Monday, March 29, 2010

Santa Fe, The City Different

I just returned from a brief vacation in Santa Fe, New Mexico. As usual, I wanted to spend a little time reflecting on what I saw and heard on my travels and how it relates to finance and issues of the spirit. Normally, when I write one of these things I have a single clear story in my head. This time it is different. It seems there are many stories to be told about Santa Fe.

We visited Santa Fe in January 1996. We enjoyed it and wanted to return, but never got around to it until last week. Things have changed a lot in the last 14 years. The most immediately noticeable change was in parking. There isn’t any. 14 years ago it was not easy to find parking near the prime tourist areas, but with a little patience, one could always find a spot. Now free parking is a distant memory. Public parking facilities are expensive and not all that convenient. The folks in the visitors’ center complain about the lack of parking, the shop owners complain about the lack of parking, their employees complain about the lack of parking and the cost of parking, and the visitors complain about the lack of parking. For a city with only two industries, tourism and government (Santa Fe is the state capital) it seems Santa Fe needs to address this issue. If they do not want to damage the historic ambiance of their 400 year old city with nasty looking parking garages, at least provide some sort of subsidized shuttle system for tourists with arthritic knees, such as yours truly.

I think the parking situation in Santa Fe, like a fractal, is a microcosmic, reduced, representative of the whole. According to the guide book, just about the time of our last visit, the economy in Santa Fe reached some sort of critical mass. A chain reaction started that continued unabated until the current recession. Santa Fe has been home to an extremely productive colony of artists, at least since the 1920s. In the 1960s those in search of alternative lifestyles and spirituality came to discover an unspoiled wilderness and Native American wisdom. The light and the space of the mountains and desert, the artists, and tolerance of different lifestyles and forms of spiritual practice, attracted the rich, the beautiful (especially from Hollywood) and the eccentric. The presence of wealth always attracts efforts to service that wealth. So Santa Fe grew and became more and more expensive at a much faster rate than most places in our country.

Everything is expensive. The art galleries are expensive. The finely crafted hand made jewelry is expensive. The Native American pottery and textiles are expensive. The many excellent restaurants serving one of the most distinctive regional cuisines found in our country are expensive. It seems everyone has their hand out. The museums are expensive (some like the Georgia O’Keefe museum were worth the price of admission). The Loretto Chapel, formally belonging to a Catholic Girls’ School, hit me up for six bucks to view the miraculous staircase. We visited the Anastasi ruins in Bandelier national monument (a side trip well worth the effort). Even at a site supported by my tax dollars, the Department of the Interior nicked me for $12.00. Things are a little better in nearby Taos and Los Alamos, but Santa Fe is no longer a mid-priced vacation. It is still, deservedly a top ten tourist destination. There is so much to see and do a week or even a month would never do this area justice. I think one would almost have to live in Santa Fe to experience everything it has to offer.

The unemployment in Santa Fe County currently runs at about 6%, well below the national average. In fact, housing in Santa Fe is so expensive many residents have two or more jobs. A dumpy little house in need of repairs located in a historically desirable part of town could easily cost $500,000. It is not unusual to find someone like a registered nurse working part time as a waitress to help make ends meet. Two of the big industries in Santa Fe are art and alternative health care. Since providing these products is unlikely to produce a steady predictable source of income many of the artists, practitioners of bodywork, herbal medicine, and shamanic practices need day jobs to pay the bills on a regular basis.

We visited the State Capitol Building to view their wonderful art collection (believe it or not, this attraction is free). Like most of our states, New Mexico is having problems balancing its budget in the face of falling revenue and rising costs. Their economy is at least partially based on mining and materials. These sectors are doing pretty well, all things considered, so the politicians can still raise taxes faster than they cut expenditures. Their most controversial tax increase was a 2% sales tax on food. The hardest to understand was a tax increase on cigarettes. Most of the tobacco sold in the state is sold on Indian land where there are not any collections state taxes. Guess the politicians want to lose even more revenue.

The recent real estate and stock market crash has hurt Santa Fe, but not to the extent found in many areas of our country. Real Estate prices have declined, but not enough to provide affordable housing to a registered nurse with a second job. There have been some foreclosure auctions and short sales, but prices still remain at historic highs. I was told by a gallery owner that in the last year over 60 art galleries in Santa Fe have gone out of business. As a tourist this is not a problem. There are still over 250 art galleries in Santa Fe. In the particular art gallery where I learned these facts, the owner was forced out of a comfortable retirement in Costa Rica. He returned to Santa Fe, laid off all his employees, sold all his personal art, and continued business on a consignment sales basis with artists he has supported for years. He isn’t happy but he is surviving. He told me that today art was a buyers’ market, make an offer, if it is within the realm of sanity, it will be accepted. Even with galleries and jewelry stores advertising steep markdowns (20%-50%), art is not cheap. A small painting can go for $1,000 to $2,000. Large paintings can easily run $10,000 to $15,000. In one gallery I saw a painting that was maybe 8 feet high and 15 feet in length. I asked the gallery manager, who could have a wall big enough for such a painting. He informed me that he had customers that had bare walls that required even larger paintings. Sometimes, he assured me, the rich and the beautiful would buy paintings just to have something new to put on a large wall, sort of like I would repaint a room in a slightly different color and put a few new decorations. However, even the rich are having trouble coughing up $15,000 for disposable wall decorations.

One of the biggest changes I noticed is not in the town of Santa Fe but in the areas surrounding the town. During our last visit there were a couple of Indian owned casinos in the area, small operations with a few slot machines and not much else. Today there are casinos all over Northern New Mexico, so many I don’t understand how they can all stay in business. We stayed at the Homewood Suites, located on the property of the Pojoaque Pueblo, adjacent to the Buffalo Thunder luxury resort and casino, a first class operation with ten restaurants, a high end spa, and a golf course. I overheard one of the managers at the Homewood Suites tell a customers that he was one of the owners of the hotel. All of the members of the Pojoaque Pueblo are owners of these properties and this pride of ownership shows in the way they run their operations. The North Santa Fe Homewood Suites is one of the best mid-priced hotels I have seen anywhere. The housekeeping is impeccable, the rooms are nicely decorated with museum quality prints of Native American art and a Southwestern theme in colors and pattern selections. The staff is uniformly polite and competent. Really it is more than that. These people make you feel like a guest in their home rather than a customer at their hotel. The complementary breakfast and weekday dinners are unusually good, a real plus for families with hungry children and business travelers on a limited per diem. Finally, let me mention I discovered that if I walked across the parking lot to the resort casino and identified myself as a customer staying at the Homewood Suites, I would be given access to their fitness center, indoor pool, and hot tub with no additional charge.

The story of the Pojoaque Pueblo is worth telling. They are the smallest of the Northern Pueblos with fewer than 400 members. Twice during their history they were almost wiped out; first during the rebellion of 1680 and then by a plague that occurred at the beginning of the 20th century. Today they are the second largest private employer in Northern New Mexico. The same manager that identified himself as an owner proudly told me their operations are attracting hotel and restaurant professionals with considerable resumes from as far away as New York City. Business at their hotels and casinos has dropped during the recession, but I was told that the cash flow is still positive. I found the members of the Pojoaque Pueblo both thankful for how much they have received from their hard work and astute business decisions and confident as they face an uncertain future.

I think Santa Fe will continue to be special because so many of the people who live there are not living their lives to earn a living. They are filled with a passion for whatever they are doing whether it makes any economic sense or not. They love what they are doing and they believe in it. Their art is their joy. Santa Fe calls itself The City Different.

Maybe, there is a lesson for all of us in the way they found to live.

Friday, March 19, 2010

Asset Allocation (Part I)

The old conventional wisdom stated that an individual investor should hold his age in bonds, certificates of deposit, and cash. Hence, at 59 I should have 59% in fixed income investments and 41% in stocks. The new conventional wisdom states that these figures are too conservative given the risk of inflation. The new rule of thumb states that the individual investor should have either 110 or 115 minus their age in stocks. Hence, I should be holding 51% or 56% in stocks at any given time.

There are lots of ways to look at the problem of asset allocation. This would not be a problem if we could see into the future with perfect accuracy. However, I am not a psychic. I am asked this question from time to time. There is no right answer. Just find a proven investment method that is comfortable for you, keep working on your investment portfolio in a systematic and disciplined manner, don’t let your actions be ruled by your emotions, and trust in the Lord with all your heart.

On the first of every month I look at my asset allocation and see if it makes sense to me. If it doesn’t, I make a few adjustments. On March 1, 2010 my assets were distributed as follows:

Stocks excluding gold and silver----------44.8%
Bonds and Certificates of deposit---------33.9%
Cash (Money market accounts)--------------17.9%
Gold and Silver--------------------------- 3.4%

That is the way I approach this problem.

To put things into context, I consider gold and silver just another but a different kind of stock and add the two numbers together when comparing my stock holdings to the conventional wisdom. When the market is dropping I continue to buy small amounts of stock on the way down. When the market heads back up I take small amounts of my winnings and move them into bonds. In late October I was holding about 55.7% (from memory) in stocks and gold. I thought then and still believe that the market is overvalued given the high levels of unemployment in this country. Since then, over time, I have been moving small amounts into the two bond funds in my retirement account. On March 1, 2010 I was holding 48.2% in stocks and gold. Since then the market has continued to climb. Because my money is divided, the total is increasing and the percentage I am holding in stocks is increasing.

On April 1, I will once again consider my options.

Schwab classifies my risk tolerance (based on my behavior over the last 8 or 9 years) as “Moderately Conservative.” Actually, I fit into three risk tolerance models at the same time, Conservative, Moderately Conservative, and Moderate. Here is how those model portfolios break out.


15% Large Cap Equity
0% Small Cap Equity
5% International Equity
50% Fixed Income
30% Cash or Equivalent

Moderately Conservative

25% Large Cap Equity
5% Small Cap Equity
10% International Equity
50% Fixed Income
10% Cash or Equivalent


35% Large Cap Equity
10% Small Cap Equity
15% International Equity
35% Fixed Income
5% Cash or Equivalent

Given the reporting methods between my retirement account at work and my self directed account differ I can’t give you a completely accurate breakdown using this model. However, I can give you a pretty good estimate.

My Current Risk Profile

27% Large Cap Equity
8% Small Cap Equity
13% International Equity
34% Fixed Income
18% Cash or Equivalent

You will notice that Schwab does not call out precious metals as a discreet category. Given the behavior of our Government, I believe this is a mistake. Almost every portfolio would benefit from a little gold. How much? Who can say? I just can't get my crystal ball to tell me anything of value.

I believe that our economy is decreasing as a percentage of the world’s economy. I believe the developing economies of countries like Brazil, China, India, Singapore, and Russia are going to become more important. I believe the amount I hold in International Equity is too small. I would buy more today, but I believe the market is over valued. Currently, my holdings are in resource rich Canada and England (with exposure to China). These economies are really not any more risky than our economy.

I am a little on the high side in Small Cap stocks, but my Small Cap stocks typically pay a dividend and are not all that risky. I believe Small Cap Value stocks that pay a dividend are pretty good investments.

I am holding more cash than recommended for a variety of reasons.

1) My car is old and may need replacement
2) One of our bathrooms needs to be gutted and rebuilt
3) I am both a coaster and a squirrel (remember Jordan Goodman’s money types)
4) A combination of fear and sloth

I should have more money in either Certificates of Deposit or an Investment Grade Short Term Bond Fund.

What is right for you? Kind of depends, on your age, on your tolerance for risk, and on your future potential earnings picture. I have given you a snapshot of what I am trying to accomplish. So far it is working pretty well. The hardest part of any investment program is controlling your emotions and remaining a systematic, disciplined saver and investor. Savings is really important and the first step in any investment program. Systematic savings will also allow you to rebuild your reserves after an economic debacle.

Maybe I will look at sector allocation on another day. Because I favor “real stuff” like oil, gold, land, consumer staples, and regulated utilities, I have had a little trouble with a tendency to let my sector allocation get out of balance. I was holding too much gas and oil when the price of those commodities collapsed with demand in the summer of 2008.

Solomon said it best.


[1] Cast thy bread upon the waters: for thou shalt find it after many days.
[2] Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth.
[3] If the clouds be full of rain, they empty themselves upon the earth: and if the tree fall toward the south, or toward the north, in the place where the tree falleth, there it shall be.
[4] He that observeth the wind shall not sow; and he that regardeth the clouds shall not reap.
[5] As thou knowest not what is the way of the spirit, nor how the bones do grow in the womb of her that is with child: even so thou knowest not the works of God who maketh all.
[6] In the morning sow thy seed, and in the evening withhold not thine hand: for thou knowest not whether shall prosper, either this or that, or whether they both shall be alike good.

Saturday, March 13, 2010

Eennie Meenie Chili Beanie

Eennie meenie chili beanie, the spirits are about to speak.

Bullwinkle the Moose

This story is way too good to pass up. Sean David Morton, who has anointed himself as “America’s Prophet,” was charged with investor fraud by the Security and Exchange Commission. The complaint lists the defendants as Sean David Morton, Melissa Morton (his wife), Vajra Productions, LLC, Magic Eight Ball, Inc. and the Prophecy Research Institute. Now truthfully, would you invest your money is something called Magic Eight Ball, Inc? The complaint states that, “All together, Morton fraudulently raised more than $6 million from more than 100 investors for the Delphi Investment Group.”

A copy of the complaint can be found at:

Sometimes I use to listen to the Art Bell show during my morning commute. For those of you who are not familiar with Art Bell, his show featured an entertaining assortment of UFO kooks, conspiracy crackpots, “fringe” scientists with perpetual motion machines and 100 mile per gallon magic carburetors, astrologers, psychics, witches, ghost hunters, and new age prophets. It is amazing how many intelligent, articulate crackpots are out there selling books and giving lectures. Generally, I found his show more entertaining than the classic rock station or sports radio, but not as good as a book on tape.

One of my favorite guests was Sean David Morton. His claims were absolutely outrageous and changed dramatically from appearance to appearance. One year he was a Buddhist monk and an expert on Tibetan astrology. The next year he was a science fiction writer who helped Gene Roddenbbery create Star Trek. After that, an expert on UFOs and finally a self proclaimed expert on “spiritual remote viewing.” Unlike Baron Muchausen, he never flew to the moon in a balloon constructed from women’s undergarments, but he did take a psychic trip to Mars to visit the beings who lived there 5,000,000 years ago. Throw in his secret knowledge of conspiracies and you have a kook for all seasons.

While Morton was routinely debunked by organizations like UFO Watchdog and the James Randi Educational Foundation, he happily sold subscriptions to his newsletter, gave seminars, and even organized tours of UFO hotspots. Ah, but when he went from giving stock market predictions in his newsletter and on Art Bell’s radio show to actually taking money from investors, he crossed the line. Now the Feds are after him and it appears that he will be the guest of the Federal Government at some low security facility for relatively harmless felons.

About ten years ago I started learning about investments. It was very difficult to find anyone who was actually willing to teach me investment basics. By the way, The American Association of Individual Investors is not a bad place to start. There are people who really know what they are doing. You read about their activities after the fact in publications the Wall Street Journal. However, they are not going to share any of that information with you. That knowledge is their power. Because I often subscribe to a very conservative investment newsletter, I receive all sorts of advertisements from various other such services. Some of them are almost as wacky as Sean David Morton. They claim secret knowledge of the future, play upon my fears, and try to excite my problems with greed. If they were all that good, they would not be selling newsletters to people like me. Remember, if it sounds too good to be true…….

And, Hey, let’s be careful out there.

Friday, March 12, 2010

The Meta-Church of The New Millennium

Its web of relationships differ from those of a country in three ways:

• No geographical or temporal boundaries exist-relations flow ceaselessly 24 by 7 by 365.

• Relations in the network economy are more tightly coupled, more intense, more persistent, more diverse and more intimate in many ways than most of those in a country.

• Multiple overlapping networks exist, with multiple overlapping allegiances.
Kevin Kelly

On a few previous occasions, I have written about how technology is changing the way we interact with others and have speculated a bit on how these changes are impacting our culture. The Church and the secular workplace will need to incorporate the changes in the rules and the playing field or suffer the consequences.

Recently Seth Godin, Yahoo’s Vice President for Marketing, successful author, and self made Internet millionaire, proposed what he termed the Word Perfect axiom.

“When the platform changes, the leaders change.”

He observed that Word Perfect totally dominated the word processing market while DOS was the operating system of choice. When Microsoft started shipping the first versions of Windows, Word Perfect ignored the changes in the playing field and the rules. Within a year it was too late. Word Perfect never recovered any meaningful market share even though they eventually produced a product for Windows Operating Systems that was better than Microsoft Word.

Recently, I realized I am a part of two churches, a brick and mortar church and a meta-church. The brick and mortar church is located in Montgomery County and has a pretty homogenous membership. All most everybody shares a common ethnic, cultural, political, economic, and, theological viewpoint. Generally, this viewpoint is strengthened and is ever more tightly defined by most of our social interactions and the information supplied by the leadership. I would guess no one travels more than 20 miles to attend this church, located near the center of our county.

I also belong to a meta-church. This church is fueled by unlimited long distance phone service, email, and most recently, Facebook. The younger members of this church and not a few of its elders would add cell phones, texting, and Twitter to that list. My meta-church literally stretches from Cambodia to Holland. Its geographic center is probably somewhere close to the Southeastern corner of Tennessee. This church is remarkably diverse. Some of its members are hard core conservative charismatics; some of them are Catholic or Orthodox; some of them are Episcopalians; some are quite liberal in their theology; and some are solid Reform Protestants. Viewpoints on politics and the economy stretch all the way from left wing Democrats who would not be offended if called utopian socialists to an extremely serious Tea Party activist who might be offended if called a conservative Republican.

In my meta-church, we share ideas and argue about issues. Generally we manage to keep our emotions under control even when we disagree. Sometimes we discover that there are certain issues that should be limited to private correspondence. Because we are exposed to a wide diversity of viewpoints, we change and we grow. A surprising number of my blog entries are answers to questions or problems first explored in my meta-church. As Kevin Kelly observes, many of my relationships in this meta-church, “Are more tightly coupled, more intense, more persistent, more diverse, and more intimate in many ways,” than those found in my brick and mortar church. I hate to say it but a phone call or an email sent to a member of my meta-church is much more likely to receive a quick and thoughtful response, than a similar attempt at communications with a member of my brick and mortar church. If I found myself dealing with a serious emotional problem, my go to guys are preponderantly members of my meta-church.

Because,“Multiple overlapping networks exist, with multiple overlapping allegiances,” approximately 2/3 of my giving goes to ministries connected to my meta-church and about 1/3 goes my brick and mortar church.

New communication and information technology will never replace my brick and mortar church any more than it will replace my local car repair shop, but already my mechanic has become a technician (really). He talks to my car with a computer, his office is connected to a world wide network of suppliers and online troubleshooting resources and informational tools, and his billing system is part of the international credit card system.

What are the implications of all this for the Church in America? I believe, like my automotive repair shop, the Church had better find ways to become a part of a larger meta-world or face cultural irrelevancy. One member of my meta-church is an Orthodox priest. He writes an outstanding blog that receives comments from as far away as Communist China. I have another friend who sends out inspirational newsletters on a regular basis to members of his meta-church. Those are just baby steps. I believe that the Church should make an effort to explore and encourage the development of networks that both reach down into their membership and up into denominational headquarters and national resources.

There is a company that for a fee will study a corporation’s patent portfolio. One of the products they produce is a “mind map.” By studying all the inventors listed on critical patents, a competitor can get a very good idea of who is working on what and how research and development teams are structured. By luring one or two key people that are at crucial intersections in a corporate R&D mind map to leave their job with offers of better salaries, working conditions, and benefits, a company can deal a significant blow to a competitor. Can such a tool be used to encourage and support the development of a meta-church within and without a brick and mortar church?

The Church in America probably should give up any thought that they have God locked up in a box. Diverse opinions and viewpoints should not only be tolerated but encouraged. No, I am not going to give up the Apostles Creed, but the fact is I can argue with a Christian who is a liberal social activist and at the end of the day we can still share communion together. By the way, the Episcopal Church is studying the possibility of sanctioning communion on the Internet (really). We really need to be willing to change and explore new ideas. We really need to support and encourage fledgling attempts at utilizing the new technology to reach out into the meta-world we inhabit.

The meta-church of the new millennium could not have been imagined even 25 years ago. Historically, this is less than 1.25% of the Christian era, barely a drop in the bucket, but as the song says, the times they are a changin’.

A link to a very old video by a very young Bob Dylan. Cut and paste because I don’t know how to make a hot link appear at the bottom of a blog entry. Ah, this new technology.

Thursday, March 11, 2010

Thinking About Retirement?

9) Start thinking about retirement when you are young. Take advantage of anything offered by your employer. This was not a problem or an issue 50 years ago, but my retirement picture is not all that good. Your retirement picture is positively scary. This is a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.

I am not revisiting the ten financial rules for young couples on purpose (yet). It just seems like every week there is new information in the financial press that calls for an update. Number 9 on my list encourages young couples to prepare for retirement. According to a recent CNN article, the number of Americans doing any savings for retirement dropped from 75% in 2008 to 69% in 2009. This is not surprising as it is difficult to save for retirement if you have lost your job. Fear also plays a role in this trend. The recent stock market and real estate crash damaged the American workers’ belief in the future. Many of them are too frightened to reenter the market. In addition, some workers were contributing to their companies’ 401K programs to get matching money. In many instances corporate contributions to their employees’ retirement accounts has been suspended or eliminated altogether.

Several articles note that Americans have no idea how much money they will need to retire. Actually, that is a pretty easy calculation. Using the current conventional wisdom, pick a number for a retirement income that is at least 75% of your current income. Of course, expense can be lowered, especially by a move to a lower cost of living area, but surveys indicate that folks don’t spend all that much less in retirement.
Some experts recommend 80% as a target.

So, let’s say your current combined family income is $89,000 (about average in Montgomery County).

89,000 X 0.75 = 66,750

Now let’s assume a Social Security income of $20,000 a year. By the way, that is actually a rather complex decision. Based on current law, there are many options. For example it might be prudent for a wife who is entitled to a smaller payment than her husband to begin drawing Social Security at 62, while her husband defers until age 65. These scenarios should be carefully examined in the light of current legislation in the months prior to applying for benefits.

66,750 – 20,000 = 46,750

For the sake of this example, let us assume that someone has at least a little bit ($10,000 a year) of a defined benefit pension. Unfortunately what was once almost the right of every gainfully employed American is becoming a benefit limited to union and government employees. I expect the number of Americans with defined benefit pensions will continue to decline.

46,750 – 10,000 = $36,750

Now, take that last number and divide by 0.04. This assumes a “safe” 4% per year draw on your retirement savings.

36,750 ÷ 0.04 = $918,750

So, there you have it. Want to maintain an “average” Montgomery County lifestyle? You will need almost $1,000,000 unless you have a CSRS pension. Until recently, most folks assumed about ½ that number would be generated by the sale of their home. That was a good assumption until 2008, but not any more.

How much do Americans have in retirement savings?

43% have less than $10,000.
54% have less than $25,000.

Many just blow off the numbers and expect to work past age 65. Is that a good assumption given the destruction of wealth creating jobs over the last two decades? No one can state with certainty what normal or structural unemployment might be in our current economy, but I bet it is a lot higher than the old 3% to 4% unemployment defined as “full employment” by economists.

Let me give you one more scary thought. Let’s say you have saved $1,000,000. You can safely withdraw $40,000 a year. Now let’s say the market drops and your account falls to $750,000. Now you can only draw $30,000 a year. Given 4% inflation, this is not a happy scenario.

The cost of medical care is the last big unknown. MEDICARE is probably going to be broke within my lifetime. I have been paying high taxes to support MEDICARE my whole life, expecting to have that benefit when I will need it. Generally, health declines as one reaches old age. If politicians try a bait and switch on the baby boom, look out. If they try and overtax the next three generations to pay for the unlimited hospitalization and medical care of their elders, things could get real ugly real fast.

More than ever we need to remember Proverb 3: 5 and 6.

[5] Trust in the LORD with all thine heart; and lean not unto thine own understanding.

[6] In all thy ways acknowledge him, and he shall direct thy paths.

Sunday, March 7, 2010

$500 Is Better Than Nothing

7) Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.

I just visited an American debt clock site. The official U.S. debt is currently $12.5 trillion. The shadow debt which includes all future obligations including Social Security and Medicare is $74.5 trillion, but who cares if you have to put a car repair on a credit card, knowing you can’t pay it off at the end of the month. The rainy day fund is number seven on my list of ten basics for young couples. Because we had some savings (not any where near six months) and I was able to obtain some scholarship money, I was able to return to engineering school when I lost my job during the last big recession in the early 1980s without incurring any student debt. That feat would be much more difficult today, as the cost of education, fueled by government guaranteed student loans, has greatly outpaced inflation.

Like most people who write about such things, I still stand by the six months goal, but that is a very hard goal for most couples. Some writers give a nod to three months, but the current recession has conclusively proven that is not enough. In fact the average length of unemployment is currently 30.2 weeks and rising. Even six months in a rainy day fund is not enough.

The well know personal finance author, Liz Weston, recently put an entirely different spin on this problem in an article titled, “Why You Need $500 in the Bank.” I really like the concept. It is pretty easy for most couples to put an extra $100 in their checking account and an extra $400 in savings. This can be accomplished by very simple methods, like giving up the daily latte (Suze Orman’s go to example).

Even a $500 cushion can protect your credit card from unfortunate events, like the car repairs mentioned at the beginning of this article. The author contends that for people who are living from paycheck to paycheck, the first $500 is the hardest. Once they see that they can actually reach a financial goal and experience the benefits of avoiding the credit card fix every time something goes wrong, the savings habit is established and $500 becomes $10,000.

Other ideas for the first $500 can be found in The Debt Snowflake (also a Liz Weston idea). They include ideas like, yard sales, tax refund checks, temporary part time jobs, and saving change in a jar.

The statistics are unbelievably horrendous. The following table is from the Federal Reserve Board’s 2004 Survey of Consumer Finances.

U.S. households with less than $500 in the bank

Age group Percentage

Under 35-------34.5%
75 and over----14.9%

Saturday, March 6, 2010

Of Mice and Men (Update)

My family has revered education for generations. My education has provided me with a pretty good living. I value education and I continue to study many subjects in both formal and informal settings, even though I am approaching retirement. I have always considered a good education a prerequisite to a good life, even though I know this is not necessarily the truth. Because of this lifetime prejudice, I have always considered student debt, acceptable debt, if and only if such debt is part of a rational career development program. As the best laid plans of mice and men unravel in our current economic downturn, I am beginning to believe that student loans are just too dangerous for many naïve, irresponsible, or foolish young Americans, who lack the sophistication to make serious, perhaps irreversible, financial decisions so early in their young lives.

Recently the Wall Street Journal published a news article about a family practitioner who managed to accrue $250,000 in student debt before graduating from medical school in 2003. Since then this number has increased to $555,000. Doctor Michelle Bisutti deferred payment of her initial debt as she completed her residency. During this time the power of compound interest and additional fees drove her debt higher and higher. The largest single fee was a $53,870 charge incurred when her case was turned over to a collection agency. There is no more gold plated guarantee of wealth in this society than a medical degree, but educational debt still has the potential to destroy even the great earning power of a medical doctor.

Doctor Bisutti, obviously an intelligent woman, admits she did not read the “fine print” in her loan agreements. Remember, bankruptcy can discharge mortgage debt, credit card debt, consumer loans, and even gambling debt, but not student debt or the charges associated with such debt. Many former students lacking the inherent earning power associated with a medical degree find they are counted among the 27 million Americans who are without a full time job. It doesn’t matter. Their student debt, even if deferred due to such hardships, continues to increase as fees are added and interest continues to compound. Currently only 40% of student loans are being actively repaid. The rest are classified as defaults or deferments.

Another example provided in the article recounts the story of a laid off factory worker from Massachusetts. $120 of her $300 unemployment checks is garnished to repay her son’s student debts. He managed to accumulate $50,000 in student debt in order to obtain a job paying $29,000 a year. When he lost his job in this recession, he defaulted. Sallie Mae, the quasi-governmental corporation that is the largest private provider of student loans, went after his mother who signed for these loans. Like Doctor Bisutti, this young man admits that he did not read the “fine print” in his loan applications.

Doctor Bisutti has entered into a legal agreement that will allow her to repay her student debt--- in 351 months--- but by then she will be 70 years old! The article states, “The debt load keeps her up at night. Her damaged credit has prevented her from buying a home or a new car. She says she and her boyfriend of three years have put off marriage and having children because of the debt.”

Look for grants, work study, or scholarship money, find a job with a company that provides educational assistance, or go to night school for years. Given the current legal structure and economic climate, avoid student loans except in the most unusual situations.