Sunday, April 25, 2010

Say Good Morning to Your Money

I like the column Laura Rowley writes for Yahoo Financial. Like me, she is old school, a champion of such simple virtues as, “Live within your means; build your skills and get a higher-paying job; stick to a budget; remain debt-free (except for a mortgage); save monthly for big goals, including college and retirement; learn about investing, risk and taxes so you do the right things with your savings; and yes, research deals and clip coupons.” Sometimes Laura puts an interesting spin on familiar material. I think this is because she learned about money as a financial journalist in order to become a stay at home mom. She is still a successful freelance journalist but her priorities are somewhat different than mine. In a recent column entitled “Improving Your Relationship with Money” she compared our relationship with our money to more normal human relationships. Reading this column sent my mind spinning off into directions I doubt would have occurred to the author. Here is my riff on her subject.

It’s true. We have expectations for all sorts of relationships with people, animals, things, and concepts. Recently, one of my coworkers was shopping for a new car. This young lady was explaining what she wanted in a car. I commented, “You want the same things from a car you want from a boyfriend.” She was puzzled and asked me what I meant by that statement. I replied, “You want it to be cute and reliable.”

She laughed and agreed with my observation and added, “I given up on trying to find a boyfriend who is cute and reliable. Maybe I will do better with cars.”

I once heard a psychologist state that he did want much from a relationship with a woman. He only wanted her to provide for all his sexual and emotional needs for the rest of his life. Is this all that different from what I am asking my money to do for me not just now in the twilight years of my career but on into retirement and old age? If I want to have a good long lasting relationship with my wife or even a friend, it will require an investment of time and emotional energy. Why should my relationship with money be any different?

“Good morning money. How are you feeling today?”

“I’m tired. I didn’t sleep very well last night.”

“What’s bothering you?”

“I don’t want to talk about it.”

“Did I do something wrong?” At this point my money scowls at me.

“You know I don’t think you should be wasting me on all those lottery tickets.”
(As an aside, I recently learned that the average, THE AVERAGE, American family spends over $500 a year on lottery tickets! Really!)

“I’m sorry. I am just bored and want something good to happen in our lives.”

“Well, why don’t you try investing me in something that is good for me, like that retirement account your friend at work has been talking about.”

“Yea, I’ll try and do better. I’ll talk to my boss about that today.”


I think you get the idea. Laura ends her article with a call to treat our money with the same kind of respect and commitment that we bring to any relationship. I wouldn’t have thought of such a thing, but I like it.

Saturday, April 24, 2010

Just the Facts Ma'am (Another in the Car Math Series)

Well, I went and did it. After 14 years and 189,000 miles I replaced my beloved 1996 Honda Prelude. Buying a new vehicle is a major financial decision. Children and houses are both major expenses but they are also investments. Except in very rare circumstances buying a car is a pure expense. As the years pass its value will decline as it continuously consumes gas, oil, insurance, and tax money. A couple of years ago one of our customers purchased a Saturn Sky with every possible performance option. He keeps the car in a garage and seldom drives it. Since it is fast, rare, and Saturn is out of business, if he continues to keep it unused in his garage, it will probably be worth a great deal of money in ten years. That is not the way most of us buy and use cars.

This is a hard saying. I understand not everyone will hear it. I have paid cash for every car I have ever owned. I suggest you do likewise. Going into debt to purchase a depreciating asset is simply a bad idea. It is much better to pay yourself car payments until you are ready to buy a new car than it is to send your car payments to the finance arm of automobile manufacturer. Yes, I have driven some pretty old and worn out cars, but debt is slavery. Debt is used primarily by corporations and government in an attempt to force compliant behavior in citizens and employees. The interest you pay on debt, private or public, represents your labor, labor for which you are receiving no benefit. Please think about that before you buy another car.

I guess the next question is when to buy another car. When I was young and poor my rule of thumb seemed to be that when the cost of repairs to the car would exceed the value of the repaired car it was time to move on. More recently, my behavior seems to indicate that when maintenance costs over the course of one year approach $200 a month it is time to buy a new car. The way I buy and use a car $200 a month is pretty much a new car. Larry Burkett of Crown Financial Ministries would frequently observe that it is almost always cheaper to repair an existing car than buy a new car, but when is enough, enough?

$200 a month X 12 months in a year X 10 years = $24,000.

Until 1988 when I bought our first new car for my wife, all of our cars were used cars. Since then I have bought new cars and then used them for a very long time. There is no question that late model used cars represent the greatest potential value to the consumer. In fact, I have been told that Dave Ramsey of Financial Peace Ministries recommends that one should ALWAYS buy late model low mileage used cars. However, there is just something about a new car. Understand that the difference in cost between a suitable used car and the new model, like a vacation, is an expenditure of discretionary income. If a new car makes you happy and you can afford it, why not?

Now, as Sergeant Friday of Dragnet fame, would say, “Just the facts, Ma’am.” The following information is not presented as expert instructions in the art of buying a car. It is just my actions and the results. I hope that you find a better way to buy a car and share it in this blog.

For over two years, I have been thinking about buying an Acura TSX. The Honda Civic is just too small for my large arthritic body. The Honda Accord is much larger than anything I need or want. Actually, the TSX is larger than what I need, but it is the Honda product that falls between the Civic and the Accord. That the TSX is a luxurious sports sedan is just icing on the cake. As you can see, my experience with the 1996 Prelude, hands down the best car I ever owned, has turned me into a highly prejudiced Honda fanatic.

First I did my research. The Internet has greatly improved the consumer’s access to information. Carmax has a wonderful website. I can see every car they have at every dealership in America at one time. They offer a “no haggle” price. What you see on the Internet is the price you will pay, period. In order to calculate the trade in value of my Honda I used the calculator on the Kelly Blue Book website. Kelly is the industry standard for calculating used car value.

Using these tools I was able to bracket a price range for my purchase. I added Maryland sales tax to the advertised price of two low mileage 2009 Acura TSXs then subtracted the fair value of my trade in. I did not include title and tags, as this price (about $60) is so small as to be irrelevant in these calculations. Here are the results:

$29,097 for a 2009 TSX with Technology Package (12,000 miles)

$26,359 for a 2009 TSX base model (12,000 miles)

The Technology Package contains a GPS system and a number of electronic gee-gaws I did not wish to purchase. It adds about $3,000 to the cost of the car.

Then I went to the Edmunds website. They provide reviews and pricing information on all new and used cars. From Edmunds I learned the following:

$29,310 was the Manufacturer’s Suggested Retail Price (MSRP) for a 2010 TSX base model.

$27,359 was the Invoice Price for a 2010 TSX base model.

Acura has a 3% hold back calculated on the MSRP. This means the dealer receives an addition $879 when the car is sold.

Therefore, I knew the starting point for the dealer was $26,480 not counting any secret incentives the manufacturer was offering their dealerships at that given point in time. There are always some secret incentives for something or the other. I could see that the amount of money I was willing to spend put me in the new car ballpark if the dealer was not too greedy.

I wrote all these facts in an orderly form in my day planner so that I would have them at hand during any negotiations that might take place. When the salesman asked the ultimate question they will always ask, “What price would it take to get you to buy today?” I said, “$27,000 drive away,” (meaning I give you my Honda and you give me a 2010 TSX, and I write a check for $27,000 end of story). I thought that was a reasonable price for both dealer and customer. I expected the assistant sales manager to turn me down then call me up in a day or two. However, he wanted to talk. We talked. After I was presented with a bewildering array of irrelevant numbers, the bottom line, the only number that interested me, was $27,833. This number was in the price range I was willing to pay for a used car, so we shook hands and today a dark red 2010 Acura TSX sits under my carport.

I had planned to use an Internet buying service this time, but I was given an acceptable offer using the traditional method. Edmunds and others offer a service that takes your requirements and solicits bids from dealerships in your area. At least one of my coworkers had good success using this method. Another man I work with has developed his own Internet method. He keeps asking multiple dealers for bids by email. Of course they don’t give him any price and encourage him to come visit their dealership. He has found that if he persists sooner or later one of the dealers will blink and make him a good offer, since they can not know what the other dealers might be doing.

I can think of one appropriate scripture for the car buying process. Both dealer and customer should keep it in mind.

Matthew 7:12 (NIV)

So in everything, do to others what you would have them do to you, for this sums up the Law and the Prophets.

Saturday, April 17, 2010

Compulsive Shopping

“I enjoyed the movie "Confessions of a “Shopaholic" because Rebecca, the heroine, eventually learned to take responsibility for her actions. Deep in debt and unwilling to stop shopping, she at first tried to blame others in order to keep her victim status. She tried to find outside resources ("I could win the lottery!") to save herself rather than changing her own behavior. But in the end, she did the wise thing: She stopped shopping, stopped blaming others, stopped evading her creditors and sold most of her possessions to pay her debts. In other words, she grew up.”
Patrice Lewis

This not the kind of post I generally want to write for this blog. It starts with a negative, compulsive shopping, rather than with a positive, thrift. However, after receiving an email newsletter from our Employee Assistance Program (EAP), I decided that this subject might be worth a post. It didn’t take long to find some supporting material, so here is something to think about. I hope someone finds it useful.

My wife is not a shopaholic. However, it would be easy enough for her to become a compulsive shopper in the Atlanta of the 1950s and 1960s. She grew up living near and shopping at the some of the biggest and most famous malls in the Southern United States. At the time, Lenox Square and Phipps Plaza were tourist destinations (really). Bus loads of women from all over the South came to Atlanta with the sole purpose of visiting these malls. To these women, shopping was entertainment. They would rather spend two hours in Bloomingdales looking at shoes than an equal amount of time at a movie or reading a book. Shopping can also become a reward for a success or a distraction from the pain of living a less than perfect life.

My EAP newsletter informs me that, “According to a Stanford University study, 17 million Americans or 6% of the population are compulsive spenders or shoppers. Researchers from the University of Florida reported that the average compulsive spender is carrying $23,000 in debt (not including a home mortgage).” That would be $23,000 of high interest unsecure consumer debt, mostly on credit cards. The interest on such a debt is simply crippling to a middle class income.

The newsletter goes on to propose a series of questions to help the reader determine when shopping has become a problem. If you answer yes to any of these questions it is probably time to seek some help.

-- Do you shop as a means of relieving stress or escaping everyday problems?
-- When you are shopping, do you experience feelings of euphoria and excitement?
-- Do you feel guilty or remorseful after shopping?
-- Do you ever hide your purchases from relatives or loved ones?
-- Do you buy things on credit that you would not normally buy if you had to spend cash?
-- Is your shopping habit causing emotional stress, financial debt or ruined credit in your life?

Lest I be accused of making this a woman’s issue, let me observe that we men are also subject to a problem with compulsive shopping. While a man will not take a bus trip to Atlanta to waste money on clothes he neither needs nor can afford, he might drop $12,000 on a bass boat and then attempt to hide the purchase from his wife or buy a new 60 inch plasma TV for a Super Bowl party with his friends.

To bring a current news story into this discussion, some authors believe that the recovery we are experiencing in retail sales is at least in part fueled by the foreclosure crisis. Some of the folks who are no longer paying the mortgage on a house that is badly upside down, are instead using the mortgage payment money to fuel a binge of compulsive spending on luxury items. There are no hard numbers connecting increased sales of furniture, appliances, and automobiles to defaults or mortgages in arrears, but there is plenty of anecdotal evidence to support the notion that people who bought a house they never could afford are now likely to use that money to fuel a retail sales binge before bankruptcy or some legal judgment overtakes them and ends the party. Let me be quick to add that there are also plenty of stories of good honest hard working people overtaken by the collapse of American industry who have done everything in their power to hold on to their house only to see their dreams vanish into foreclosure and eviction.

It is all too easy to find ways to escape the pain of living with a momentary high. Food, alcohol, drugs, gambling, and sex are probably more common than compulsive shopping but all can result in serious negative consequences. There are better ways to cope with “depression, sadness, anger, emptiness, boredom or low self-esteem.” It is not easy. Sometimes I use food as a reward or comfort in time of sorrow. Not surprisingly, I have a problem with my weight.

There is help out there. I hope, if you are facing this problem, you can start at your church. Many churches are beginning to offer courses in financial literacy and support groups for folks with money problems.

As we have learned from the 12 step programs, the first step in solving a problem is to admit we have a problem. There are people out there who are willing to help, not only with the problem but with the guilt, shame, and anxiety associated with compulsive shopping.

Sunday, April 11, 2010

Short Sales

I have mentioned short sales in several of my previous posts, but I have never actually defined or discussed short sales at any length. One of the friends of this blog believes it is worth a post (I agree) and has provided me with some information on short sales.

Over the last two years our country has suffered a severe drop in the value of residential real estate. In some areas it appears to have reached a bottom. In some areas home values continue to drop. Currently no reputable projections are calling for a rapid recovery in property values. Traditionally, during a recession, displaced workers sell their homes, move to areas with better employment opportunities, and start over. In this recession the drop in home values has locked many Americans in a situation in which they owe the bank more on their house than their house is worth. For example if they owe $400,000 on a house with a realistic appraised value of $300,000, the bank would expect the home owner to cough up the extra $100,000 when the house is sold. This condition is termed, being underwater or upside down. Since it is impossible for an unemployed or underemployed individual to come up with that kind of cash on short notice, the homeowner is locked into a predicament that severely limits their options.

An option to foreclosure or simply walking away from the house and allowing the bank to take possession of the property is termed a short sale. In a short sale, the bank will accept the market value of the house without further penalizing the mortgage holder, writing off the difference between the current value of the property and the value of the loan as a tax loss. The homeowner is expected to find a buyer using a realtor and present the deal to the mortgage company. Since a mortgage is a contract, the bank holding the mortgage can choose to accept or decline the offer.

Why would a bank choose to allow a homeowner to walk away from a valid contractual agreement knowing that it would result in a serious loss of profit? Consider the option: In a foreclosure, the homeowner would stop making mortgage payments but continue to live in the house. Evicting a homeowner, depending on the jurisdiction, can take as long as a year. During this time homeowners, knowing that they will lose their property, frequently vandalize the house before they are finally evicted. In one such case in my neighborhood, the evicted owners did about $70,000 worth of damage to their home. The bank was then stuck with a substandard property that took over a year to sell. During this time the bank was responsible for maintaining the property and liable for any accidents that might occur on that property. Ultimately the property, once worth over $400,000 was sold at about $210,000. The bank would have only lost $100,000 in a short sale and they would not have been responsible for two years worth of aggravation and legal hassles. In addition if the bank accepts a short sale, it will receive $1,000 from the Federal government. Not much of an incentive, but at least enough to pay for some of the paperwork.

Of course the short sale is good for the distressed homeowner. The homeowner receives mortgage relief without further damage to their credit ratings, the bank agrees not to sue the homeowner for any unpaid balance, and the information I have received indicates that some Federal money ($1,500) will be available to help the homeowner relocate after a short sale. I have not verified that last claim. If the homeowner was not delinquent at the time of the short sale they will be eligible under Fannie Mae guidelines to buy another home immediately. If the homeowner was 60 days or more in arrears at the time of a short sale then they will be eligible to purchase a new home in two years rather than the traditional seven years required to recover from foreclosure or bankruptcy.

Real estate agents benefit from short sales. They will be paid by the bank if the short sale is successful. The real estate agent receives nothing if the short sale fails and the property goes into foreclosure. Even in the instance of failure, the agent receives free publicity and new business through the sales process.

There are drawbacks to short sales. The bank will want to examine the homeowner’s personal financial records in will require a hardship letter requesting mortgage relief. The homeowner will be expect to keep their property in meticulous condition and put up with a stream of prospective buyers for months, as the bank processes the request for a short sale. After all that there is still no guarantee that the bank will accept the offer. From what I have read it appears that the homeowner must be 60 days or more in arrears to qualify for Federal money. This seems odd as it is a catch 22 to the Fannie Mae guidelines.

Banks do not like short sales, but sometimes they will agree to such an arrangement because it will limit their losses. However, the situation is greatly complicated if there is a second or even a third mortgage on the property. In such situations the homeowner is not only asking for the first mortgage holder to take a hit but is asking any additional lien holders to take a total loss. Some of the money from the $75 billion mortgage modification program is going to be applied to provide some relief in this area. If a second mortgage holder agrees to a short sale, then that servicing company will also receive $1,000 from the Federal Mortgage Relief Program.

If you find yourself underwater in a mortgage and are forced by circumstances to consider a short sale, be certain to find a reliable real estate agent to assist you in this process. As laws concerning foreclosure and repossession vary dramatically from state to state, I would also recommend advice from a competent real estate attorney. Evidently short sales are nothing new. Banks have been accepting such offers for years. However, they do not want that information to become common knowledge. In the current real estate crisis the mortgage companies might be more likely to entertain the offer of a short sale than in years past. It is definitely a option worth investigating.

Saturday, April 10, 2010

If The Truth Was Told

If the truth was told, I would save more money by brown bagging it at work rather than scheming to save a few hundred or a few thousand dollars on major purchases, but that wouldn’t be any fun. I think this would be a good time to update y’all on how some of my decisions in this area are turning out.

Last October my eleven year old push lawn mower suffered a catastrophic failure. The entire front wheel assembly broke off the deck. Then at full speed the blade dug into the ground, giving it a strange new wavy shape. I expected to replace that machine after the end of the season anyway, so I wasn’t too upset. After I returned from vacation I went looking for a left over lawn mower. I thought I would buy a high quality self propelled mower from a privately owned power equipment store. I thought that self propelled mowers are notoriously unreliable. If I bought the thing from the same guy who repairs what he sells, I would receive better treatment. There was a problem with this plan. Well reviewed products by Lawn Boy, Toro, and Honda were all gone. Only a few poorly reviewed models remained in stock at the various dealers in this area. I did finally locate a Honda floor sample at a Home Depot. It was the last self propelled lawn mower in the store and it was priced to move. I was a little worried about buying a floor sample from a big box store, but it was a Honda. Yesterday, for the first time, I brought the mower out of the shed, added oil, gassed it up, and off I went. As an engineer, I found playing with my new toy extremely cool. It has two blades. I would guess they are counter rotating. Whatever they are doing down there they mulch grass like crazy. It has a hydrostatic drive system, ball bearing wheels, and a bunch of neat features---boys and their toys.

Last July I decided to pay for the 180,000 mile maintenance for my beloved 1996 Honda rather than buying a new automobile. I figured that if I could get a year out of my car without any more major repairs, I would consider that decision a win. I rolled the dice and lost. In February I blew the seal on the oil cooler. I didn’t even know the car had an oil cooler. I thought pickup trucks with towing packages had oil coolers, not passenger cars. But the Prelude is a sports car. I guess I need that oil cooler for sustained speeds in excess of 130 miles per hour. Two hundred dollars for the oil cooler is not a major repair. However, last week a rear brake caliper failed, causing about $700 worth of damage. That constitutes a major repair. I am also going to lose the use of the car for nearly a week because the car is old and rare. Finding parts is becoming a major headache. After 14 wonderful years and 189,000+ miles it is time to say goodbye to the best car I have ever owned. Putting any more money into a car with a $2,100 trade in value just doesn’t make much sense. I would like to buy a late model low mileage Acura TSX, but so would a lot of other people. There are not a lot of them available and they don’t depreciate very quickly. It looks like the best buy on my short list of desirable cars would be a used mid-model to high end Honda Accord with the four cylinder engine. They depreciate faster than they same models with the V-6. I really don’t need a sports sedan with a decent power to weight ratio. I don’t drive at speeds over 120 mph. But I want MORE POWER. I will continue to keep you informed, as my adventures with money continue to unfold.

Saturday, April 3, 2010

Asset Allocation (Part II)

When financial journalist and author, Ric Edelman, does his thing on PBS, one of the more interesting parts of his presentation is a demonstration of the importance of sector diversification. He lists different sectors of the economy (not everyone agrees on how to categorize the market), then he places a different colored block next to that sector representing how “hot” that sector was in the previous year. Then he shows the same information for the last 10 or more years. The result is a meaningless blob of seemingly random color patterns. The point is what is hot this year will not be hot every year. There is not even any meaningful pattern that a sector will follow over a number of years. The actions of market sectors over time are impossible to predict. Therefore it is wise to diversify across all sectors of the economy.

Remember, as you read these numbers, they apply only to common stocks. This information assumes that, depending on your age, tolerance for risk, and financial situation some percentage of your investments are in bonds, cash, and certificates of deposit.

The two page fact sheet for the C fund from my TSP retirement account indicates that the S&P 500 Index breaks down into the following industry groups.

11.2% Energy
15.4% Financials
13.4% Health Care
19.0% Information Technology
3.1% Telecom Services
3.4% Materials
3.8% Utilities
9.0% Consumer Discretionary
9.9% Industrials
11.7% Consumer Staples

Index funds, such as the C fund track the S&P 500, rebalancing from time to time in order to reflect changes in the importance of different sectors of the economy. Many people consider (LOW COST!!) index funds such as those offered by Vanguard as a nearly ideal method for the small investor to share in the profits of large companies. I am looking at a graph of the Dow Jones Industrial Average (an index that is similar to and closely tracks the broader S&P) from 1945 until the present. Although there are some nasty humps and bumps along the way, the line is remarkable close to linear as starts at 150 and ends at 10,900 over the last 65 years. Warren Buffett, the genius, famously bet a manager of a hedge fund a total (at maturity) of $1,000,000 (the proceeds go the charity of the winner’s choice) that a low cost S&P Index fund will beat any hedge fund selected in advance over the next ten years. We shall see.

Now, let me admit my prejudices. I like stocks that pay a dividend. I tend to be suspicious of any company that does not want to share its profits with its owners. Of course high tech startups need to plow profits back into research and development, but when is enough, enough? Cisco Systems and Apple are sitting on multi-billion dollar war chests. They are world recognized, well established brands. It is time they share their wealth with someone other than corporate managers with stock options. Almost all of my individual stocks pay a dividend. Some of them pay a very good dividend. I tend to believe in companies that produce stuff that people have to buy or are going to buy anyway. Therefore I am overweight (compared to the S&P 500) in areas like energy, consumer staples, and regulated utilities. Somehow I believe that no matter how the economy is faring, people are going to buy gasoline and toilet paper.

The stock funds in my retirement account are index funds. Sharing the distribution of my personally directed money, as categorized by Schwab, would require more effort than I am willing to undertake. For example, Schwab shows that I have 0% in basic materials. They categorize GoldCorp, a Canadian mining corporation, as a foreign stock and they helpfully categorize Plum Creek Timber, a wood products and land development Real Estate Investment Trust (REIT), as “other.” Both those companies meet the definition of materials.

Argus, a financial research company suggests a number of model portfolios showing sector diversification. They also suggest individual stocks to hold within these portfolios, but I will let you look up that information.

Equity Income

6.3% Basic Materials
12.6% Consumer Discretionary
3.4% Consumer Staples
11.6% Energy
9.0% Financial Services
8.7% Health Care
8.7% Industrials
6.0% Technology
6.8% Telecom

Growth and Income

3.2% Basic Materials
7.8% Consumer Discretionary
9.1% Consumer Staples
14.3% Energy
18.2% Financial Services
8.0% Health Care
7.8% Industrials
15.9% Technology
2.1% Telecom
13.4% Utilities

Mid-Cap Growth

0.0% Basic Materials
12.0% Consumer Discretionary
3.0% Consumer Staples
11.4% Energy
8.2% Financial Services
25.8% Health Care
11.4% Industrials
24.3% Technology
0.0% Telecom
3.9% Utilities

Before starting to build a portfolio of stocks and/or common stock funds, develop a plan to achieve a goal. This plan, of course, will be modified over time as your financial position, risk tolerance, and age change. Right now I seem to fall somewhere between the Equity Income and the Growth and Income models. Since Schwab classifies stocks as small cap or large cap, I can only guess at what I might own that Argus would classify as mid-cap. Don’t allow your decisions to be ruled by your emotions. If you do, you will sell when the market is at or near a bottom and buy just before it reaches a peak. These are two of the most common mistakes made by individual investors.

Finally, know what stocks are in your funds. You may not be as diversified as you think. For example, here are the top ten holdings of the C Fund as of December 31, 2009. A star before the company name indicates that I hold the stock in my self directed account.

Exxon Mobil
* Johnson & Johnson
* Proctor & Gamble
* AT&T
JP Morgan Chase
* General Electric
* Chevron Texaco

And, Hey! Let’s be careful out there.