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Persfi/–“/dt1st/lk2nd By SCOTT BURNS Not long ago I had dinner with a very wealthy man. His investments start in millions, his spending is in thousands, he arrives and departs by his own jet, and he has more money invested in wine than most people have in their 401(k) plan. He is also a tough guy with a big heart. But even now, in his 50s, he is afraid of being as poor as he was as a child. Decades after having been poor, he still spends much of his time proving to himself that he is not poor and that he has plenty of money. Others can be poor and not know it. I was poor during the first 10 years of my life. I lived in rented rooms with my single-parent mother. In one place we cooked our meals on a hot plate in a basement room that had been converted from coal storage. In another, we lived in a room in a house that had no indoor plumbing. And we moved a lot. By any measure, we were poor. I did not know it, however, until I became a millionaire’s stepson. Which raises an interesting question: How do you know if you are poor? And should it matter? I am serious. The most consistent fear that most people have is the fear of being poor. If they could lose that fear or discover that it didn’t really matter, their lives would be more peaceful and less anxious. I know this from 20 years of reader letters. In fact, one of the least understood facets of our society is that you can take an enormous economic fall and still be in good shape. You can have a nice life, even by material standards. You will be poor only if you measure yourself against the bizarre but well-publicized habits of sports figures and top executives. Let me spell this out as concretely as possible. In 1995, according to U.S. Census Bureau reports, the poverty threshold for a single-person household was $7,763; it was $9,933 for a two-person household, and $12,158 for a three-person household. Many families spend as much on car payments. In spite of that, more than 90 percent of households below the poverty line have a kitchen range, a refrigerator and a color TV. Indeed, if you consider access to telephones, clothes washers, clothes dryers, microwaves, etc., there is little visible difference between the poor and non-poor. Indeed, recent figures indicate that the affluent are shopping at discount stores, having adopted some of the shopping habits of those with less income. A 1995 study from the National Center for Policy Analysis found that more Americans at the poverty level owned dishwashers than families in the Netherlands, Italy or the United Kingdom. It also found that more of our poor owned microwaves than the people of any nation in Europe, and that our poor owned more clothes dryers than the people of affluent Sweden. Needless to say, this level of income won’t take you to dinner at fashionable restaurants, won’t buy a luxury car, and won’t put gold faucets in one of the bathrooms no one ever uses. It will allow you to eat regularly, to go to dollar movies or rent videos at the grocery store, to have a margarita at Taco Cabana, to buy clothes at countless outlet stores, and to do any number of things that are part of the American experience. You could also be a homeowner, though it would help to have paid for it before your income declined the experience of many elderly people. This level of income may also allow you to experience more of life, not less. You’ll just have the experience in Peoria instead of Nepal or Tuscany. If you’re really fortunate, you might even develop deep feelings of superiority to all those poor souls who believe there will be less of them without more things. Millions of people are sublimely happy substituting spiritual life for material life. The bottom line: We can and should save, invest and try to create personal wealth. But the actual amount isn’t nearly as important as how we deal with it. Questions & answers Question: I am 26 and one year out of law school. I am an associate at a small firm where I earn $31,000 a year, plus an annual bonus, which is usually about 10 percent of salary. My employer has a profit-sharing plan, so I am an active participant in an employer-sponsored plan. This means no 401(k). Unfortunately, very little money ever goes into the profit-sharing plan. So I have opened and fully funded a Roth IRA. I still owe about $8,000 on a 9.25 percent car loan and about $30,000 in student loans at 8 percent. What should I do with any leftover cash? Should I put more money away for longer-term growth, pay off my car and student loans, or do a little of each? I know that conventional wisdom says to pay off consumer debt before doing long-term investing, but the outstanding debt is at an interest rate that can be beat with long-term investing, i.e., the 10 percent to 12 percent of a growth stock fund. See my confusion? If I am to invest long term, how should I do it? S.M., in Ohio Answer: Don’t be so quick to dismiss the cost of consumer debt. Getting an after-tax return of 8 percent isn’t a lead-pipe cinch. For someone just entering the 28 percent tax bracket, as you are, your 8 percent interest cost translates into an 11 percent pretax return, which is competitive with common stocks except that the return on loan reduction is a sure thing. My suggestion: Work on paying down the student loans. The more you repay in your current tax bracket, the less you’ll have to repay with after-tax income from a higher tax bracket. In addition, $30,000 of student loans is a big lump. It will interfere with any home- or condo-buying plan you may have in a few years and generally make a mess of your finances. Q: I have about $250 a month that I put into extra payments on my only debts, a home mortgage and an auto loan. What I’ve done is put $175 a month extra into the car loan that has a very high rate of 19.5 percent (I’ve had some serious credit problems in the past), and the remaining $75 was put into additional payments on my 8.5 percent home mortgage. The mixture of payments felt good. I am going to pay off the auto loan with cash from a money market account in a few weeks. Looking back, I wonder what would have been the best allocation of that extra amount? Ignoring the tax implications of the home mortgage interest, how should I have handled this? L.C., by e-mail A: When the rate is 19.5 percent and the interest isn’t tax deductible, there is only one thing to do: Put every dime against the expensive money. You can check out the savings very easily by using the debt-reduction planner that you can find on the Quicken Web site (www.quicken.com). Q: In a recent article you said it was possible to have a loss on a mutual fund investment and still have positive, taxable capital gains. I put $20,000 into some funds for the education of my children in July, just before the market correction. My $20,000 was worth only about $18,000 a month after I invested it. Could I have sold all my shares at the $18,000 point and then immediately repurchased them to record a loss on my taxes of $2,000 in order to offset end-of-the-year dividends and distributions? Would this have been legal? S.A., Arlington, Texas A: No, it would not have been legal. The IRS calls this a “wash sale” and disallows the loss. Investors in this situation regularly do year-end tax switches. You can, for instance, sell one fund at a loss and replace it with a different but very similar fund. It is also possible to do the same thing with common stocks, selling one at a loss and buying a similar stock with the proceeds. Another way to do the same thing is to sell the fund or stock at a loss and then wait at least 30 days. After that period, a repurchase would no longer be considered a “wash sale.” Given the strength of the market upturn from the correction, selling and waiting 30 days would have been an expensive proposition. Syndicated columnist Scott Burns can be reached by fax at (214) 977-8776 or by e-mail at scott@scottburns.com.

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