US Postal Service to raise its Stamp Price on 27 Janurary 2013

The US Postal Service is raising their price on stamps this year, as they did about the same time one year ago.  There will surely be some griping here, however the postage price has roughly kept pace with inflation.  The price increase should be expected.  The chart below indicates that the postage stamp rate since August 15, 1971 has nearly matched inflation.

Date

Stamp Price

Inflation Base

Difference

15-Aug-71 8 8.0 0.0
2-Mar-74 10 9.7 0.3
31-Dec-75 13 10.6 2.4
29-May-78 15 12.9 2.1
22-Mar-81 18 18.0 0.0
1-Nov-81 20 18.0 2.0
17-Feb-85 22 21.3 0.8
3-Apr-88 25 23.4 1.6
3-Feb-91 29 26.9 2.1
1-Jan-95 32 30.1 1.9
10-Jan-99 33 32.9 0.1
7-Jan-01 34 35.0 -1.0
30-Jun-02 37 35.5 1.5
8-Jan-06 39 39.8 -0.8
14-May-07 41 41.0 0.0
12-May-08 42 42.5 -0.5
11-May-09 44 42.4 1.6
22-Jan-12 45 45.4 -0.4
27-Jan-13 46 46.2 -0.2

There was a reason that 15 August, 1971 was chosen as the date.  That is the date when then President Nixon signed the order to allow for the termination of exchanging dollars for gold.  This allowed the US dollar to then float in value, almost always in the inflationary direction.  This period provided for the most “apples to apples” comparison for monitoring stamp prices.

If you know you’ll need the stamps and won’t lose them, buy them right before January 27, 2013.  Since the “forever stamp” that is available today at the price of $0.45 will rise to $0.46 next week, $1 is made in short time on 100 stamps.  There is no sense in hoarding stamps for this purpose, but it is worth noting that the “forever stamp” will hold its value better than cash in the wallet.  The below chart shows the price increases of the US postage Stamp since 1971.

Stamp prices from USPS.gov, inflation data from usinflationcalculator.com

Stamp prices from USPS.gov, inflation data from usinflationcalculator.com

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Compound interest and doubling your money

There are some basic rules of finance whose understanding is integral to the proper management of money.  The first rule has been to understand the concept of the time value of moneyInterest rates drive all things finance; from credit card debt and house buying to savings accounts and bond investments.  The concept of the time value of money is rooted in mathematics and can be cumbersome to commit to memory.  The good news is that there has long been a rule that is easy to commit to memory and serves as the 95% solution to figuring out how much an asset can make you or how much a loan can cost you.

The rule is called “The divide by 72 rule“.  If you already know of this rule, you’re ahead of many.  However, do you know why that rule works, or even whether it actually does or not.  Anything based math should not be taken on faith, but instead proved through relationships.  The 72 rule states:

To quickly calculate the time in years to double your money in an investment due to compounding interest payments, divide 72 by the annual interest rate.  For example an 8% interest rate would take (72/8) 9 years to double the money invested.

This can work with interest rates that are compounded annually or even in shorter terms, so long as the annual effective rate is used in the calculation.

Rate Rule of 72 Annual Delta %
1% 72.0 69.7 3.2%
6% 12.0 11.9 0.9%
11% 6.5 6.6 -1.5%
16% 4.5 4.7 -3.8%
21% 3.4 3.6 -6.1%
26% 2.8 3.0 -8.3%
31% 2.3 2.6 -10.5%
36% 2.0 2.3 -12.7%

>>>The above table shows a comparison between the rule of 72 and annually compounded interest rates.  Notice that the error is low for interest rates that we commonly calculate.  The formula for the time to double your money is Time=ln(2)/ln(1+rate), where the time is in years and the interest rate is expressed as a percentage.  The divergence at higher interest rates from the rule of 72 is cause by the rule of 72 actually being tied to the formula for continuously compounding interest.  This is where interest is always compounding upon itself.  The formula for doubling you money in this case in Time=ln(2)/rate.  This formula tracks perfectly with a rule of 69.3 as shown below.  The reason that 72 is used is because “head math” with 72 works easier as 72 has plenty of multipliers (1,2,3,4,6,8,12…and so on) that are common interest rates.

Rate Rule of 69.3 Annual Delta %
1% 69.3 69.3 0.0%
6% 11.6 11.6 0.0%
11% 6.3 6.3 0.0%
16% 4.3 4.3 0.0%
21% 3.3 3.3 0.0%
26% 2.7 2.7 0.0%
31% 2.2 2.2 0.0%

 

 

 

Too little pay on the job? Owning your own production may be the answer.


Having a hard time getting ahead? Is your salary getting you down? Increasingly, this is all too common and unfortunately, it is by design. Only so much wealth can be created by one individual’s work. Past that point, additional wealth must be generated off of the efforts of others. This is the guiding principle behind any corporation and if you can align with one that pays well, then there is no issue. However, this is an exception to the rule as companies rarely pay a worker more than they have to.

And why should they? It’s a problem in economics. There are two concepts of interest here; marginal cost and marginal benefit. The marginal cost represents a small increase or decrease in the cost from the initial starting point. The marginal benefit is the change in benefit achieved by the change in cost. The two are combined as a ratio to determine how much benefit the next dollar buys. To a corporation, a worker’s marginal benefit will run out quickly at any cost beyond market rate. Why, because the corporation could have just as well hired anyone else at market rate.

For the individual, the problem of marginal cost and benefit is reversed. A person who owns their own production, in the case of a sole proprietor or single person corporation has an interest in maximizing their own total benefit. This is the point in which the income that they bring in is built up to the point where the marginal cost equals the marginal benefit. This is the maximum point of income generation at which beyond this point any additional work results in a loss for the individual. It is in this principle, that many self-employed have come to appreciate the liberating feeling of their work “on their own terms”

Fixed costs and variable costs in your life

Good Evening FPO Readers,

This is a mini lesson in economics.  There are two types of costs, fixed and variable.  A fixed cost is one that remains the same independent of other variables.  A variable cost is a cost that changes based on a combination of variables.  Many bills and purchases in our life have a combination of fixed and variable costs.  A utility bill is a common example.  For any consumable, there is a fixed base account/delivery charge and a variable change based on the amount delivered.  This applies the same to a water, electricity, or natural gas bill.  The fixed cost must be overcome before any variable costs are encountered.

The important concept here is that it is easier to cut variable costs than it is to cut fixed costs.  However, the counter to this is that the price per unit consumed raises since the fixed cost becomes more of the dominant cost of the two.

A useful application of this principle would be a household that has both an electricity service and natural gas service.  The only device on the natural gas line is the hot water heater.  The fixed monthly cost is for delivery is $14 and the consumption by this house is low at approximately $8 per month average.  In this case, it is likely beneficial to switch to an electric water heater when the natural gas unit reaches the end of its life.  With a variable cost that would likely be $12 to $14 per month, the natural gas fixed cost is eliminated since hot water is now provided by the electric service, whose fixed costs are already covered.  Though an electric unit does not heat as fast, this should be an acceptable trade off since the hot water consumption was low enough to start.

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