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Welcome to hard times

—Ed Quillen, Writers on the Range

First, there’s the dark cloud: The economy of the Mountain West is going into the tank for a few years, and there’s not much that anybody can do about it. But then there’s the silver lining: The West will become a better place to live.

Consider what has been driving the economy of the rural West in recent years. Start with the “energy boom,” with its oil- and gas-drilling rigs sprouting across once-remote areas. Add increasing demands to develop oil shale and a lot of prospecting for uranium.

Now look at the price of crude oil, which serves as an indicator for energy prices in general. Crude peaked last summer at $140 per barrel, and now it’s below $60. Americans are consuming less, and the global economic decline means less demand from emerging markets like China and India. OPEC is considering production cutbacks.

A lot of projects that make economic sense when oil is $140 a barrel and climbing make no sense when it’s $60 and dropping. Energy companies will have to cut back on exploration and drilling, meaning fewer man camps in our back country, less social disruption in many rural towns, and reduced demands on school districts and sheriffs’ departments—not to mention easier times for our now-stressed wildlife.

Oil, natural gas, uranium—they all follow what economists call the “commodity price cycle.” As demand rises, so does price, until it reaches the point where it’s profitable to invest in new production. The new production comes on line. Supplies rise, and prices drop. Companies worry about being able to sell what they’re already producing; they don’t go out prospecting for new sources.

So the current boom will fade, although its collapse might not be as dramatic as that of May 2, 1982, when Exxon, after spending more than $1 billion in western Colorado, pulled the plug on its proposed $5 billion Colony oil-shale project. As for mining in general, note that gold, silver, molybdenum, and just about every other thing we dig up also follow the commodity price curve. Their prices soared, production went up—and now the prices are sliding as inventories grow.

The other major economic driver is “second-home construction.” In fact, many of these new houses on Western acreages are the full-time homes of retirees rather than vacation retreats, but their construction has the same effect on local economies.

And that’s a bigger one than we often realize. A couple of years ago, I heard Jim Westkott, Colorado’s senior state demographer, explain that we should regard residential construction as a major industry, something like a huge mine. The work sites may be scattered across the countryside rather than concentrated at a portal, but the effect is the same, since this industry employs an army of carpenters, masons, glaziers, electricians, plumbers, architects, landscapers—everything from heavy-equipment operators to interior designers.

How’s the “mortgage meltdown” affecting this industry? My contractor friend Kirby, who specializes in upscale rural residences, had four houses under construction a year ago. Today he has only one, with nothing new on the immediate horizon, and he’s had to lay off most of his employees.

I asked a local realty agent. She said the financial collapse hasn’t visibly affected those very rich people who want to build mansions hereabouts. But once you move down the financial food chain, you see problems.

“I’ve talked to a lot of people who had been planning to retire to the mountains,” she said, “and now they’re telling me that their 401(k)s have tanked and they’re going to have to keep working, so they won’t be moving here anytime soon.” And even if there aren’t many foreclosures here, she said, “we’re already feeling the pinch.” And where there are a lot of foreclosures, “then there might be a solution to the affordable-housing problem.”

Thus, there aren’t nearly as many construction jobs as there were a year ago. But though I don’t like seeing anybody lose honest work, there’s some sunshine in this gloom.

Illegal immigration will fade as an issue. The Mexican consulate in Dallas says unprecedented numbers of Mexican citizens are seeking the paperwork to return home because they can no longer find work in America.

Life will get a little easier for those of us who stay. When I called Gary the Plumber last year, he said it would be a while before he could get to me, and observed that he much prefers new construction to contorting himself in my cramped cellar. When I called last month, he was here in a few minutes.

Meanwhile, as our economy recedes, the greedheads who were just here to make a quick buck will quickly migrate to greener pastures. The people who stay—the folks that Wallace Stegner called “stickers”—will be those who really want to live in the West, and they will find a way to make it work.

So there’s a dark cloud over the West right now as the boom turns to bust. Hard times loom. But we’ll be better for it, if we stick it out.


IRS offers year-end tax tips

The Internal Revenue Service is offering some tax tips that could result in a bigger refund or fewer taxes due next year, as well as a few new tax law items.

Consider Charitable Contributions—Make charitable contributions no later than December 31. Make sure it is a legitimate tax deduction by giving to a qualified public charity and keeping a paper trail. Donations charged to a credit card by December 31 are deductible for 2008, even though the bill is paid in 2009. Also, checks count for 2008, as long as they are mailed this year. Taxpayers must itemize deductions in order to benefit.

Clothing and household items donated to charity must be in good used condition or better. Household items include furniture, furnishings, electronics, appliances, and linens.

Cash donations require, regardless of the amount, a bank record or a written statement from the charity showing the name of the charity, the date, and the amount of the contribution. See Publication 526, Charitable Contributions, for more information or log onto IRS.gov.

Contribute to Retirement Accounts—This year, you can contribute up to $5,000 to an Individual Retirement Account (IRA), and if you’re fifty or older, that amount goes up to $6,000. The Retirement Savings Contribution Credit or “Saver’s Credit” of up to $2,000 is also available for taxpayers who contribute to a plan and whose income is generally less than $53,000. Contributions to qualified pension funds generally must be done on or before December 31st. Contributions to an IRA can be made through April 15th of the following year. Publication 560, Retirement Plans for Small Business; Publication 575, Pensions and Annuity Income; and Publication 590, Individual Retirement Arrangements can answer most questions.

Keep Classroom Supply Receipts—The educator expense deduction allows teachers and other educators to deduct the cost of books, supplies, equipment, and software that they buy for use in their classrooms. Eligible educators include those who work at least nine hundred hours during a school year as a teacher, instructor, counselor, principal, or aide in a public or private elementary or secondary school. The educator expense deduction is worth up to $250 and available whether or not you can itemize your deductions on Schedule A.

Sell the Losers—Consider an adjustment to your stock portfolio. Capital gains can be netted against capital losses, dollar for dollar. Any remaining capital losses can then be used to reduce ordinary income up to $3,000. After that, any remaining capital losses must be carried forward into the next tax year or subsequent tax years as needed.

New: Take the Additional Real Estate Tax Deduction—For those who pay real estate taxes but do not itemize their tax deductions, there is an additional deduction of up to $500 or up to $1,000 for joint filers for real estate taxes paid. This deduction is available for the 2008 and 2009 tax years. This property tax deduction is in addition to the standard deduction.

New: Remember First-Time Homebuyers Tax Credit—First-time homebuyers should consider taking advantage of a new tax credit available for a limited time. The credit applies to primary home purchases between April 9, 2008 and June 30, 2009. This tax credit must be paid back in equal payments over fifteen years. The credit is ten percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. First-time homebuyers are those who have not owned a home in the three years prior to a purchase.

New: Recovery Rebate Credit—If you did not file for or did not qualify for or did not receive the maximum amount for the Economic Stimulus Payment, you may be entitled to a Recovery Rebate Credit when you file your 2008 tax return. The key here is to complete the Recovery Rebate Credit worksheet. More information is available at IRS.gov.

Tuition and Fees Deduction—Without having to itemize deductions, you may be able to deduct qualified tuition and required enrollment fees up to $4,000 that you pay for yourself, your spouse, or a dependent. Remember, you can’t take both the tuition and fees deduction and education credits (Hope & Lifetime Learning Credits) for the same student in the same year. See Publication 970, Tax Benefits for Education, for more information.


The power of compound interest

—Jason Alderman, Visa financial

Among the most valuable financial wisdom you can teach your kids is how to harness the power of compounding. This life lesson is best learned early, because the payoff grows exponentially the sooner you start practicing it.

What is compounding? Basically, it’s where you put aside money—whether in savings, a retirement account, or the stock market—and then essentially leave it alone. As your account earns interest or dividends, you continually reinvest those profits, generating (compounding) additional earnings at an accelerated rate.

Numerous interactive calculators are available online to help you estimate potential savings under different scenarios. I used several at www.dinkytown.net/savings.html in the following examples, but similar tools are located on financial and investment sites across the web.

How investments grow over time. Using the Dinkytown “Compound Interest and Your Return” calculator, you can estimate how quickly a one-time investment will grow at varying interest rates and periods of time. For example, $10,000 invested at an eight percent annual percentage yield would be worth $21,589 after ten years; $46,610 after twenty years; and $100,627 after thirty years.

Escalating impact of regular monthly savings. By setting money aside every month, your savings will grow even faster. According to the “Cool Million” calculator, if at age twenty-one, you began saving $100 a month at eight percent interest, by sixty-five, your account would be worth over $450,000. Increasing the monthly contribution to $200 would double that to more than $900,000. And, by saving $300 a month, you’d reach $1 million by age sixty-one.

Interest rates matter. The riskier the investment, the greater your potential gains—and losses. For example, regular savings accounts typically offer very low interest rates in exchange for very low risk of loss. On the other hand, investing in the stock market can potentially earn double-digit investment rates over long periods of time. Of course, stocks can be a risky short-term investment, as we’ve seen this past year.

So why not simply park your money in a safe haven? Simple: inflation. If your money is earning two percent interest but the inflation rate is three percent, you’ll actually net a one percent loss.

Go back to the “Cool Million” $100-a-month example above. If you expect to earn eight percent interest, but factor in a 3.1 percent expected annual inflation rate, your account balance at age sixty-five would be worth more like $110,000 in today’s dollars, versus $450,000-plus unadjusted for inflation. Furthermore, by reducing the expected annual interest rate to only four percent, your account balance would drop to around $140,000—or less than $40,000 after adjusting for inflation.

A good financial advisor can help you devise a well-diversified investment strategy that will help you balance your appetite for risk with methods to beat inflation. If you don’t know a financial planner, www.plannersearch.org is a good place to start looking.

Postponing savings can hurt. The longer you delay saving, the harder it is to catch up. According to the “Don’t Delay Your Savings” calculator, if you saved $100 a month at eight percent interest, after twenty years, your account would be worth $57,266. But wait only two years to begin saving, and that balance would shrink to only $46,865—over $10,000 less. A five-year delay would reduce the balance to only $33,978.

Bottom line: Don’t let the economic volatility of the last few months stop you from saving. And get your kids on the compounding bandwagon as well; they’ll thank you in twenty years.

 

     

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