe (if held to maturity).While the corporate bond ETF's I've been using to illustrate these options only hold investment-grade securities, anyone who lived through 2008 knows that the term "investment-grade" can conceal just as much as it reveals. That being the case, you might simply chop your bond holdings into two categories: the federal bonds you hold because they're ultra-secure and the corporate bonds you hold to optimize some other value, like yield, duration, or credit.As mentioned, VTBIX holds about 43% of its value in federal securities. If that's the level of Treasury security you want in your domestic bond portfolio, you can simply allocate 43% of your domestic bond portfolio to a short-term bond ETF like VGSH. With that out of the way, you can set about optimizing your corporate bonds for some other value. Portfolio Visualizer has a nice, free tool that lets you optimize a portfolio for things like Sharpe ratio or risk parity (note: I have nothing to do with Portfolio Visualizer and don't vouch for any of their tools or results).

Conclusion

As a general rule, bonds are helpful to have even in the most aggressive investment portfolio, not because they're expected to contribute to total return, but because their imperfect correlation with stocks means they periodically present opportunities to rebalance into higher-expected-return assets. Treasury bonds offer the additional advantage of a federal guarantee of their value (if held to maturity) and exemption from state income taxes.In tax-advantaged accounts, you may well value the imperfect correlation of investment-grade bonds with stocks, and you may well value the federal backing of Treasury securities, but you should not value the state income tax exemption at all: you're not paying state taxes on the income either way. That means there should be some margin at which you're willing to shift away from the default allocation to federal bonds, either in order to reduce your risk even more, to collect additional yield from investment-grade corporate bonds, or to optimize your portfolio across both risk and yield.Become a Patron!