Keren Hishtalmut: Part II

Q. “Keren Hishtalmut” means “education fund,” but what does it have to do with education?

A. Nothing. It was originally created to help people save for education expenses and was later expanded. You can still use it to save for education. In that case, instead of waiting 6 years to withdraw the money tax free, you can do so after just 3 years.

Q. Where can I invest the money?

A. Your Keren Hishtalmut is held by an investment company of your choosing. Each company has different “מסלולים,” or investment funds, that you can choose from. This is a very large market in Israel with many investment companies offering Keranot Hishtalmut services.

Q. How do I choose which company to use?

A. First, you should decide on your investment objectives and then on a target allocation. For example, you may decide that you want to invest the money for the “medium term” and allocate 60% to stocks and 40% to bonds.

Next, you can then go to a website like this one and look for all of the funds that meet your target allocation. From this long list, you can decide on which firm to use by performing appropriate non-expert research. For example, you could chose the one with the most colors on their website, or the one whose name rhymes best with words that you like.

Q. That sounds like a lot of work. Could you just tell me which companies to look at?

A. I could, but I wouldn’t do that because I am not a bank. If I were a bank, I would definitely provide you with a “free” consultation in which I would independently recommend a company for you to use based on thousands of hours of in-depth research that I preformed in a strictly objective manner that I cannot explain to you because it would be highly proprietary.

I would offer you this research absolutely free, and I certainly would not be taking a kickback from the fees that you will pay to the investment company without telling you. I also definitely would not deny that I am taking a kickback until you call me on it explicitly. This absolutely would not happen. However, if it did, I most certainly would not get in your way of negotiating a more reasonable fee with the investment company that I recommended.

I wouldn’t do any of this because I know that if I did, you would just move your investment to a different company.

Q. It is too bad that you are not a bank. What is reasonable in terms of fees?

A. The fees are assessed as a percentage of your investment like any traditional money management fee. It should not be higher that 1% and could be as low as 0.5% or less if you have a large amount of money in your account.

Q. I know that you are not a bank, but in your research are there some companies that stand out in terms of performance, fees or service?

A. Yes, but I won’t write about it on my blog because that really isn’t my style. However, you can email me and we can share stories directly.

Q. Is it a good idea to invest more money in a Keren Hishtalmut above the amount that is tax free?

A. No. There is no advantage to this and you will just make your taxes more complicated to manage.  Above the amount that is above the tax free ceiling, you will have to pay tax on the money you deposit and on any gains from these deposits at the time of withdrawal. If you have more money to invest beyond what you are saving in a Keren Hishtalmut, you should just invest it in a regular brokerage account.

Q. I still have more questions. Is it ok if we continue next week?

A. Absolutely. This was only Part II. We could go on about this for weeks.

Keren Hishtalmut: Part I

Over the years, many an accidental reader has approached me with questions about the Keren Hishtalmut. Like you, they are seeking a non-expert opinion on this popular Israeli savings mechanism from someone they know they cannot trust.

Here are all the answers, formulated in Investing by Accident’s brand new easy-to-read Q&A format.

                                                                

Q. I’ve seen it written that that the Keren Hishtalmut is the best thing sincesliced pita. Is this true? 

A. Yes.

Q. Personally, I think that “best thing since sliced pita” is an awkward mixed metaphor because there is no such thing as sliced pita. Even if there was such a thing, it doesn’t sounds like it would be so good. If you are trying to find a clever Israeli alternative for “best thing since sliced bread,” what do you think about, “best thing since frozen schnitzel”? It isn’t sliced, but it is a great invention.

A. I agree. My children love the frozen schnitzel.                          

Q. Why is it so good?

A. Well, it’s schnitzel that is ready for you to eat whenever you want it. All you need to do is heat it up.

Q. I mean, why is the Keren Hishtalmut so good?

A. With a Keren Hishtalmut, you can put money in a fund that grows tax free, and after 6 years you can withdraw the money and not pay any Israeli tax on it. The deposits and the gains are free from Israeli income tax.

Q. That sounds great! What about the money that I contribute to the Keren Hishtamut after year 6?

A. The Keren Hishtalmut is “unlocked” after 6 years. Even money you put in in years 7, 8 and 9 (and later) can be taken out without paying Israeli tax. However, once you withdraw, the 6 year “locking period” will reset.

Q. What about investment income that accrues in the account after 6 years?

A. Same thing. This money is free from Israeli income tax when you withdraw it from the account any time after 6 years.

Q. That sounds absolutely awesome. Can I put all my money into a Keren Hishtalmut?

A. No, of course not. There are limits.

Q. What are the limits?

A. To find the limits, you can simply read the לוח עזר לחישוב מס הכנסה ממשכורת ושכר עבודה which the Israeli Department of Taxation conveniently publishes every year, but which is surprisingly difficult to find.

Or, I could just tell you.

The limits are slightly different if your Keren Hishtalmut deductions are made through your employer or if you are making them yourself from your self-employed income.

Through your employer, you can contribute up to 2.5% of the first 15,712 shekel of your salary per month. Your employer can match your contribution up to three times, or up to 7.5%. This brings the yearly limit to 10% of 15,712 shekel per month, or 18,854 shekel per year.

If you are self-employed, you can contribute up to 18,480 shekel per year into your Keren Hishtalmut. Of this amount, only 11,880 (or, up to 4.5% of your salary, whichever is lower) can be reduced from your Israeli income for income tax purposes.

The limits are adjusted every year, so be sure to search the latest “לוח” every year. Also, it should be obvious, but I love the obvious: if you don’t make any money, then you can’t put anything into a Keren Hishtalmut.

Q. It is weird to me that the limits are different by so little between contributions made through employers versus those made by people who are self employed: 18,854 shekel versus 18,480 shekel. If they are already that close, why not just make them the same?

A. That would make sense, but it wouldn’t give us the opportunity to find clever uses of the Keren Hishtalmut for the self employed that we could write about on our blogs, would it?

Q. I guess not… but who is asking the questions here?

A. You are. That was an answer.

Q. I have many more questions, but we’re out of space in this blog. Would it be alright if I continuing asking questions next week?

A. Of course. That’s why I called this, “Part I.”

The Bombs Bursting in Air

A lot people don’t know this, but I am actually somewhat of an expert on things that explode. I used to sing along about them in America just before the start of baseball games. For example, rockets have a distinctive “red glare.”

I usually do not write about important political issues because I am not sufficiently non-expert. However, many Loyal Readers have been posting comments about the missile attacks. I understand this as an implied accidentally asked question, and I assume they want to know what the internet’s foremost non-expert on investing thinks about operation Protective Edge.

Disproportions

I know what the world media is thinking about operation Protective Edge because I listen to podcasts of NBC Nightly News. The main concern is that Israel will use disproportionate force to stop the rocket attacks. There is also a lot of focus on Iron Dome, which is directly responsible for the disproportionate amount of civilian causalities in this conflict.

I am big fan of Iron Dome. It was built by clever Israelis and paid for by tax paying Americans. In others words, I pretty much created it by proxy.

However, this is a serious blog in which we discuss serious issues. There is an extraordinary level of disproportion with Iron Dome that needs to be addressed.

Missile Investments

There is no price that we will not be willing to pay for safety. Or, more accurately, there is. It is $50,000, which is the cost for each Iron Dome intercept missile. 

The problem is that this is in great disproportion to the cost of the missiles that Iron Dome is intercepting. I mean crazy disproportion. It’s like when one of your kids uses up all of your remaining Bounty paper towels just to dry their hands.

                                                                                      

Well, maybe it is not that disproportionate. I really don’t know how much Hamas is paying for their missiles. They are not reporting the financials on their Twitter feed. I don’t know for sure, but my guess is that this is a violation of the Geneva Convention’s financial reporting requirements.

In any case, I think we can make some simplifying assumptions because the rockets are based on Chinese designs. From my experience, this means that they would cost roughly $0.99, plus some amount more for smuggling charges.

Leveling the Playing Field

Clearly, this level of disproportion in missile costs is entirely unacceptable and we need to take steps to correct it.

The most obvious solution would be to tax the rockets that Hamas sends to Israel. This would be a clever solution, since most of the revenue from taxes is used to pay for defense systems. However, I am a free market capitalist who believes that you should not raise taxes to solve a problem unless there is no alternative.

Lowering the Cost of Iron Dome

Perhaps the best way to solve the disproportion would be to lower the cost of Iron Dome. I can think of at least three ways this should be possible.

1. Comparison Shopping. It seems to me that $50,000 is really expensive for just an intercept missile. Are we paying retail? I think between all of my contacts on Facebook and LinkedIn, I should know a guy that could help us get it cheaper. If that doesn’t work, I think we can ask our American friends to lend us some of their Bed, Bath & Beyond coupons. If we get enough, we should be able to use them to get 20% off each missile.

2. Hybrid Missiles. We could use an electric engine in combination with rocket fuel to power the missiles. The only concern would be that this would actually raise the cost. If so, it wouldn’t be a good solution to the disproportion problem, but we could do it anyway because we love trees.

3. Ukraine. We can use our clean and safe Ukrainian nuclear reactors to power the intercept missiles. I would even be willing to lend you the parts from my water heater. Or, on second thought: would this just make them even more disproportionate?

These ideas seem very promising to me and are probably all that we need. However, on the off chance that they do not lower the Iron Dome costs, it would also be worthwhile thinking about how we can offset the costs by generating revenue.

The Iron Dome Franchise

This past Shabbat, my children and their cousins spontaneously began playing “Iron Dome.” The way it worked is that the kids created paper airplanes which they shot at the adults. In turn, the adults used an intercept mechanism (such as their hands) to thwart the airplanes.

In general, the airplanes did not hit their targets. Upon occasion when they did reach their target, the intercept mechanisms were very good at preventing any serious damage. Actual direct hits were very rare (Bubby: I hope your ear is feeling better), but when they did occur, the children were extraordinarily exuberant in their victory. I suppose the adults could have prevented more attacks by taking out the airplane maker, but we felt we couldn’t do this because he is just a child.

In other words, the game was very much like real life.

I made Aliyah by Accident, and for me this game was pretty much one of my greatest aliyah moments. Next time I am in America and see my friends’ children playing “Cowboys and Indians,” I intend to point out just exactly how much this exemplifies their extreme state of exile.

In any case, it occurs to me that Iron Dome would make an excellent video game. We could even have a multi-player mode so that you can actually play directly with Hamas.

I think this idea is so good that I am even willing to donate the following original artwork that we could use to advertise it. It comes from my son and accurately depicts an IDF formation around Gaza poised to protect us from Hamas missiles. If you look closely, you can even see Israel’s famous, “King Sea.”

If the game works out, we could expand the franchise into movies and television. We will know that we really made it big when the action figures hit the shelves. 

New or Used?

Accidentally enquiring minds want to know: is it cheaper to buy a used car than it is to buy a new car?

This is an easy question. It’s just like this one: is it cheaper to send your children for a Jewish education in Israel than it is in the U.S.?

Obviously, yes. It’s really just a matter of some trade offs.

Cost by Cost

There are essentially six costs for a car: 

• Money Costs
• Depreciation
• Maintenance
• Insurance
• Gasoline
• Registration & “Tests”

This is rather obvious, but I usually write about obvious things: some of these costs change significantly between used vehicles and new vehicles and some of them do not. Understanding how much cheaper a used car will be is simply a matter of understanding the differences in these costs. This actually not that hard at all since many of the costs do not change much.

I don’t even think we will need to use the skipping tags.

Things to Ignore

The easiest costs to ignore are Insurance, Gasoline and Registration & “Tests”. These will not change significantly between the new and used versions of the same car.

For the purposes of this blog, I will also ignore Money Costs. This cost includes anything you have to pay in order to borrow money to buy a vehicle (“interest”). This will obviously vary depending on how much you need to borrow and what interest rate you get.

Also included in Money Costs in the “lost opportunity” for any money that you spend to buy the car. This should be calculated as the amount of investment income you give up by spending the money rather than investing it.

I am ignoring Money Costs because they vary greatly. Also, interest rates are very low right which means that difference in Money Costs between the new and used cars will tend to be negligible for most people at the moment.

The costs that you should not ignore are those for Maintenance and Depreciation. 

Maintenance Not Like It Was

The common wisdom today is that “cars are more reliable than they used to be.” In fact, I found one nice article about this that you could read instead of reading this blog.

Actual costs are hard to estimate because it will depend on the particular make and model of the car and your driving conditions. However, in order to write this blog, I need to propose something. Here goes:

Years	Maintenance Costs
1-3	As low as possible
4-6	A bit higher
7-9	Probably significantly higher
10+	Lots and lots

This analysis of cost is based on my experience owning the Mitsubishi Grandis, which we bought along with everyone else in my neighborhood just over 3 years ago. During years 1-3, our only maintenance costs where the regularly scheduled oil changes. We did not have anything that needed to be fixed, but if we had, it would have been covered by the warranty. Now in year 4, the only additional maintenance costs we encountered is to replace the two front tires for 800 shekel.

Judging by the way the Grandis drives (“still like new”) and from the problems that my friends have had with theirs (“none”), I anticipate that the low maintenance costs will continue for at least another 3 years.

In years 7-9, my guess is that the maintenance costs will start to rise as parts will wear out and need to be replaced. Beyond year 10, I cannot imagine that the costs will not rise sharply. At this point, it will definitely be time to sell the Grandis to a large family living in a settlement.

Everything else being equal, it would make sense to have the car for just the first few years when maintenance costs are low. Which brings us to…

Depreciation

The major difference in cost between a new car and used car is the amount of value you lose in the depreciation of the vehicle.

The lease on my company car ends this October, and I have already started to accidently research a replacement in the “supermini” category. To give you a sense of the size of a supermini, think “Matchbox” but with a working engine.

To get a sense of the cost of depreciation, I used the price list on yad2 to track the value of the Toyota Yaris with an automatic transmission in the basic trim level:

Year	List Price	Depreciation
New	101,700.00	---
1	72,900.00	28%
2	70,900.00	30%
3	67,300.00	34%
4	63,400.00	38%
5	54,600.00	46%
6	47,900.00	53%
7	44,200.00	57%
8	41,500.00	59%
9	38,700.00	62%
10	34,200.00	66%
11	30,700.00	70%
12	28,575.00	72%
13	24,900.00	76%
14	22,800.00	78%

Perhaps more interesting is to look at the depreciation cost several years at a time:

Year	Total Depreciation
1-3	34,400.00
4-6	19,400.00
7-9	9,200.00

I find this interesting because what it says is that the premium to own the car in years 1-3 of years 4-6 is only 15,000 shekel. That is a chunk of money, but not entirely unreasonable when you consider that the used car will come with somewhat higher maintenance costs and has the risk that previous owner did not care for it as well as he should have.

Or, perhaps stated more simply: you could absolutely make the case that 15,000 shekel is money well spent not to have to talk to an Israeli used car dealer.

                                                                                       

There would be no fault in buying a new car like this. However, before you do, you should consider that not all cars depreciate the same way and there may be a good bargain out there if you keep looking.

Bargain Hunting

It seems to me that there would be a good bargain in the used car market if you can find a car that is both highly reliable and has higher than average depreciation. Fortunately, this appears to be much more than just theoretical thanks to Israel’s #1 car seller: Hyundai.

Hyundai cars are very reliable and sold extensively to rental and leasing companies which has the accidental result of flooding the used car market with discarded almost new vehicles.

In the supermini category, here is the depreciation on the Hyundai i20:

Year	List Price	Depreciation
New	97,800.00	---
1	77,800.00	20%
2	71,000.00	27%
3	60,100.00	39%
4	53,600.00	45%
5	48,500.00	50%

This car already depreciates more than the Toyota Yaris, but the bargain comes in once you factor that the asking price for used cars that are sold by rental and leasing companies starts automatically at 15% below list price.

I don’t know how much further you can negotiate from there, but it seems to me if a rental or leasing company has a lot full of leftover Hyundais, you would be in a very good position to negotiate.

The potential bargain is magnificent:

Discount from List	Price
0%	60,100.00
15%	51,085.00
20%	48,080.00
25%	45,075.00

At a 20% discount to the list price, you would getting a 3 year old Hyundai i20 at less than 50% of the new car price. I’m not an expert, but it seems to me that you are receiving way more than 50% of the value of the car. If this exists, it would be a very good deal.

My Car Algorithm

Buying a new car can be perfectly reasonable. If that is the direction you plan to take, I suggest looking for a car with historically low depreciation. On the other hand, there could be an opportunity to save a lot of money in the used car market if conditions are right.

The way I shop for a car is to first find the car (or cars) that I would be willing to buy new. Then, I look to see if there are any good opportunities to buy it (or one of them) used.  

How much you need to save to make it worthwhile to buy the used car is a matter of personal preference (and I suppose, your level of wealth). I personally will be looking to get a 45% discount from the list price of the new car in order to purchase the 3 year old version instead.