Saturday, April 30, 2011

Dave Ramsey Dumping Debt (Class 4b of 13)

Dave Ramsey promotes a method of debt reduction called the Debt Snowball. It is not the most financially efficient method available but Ramsey contends that for sound psychological reasons it is the method most likely to succeed. He points out that if you understood the numbers, you would not be overwhelmed with credit card debt. Getting out of debt is hard work. It requires what (the pf stands for Personal Finance) calls, “Getting Mad, Zealous, and Passionate.” Dave Ramsey calls it Gazelle Intensity. He recommends selling so much of your stuff to raise money to pay off your debts the children will think they are next. He also recommends taking a temporary part time job “throwing pizzas or delivering papers” until your debt problem is under control. He even recommends holding off on contributions to your 401K fund until completing baby step 2, the debt snowball.

The method works as follows. First rack and stack your debts, excluding your mortgage. Paying off the mortgage early is baby step 6. Start with the smallest debt and end with the largest. Let’s make up some numbers. For the sake of simplicity we will not consider the effects of interest rates in this example.

$500 Owed to store for new TV
$1,000 Credit Card A
$5,000 Credit Card B
$6,000 Credit Card C
$12,000 Car Loan
$19,000 Home Equity Line of Credit (HELOC)

First, while making the minimum payments on all your debts, build a $1,000 emergency fund, baby step 1. Then, while only paying the minimum on every other debt, take all the extra money you can afford on a monthly basis and go after the smallest loan first, in this case the TV. Let’s say you can make minimum payments on everything else plus $250 dollars per month because you have taken that part time job throwing pizzas or delivering papers. In two months the TV is paid for. Tape the receipt for the final payment on your refrigerator and celebrate.

Next take the $250 and the $50 dollar minimum payment you were making on the TV and add it to the minimum payment on credit card A. In three more months Credit Card A is paid off. Tape another paid in full statement to the refrigerator, while screaming curses and threats at credit card B. (Just kidding--maybe.)

Then take the $300 plus the $25 minimum payment you are making to Credit Card B. In 15 months the final Credit Card B statement resides on the refrigerator.

Then take the $325 and add it to the $50 minimum required by Credit Card C. In 16 more months another one bites the dust.

It is called snowballing because as you pay off each debt you have more money available to pay off the next debt, like a snowball rolling down a hill. Ramsey believes that extricating oneself from debt is 80% an emotional problem and 20% a matter of knowledge. He believes in going after quick attainable goals to build a psychology of success and willingness to continue when the going gets tougher. Based on Dave Ramsey’s data, my example is rather pessimistic. 18-24 months is typically the time required to complete the debt snowball.

Dave Ramsey’s five Rules to “Juice” the Debt Snowball

1) Quit borrowing more money
2) You must save money
3) Prayer really works
4) Sell something
5) Take a part time job or work some overtime

There are snowball debt calculators that require Excel or an Open Office equivalent available on the web. I used a spread sheet to track my mortgage as I made extra payments to principal. It is reinforcing to watch the extra payments peel off the backside of the loan as you go after a reduction in principal. I expect these would aid in a debt payment plan using Dave Ramsey’s method.

Friday, April 29, 2011

Dave Ramsey Dumping Debt (Class 4a of 13)

This is Dave Ramsey’s signature performance. Most of the class presentations run 50 minutes to an hour. This one is an hour and a half of Screamin’ Dave at the top of his game. He attacks every form of debt we have been taught is not only acceptable but desirable. Then after all the myth busting coupled with more Sturm und Drang than I can express with the written word, Dave offers a way out, The Debt Snowball.

Lending money to a friend or relative is stupid. Borrowing money from a friend or relative is bad because it poisons the relationship. Proverbs 22:7 states: The rich rule over the poor, and the borrower is servant to the lender. Dave believes your subconscious mind knows you are now a servant. If you don’t repay the loan, it will likely destroy the relationship.

Cosigning for a loan almost guarantees you will end up paying for the item. The bank wants to make loans. That is how they make money. If the bank wants someone to cosign they believe the customer is a bad credit risk who will not repay a loan. Usually they are correct. Proverbs 17:18 One who has no sense shakes hands in pledge and puts up security for a neighbor.

Payday loans, car title loans, and similar short term high interest rate businesses exploit the poor. Dave correctly states such businesses are plain evil. Proverbs 22:16 states, "He who oppresses the poor to increase his wealth and he who gives gifts to the rich--both come to poverty."

Next Dave goes after a tax on stupidity, the lottery. Studies indicate most lottery tickets are purchased by the poor, the desperate, and the uneducated. Look at the odds. The chances of finding a winning lottery ticket blowing around a supermarket parking lot are about the same as buying the winning ticket. Proverbs 12:11”He who works his land will have abundant food, but he who chases fantasies lacks judgment.”

Next Dave goes after the great middle class myth; you will always have a car payment. Dave shows by example that paying cash for an older car, then driving it as you pay the equivalent of a car payment to yourself will put you in a very nice late model used car in a couple of years. Dave saves a particular dose of venom for the car lease or fleece as he prefers to call this method of obtaining a car. In a fleece the victim pays top dollar and does not even own anything at the end of the agreement. Some businessmen observe the cost of leasing a car can be deducted as a business expense. Dave counters by pointing out a vehicle purchased for cash can be depreciated giving the business the same tax benefit at a lower cost. Finishing up car myths, Dave rants, never buy a new car unless you are a millionaire. New cars depreciate so quickly in their first three years, the buyer will always come out ahead by buying a two or three year old car (maybe something just coming off lease).

Conventional wisdom states, buy as much house as you can possibly afford with a 30 year mortgage to keep the payments down. Put as little down as the bank will allow. Property values always go up, at least until 2008. Then they didn’t. Dave recommends a 15 year mortgage with as much as 20% down. The savings over the lifetime of the loan are extremely significant. Dave Ramsey considers gimmick loans such as adjustable rate mortgages and balloon mortgages examples of suicidal stupidity. He didn’t even bother to mention some of the things seen in the run up to the current great housing disaster, interest only loans, reverse amortization loans that left the borrower owing more at the end of each month even after making the payment, or 40 year mortgages.

Dave Ramsey’s attitude to credit cards is similar to that of a reformed alcoholic to social drinkers. Dave nearly destroyed his life and his marriage with credit. He does not tolerate credit cards. He considers them as dangerous as crack cocaine. He does not own a credit card but uses debit cards for both business and personal expenses. Dave Ramsey’s company will not accept credit cards. This proved problematic for our church when buying materials for this course. Dave does not want to hear from people who pay off their credit card every month. Dave does not want to hear about frequent flyer miles or other credit card benefits. Dave nearly goes ballistic over the exploitation of college age young folks by the credit card companies.

The use of home equity lines of credit (HELOC) has been pretty thoroughly discredited by the events of the last few years. My generation was told; use all that equity in your house to buy a new car, a great vacation, or even for your stock market investments. When the vacation is over, the car is worn out, and the stock market crash destroyed your wealth, you still have a second mortgage on your primary residence. A second mortgage by any other name is still a second mortgage and it stinketh. Pretending a HELOC or any kind of debt consolidation loan can get you out of debt is foolishness.

Dave Ramsey points out you can’t get out of debt by borrowing more money. One can get out of debt by what Dave Ramsey terms gazelle intensity. Starting with the following passage from Proverbs, Dave shows a video of a cheetah chasing a mother gazelle and her fawn, while he screams about running away from debt, especially credit cards. This, he contends, is the emotional intensity necessary to escape the debt trap.

Proverbs 6 1-5

My son, if you have put up security for your neighbor, if you have shaken hands in pledge for a stranger, you have been trapped by what you said, ensnared by the words of your mouth. So do this, my son, to free yourself, since you have fallen into your neighbor’s hands: Go—to the point of exhaustion—and give your neighbor no rest! Allow no sleep to your eyes, no slumber to your eyelids. Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler.

Sunday, April 24, 2011

A Brief Rant Inspired by Proverbs

Proverbs 22:29 (NIV)
Do you see a man skilled in his work? He will serve before kings; he will not serve before obscure men.

Many years ago when I first started work at the lab, I became the de facto manufacturing engineer for our branch since I had 9 years of factory experience. The other engineers asked me for reality checks on the feasibility of their designs before they sent them to our shops. There was one hole in my experience. I knew very little about welding. I sought out a short course on welding for supervisors. During this search I discovered my county offered an enriched magnet high school program in the trades. I spoke with the welding instructor. He informed me not only did his students learn the basics of their trade but were exposed to experimental techniques being developed at the then National Bureau of Standards. The teacher expressed both pride and despair. The staff of this school had developed one of the best such programs in the country, but no parents wanted their children to learn a trade. Instead they all wanted them to go to college, wear dress shirts, and become professional cogs in the great machine. A quick web check seems to indicate there is no longer a magnet school for the trades in this county, but there are still programs offered at two high schools.

Eventually I located an appropriate 2 or 3 day class offered by Lincoln Arc Welding. I took this information to my supervisor, a man who has long since gone on to bigger and better things. In a very subtle sensitive manner, he attempted to guide me away from such folly. He gently indicated, courses in the trades were really beneath experimental engineers. I took the hint and dropped the request, but I did not agree with his conclusion.

The fact is, I know two plumbers. They both lived in nicer houses than I could afford at the time. Someone cut the marble or granite counter tops that were installed in Dan Snyder’s mansion. I assure you he was not an ordinary construction worker. He was a skilled master craftsman. He did not stand before ordinary men. He practiced his trade before a billionaire. I assure you, he was not paid minimum wage. His skill can not be outsourced to China or replaced by the Internet.

Saturday, April 23, 2011

Where Have All The Good Jobs Gone?

[5] Servants, be obedient to them that are your masters according to the flesh, with fear and trembling, in singleness of your heart, as unto Christ;
[6] Not with eyeservice, as menpleasers; but as the servants of Christ, doing the will of God from the heart;
[7] With good will doing service, as to the Lord, and not to men:
Paul Letter to the Ephesians Chapter 6

Finally, the economy is producing new jobs. The most recent report indicates 200,000 new jobs per month. That number is larger than the approximately 125,000 new jobs per month necessary to keep up with population increase. At this rate it will take about nine years to recover the approximately 8,000,000 jobs lost in this most recent recession.

The problem is supply and demand. There are too many unemployed Americans chasing too few jobs. According to U.S. News and World Report, the new jobs are in low paying fields such as administrative and support services (median pay $12.91 per hour). Other growing fields listed in this article include retail, social assistance, and nursing homes. All of these areas pay less than $13.00 per hour. Higher paying jobs (defined as paying an average wage of $19.00) including utilities, finance, insurance, information services, and construction are still shedding jobs.

The civilian employment ratio (the percentage of Americans with jobs) hasn’t been this low since the recession of 1982, almost thirty years ago. The last time this number stood at 58.3% (read off a graph) during normal economic times, occurred in the 1970s before large numbers of women entered the workforce. Not surprisingly, fewer middle aged men are working today than at any time since WWII. In 1970 that number was 80%. Today it is only 66%. Since men have historically worked in higher paying fields like construction and manufacturing and women tend to work in lower paying fields like healthcare and education, real family income in inflation adjusted dollars has been dropping.

The new jobs don’t pay a good salary; don’t offer defined benefit pensions, health insurance, or security. In the past, a worker found his identity as a part of his union, or as an employee of his company. This is no longer a useful paradigm for new employees entering the work force, or for that matter, old employees reentering the workforce. Today, it is more useful for an employee to consider himself as self employed. Ultimately, the covenant between employer and employee has been broken. Expecting anything more than a paycheck for the work done today will too often lead to disappointment.

What this means is the average employee is in trouble. Many years ago when I worked as a shift superintendent at a factory, I noted that about 1 out of 5 employees were just good employees. It didn’t matter how much they were paid, how badly they were treated, or if they were provided with good working conditions. They were just good employees. Likewise, about 1 out of 5 were just bad employees. It didn’t matter if they had good compassionate supervision, a tolerable work environment, or good pay. They were lazy, unreliable, and frequently dishonest employees. It was their nature. I found it difficult to fire these people. I was always inclined to believe that if I gave them one more chance, I could find a way to motivate them. I should have been quicker to fire these people. I concluded that about 3 out of 5 employees were just average. If they received a reasonable salary, were treated with respect, and didn’t have to suffer poor working conditions they did a reasonably good job. In today’s economy average isn’t good enough. There are always people who will receive promotions and raises in any work environment. In the past, average people would move up the same pay scale as outstanding employees. Their progress would be slower and they would not reach the same levels as outstanding employees but they could look forward to regular promotion unless they really screwed up. Today that is no longer true.

This brings us back to the hard exhortation at the beginning of the post. In the context of the times, the apostle is telling slaves to be good slaves. He is telling them to offer their masters respect and obedience just as they offer respect and obedience to the Lord. That kind of attitude will work in any economic environment, but how often I fall short of that mark.

Saturday, April 16, 2011

Bucket Brigade

There is a investment metaphor that is being promoted by some of the investment houses. Evidently, it has been around for some time but is just now becoming a major sales tool. Investors are told to put their investments in two, three, or four buckets. Sometimes these buckets are labeled by time horizon and sometime by risk tolerance. The same principles are at work in the so called Lifecycle funds that divide up your assets according to the number of years left before retirement.

The first bucket contains short term money. This is money that you will be spending in the foreseeable future, say the next five years, although different programs define different years and content for these buckets. The theory is that investments in any given year may do well or may get hammered. Therefore, if you know you are going to need to replace that car sometime in the next three years, just leave it in that insured money market fund at your bank or credit union.

The second bucket contains money that might be needed in years six through ten. This bucket contains investments that are still conservative but are less liquid. Examples would include bonds, CDs, and large cap stocks with righteous dividends such as Johnson & Johnson, Exxon, and Altria.

The third bucket invests for years 11 through 20. It would contain moderately risky investments, including mid cap stocks, a little bit of small cap gambles, and some international stock funds. Simply put this is where you would put most of your growth funds money.

The money held in the fourth and final bucket contains money for years 21 through 30. This is where risky investments live, some of your wilder growth stock gambles, options, futures, and collectibles. I wonder what a bat signed by Barry Bonds might be worth in 2040? Hmmm.

Of course the broker will be glad to tailor the contents of each bucket to his client’s risk tolerance, interests, and prejudices. For example I would have most of my money in second bucket kind of investments no matter when I wanted to use that money. I would have a respectable third bucket, but I might not have a fourth bucket at all. That might be a mistake. Also the broker will be happy to manage the size of each of your buckets, rebalancing as you continue your journey through this valley of tears.

So called lifecycle funds offer a variation on this theme by using a mix from a family of mutual funds that is age appropriate. I am familiar with the Thrift Savings Plan offered Federal employees under the new retirement system so I will use those offerings as an example of what is available.

The Funds
G – Government Bonds
F – Investment Grade Bonds
C – Common Stock Index Fund (least risk for stock funds)
S – Small Cap Index Fund (greatest risk for stock funds)
I – International Index Fund

These offerings can be prepackaged according to your retirement date. Here are some examples of the current mixes.

L Income (for those who are already retired)

G 74%
F 6%
C 12%
S 3%
I 5%

L 2020 (for those who will retire between the years of 2015 through 2024)

G 35.8%
F 7.45%
C 30.15%
S 9.8%
I 16.8%

L 2030 (for those who will retire between the years of 2025 through 2034)

G 22.05%
F 8.45%
C 35.08%
S 13.80%
I 19.90%

L 2040 (for those who will retire between the years of 2035 through 2044)

G 11.05%
F 9.45%
C 39.80%
S 16.90%
I 22.80%

L2050 (for those who will retire after 2045)

G 3.5%
F 7.0%
C 43.80%
S 18.90%
I 26.80%

Just a note, if you decide you like lifecycle fund idea for retirement, you will still need to fill that first bucket at your bank or credit union.

Friday, April 15, 2011

Dave Ramsey Cash Flow Planning (Class 3 of 13)

“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
Stanley and Danko

Before I start an engineering project at work, my management and our customer have come to an agreement on three issues, schedule, deliverables, and a budget. Corporations and governments project revenues and plan expenditures, usually on an annual basis. This is called the budget. If the corporate financial officer is competent and fortunate, expectations will closely match the developments of the fiscal year as it unfolds. If they do not know what they are doing or are overwhelmed by a disaster (think British Petroleum and the Gulf oil spill of 2010) the market price of their shares fall and executives are fired.

Dave Ramsey insists that this same formal discipline must be extended to the family. He observes that money is active, always on the move, flowing from point to point. If you do not accurately plan and manage this flow, your family will suffer. Dave rails against sloppy, lazy money habits. He is astonished at how many people are unable to balance a checkbook. He has seen that bounced checks and overdraft fees cause a great deal of pain and suffering in the families he has counseled.

Generally, people are resistant to the idea of developing a formal budget. It is difficult, time consuming, and unpleasant to sit down with a spouse or accountability partner to develop a budget. There is a great deal of fear that you will not be able to afford something you really want. There is the guilt associated with learning you spent money you didn’t have on something you didn’t need. In a relationship, the use of money is a source of power and freedom. By our natures, anything that we perceive as limiting our power or freedom is to be avoided. Finally, people frequently claim budgets don’t work.

Dave Ramsey observes there are 4 major reasons budgets do not work.
1)They leave things out
2)An overly complicated plan
3)You don’t actually develop a plan
4)You don’t actually live on the plan

Dave Ramsey suggests developing a formal, written, and complete budget at start of the month. Then make certain that expenditures follow the plan. This will greatly limit the number of financial disasters, resulting in less effort at crisis management. Certainly, managed money will go farther than unmanaged money. Also, since developing a budget and strictly following that budget is a jointly agreed upon process involving both husband and wife, it will reduce the number of money fights in a marriage. As in 12 step programs, sunlight is the best antiseptic. Once expenses are out in the open, guilt, fear and shame disappear. Planning for necessities first, what Dave Ramsey terms the four walls, food, shelter, clothing, and transportation will eliminate overdrafts or growing credit card balances.

Specifically, Dave Ramsey recommends what is termed a zero based budget. That is, every month every dollar coming into a household is given a name before the month begins. The money is to be spent as planned or the budget must be renegotiated. At the end of the month salaries and other inflow minus expenditures and saving must exactly equal zero. Then the process begins again. The simplest version of the zero based budget is called the envelope system. At one time, this system literally used envelopes. For example when a paycheck came into a house a certain amount of cash would be placed in an envelope marked “food.” Any time anyone bought any food, the money had to come out of that envelope. When the envelope was empty, no more food was purchased until the next paycheck.

As far as I know, all of Dave Ramsey’s courses and books contain the same budgeting forms.

Form 1) Major Components of a Healthy Financial Plan - This is a checklist of necessary components or activities found in an orderly financial plan.

Form 2) Consumer Equity Sheet – This is a calculation of net worth, a calculation that should be performed on a monthly basis.

Form 3) Income Source – A sheet for projecting expected income for that month.

Form 4) Lump Sum Payment Planning – This sheet lists infrequent expenses, such as property taxes. This expense is divided by 12 to calculate a monthly amount that is then factored into the monthly cash flow plan.

Form 5) Monthly Cash Flow Plan – This is the big long plan that actually predicts all of your monthly expenses. Projected income minus projected expenses and savings must equal zero—always!

Form 6) Recommended Percentages – This form allows you to compare what percentage of your income is actual spent against “normal” recommended percentages on any given category.

Form 7) Allocated Spending Plan – This form tracks actual expenditures so they might be compared against projections. If they do not match, then something, planned expenditures or behavior, must be changed. At the end of the month, income minus expenses and savings must equal zero—always!

Form 8) Irregular Income Planning – This is a additional form for commission sales people and the self employed.

Form 9) Breakdown of Savings – This form allows the user to place a name on every dollar in savings. This allows one to track a separate “sinking fund” for major infrequent expenses, such as paying cash for a new car.

Normally, I do the homework at the same time as the class. This time, for the Cash Flow Planning lesson, I did the homework before the class. I wanted to see just how time consuming and difficult the budgeting process would be before speaking to the group. Since I do not have any debt, my forms are simple. It still took me more than an hour of time expended over a two day period. It isn’t easy, but living on a budget may change your life.

Dave Ramsey adds that your first attempt at developing a budget will not be completely successful. His experience indicates it takes the average couple about three months to learn how to develop a proper formal budget.

Saturday, April 9, 2011

Dave Ramsey Relating with Money (Class 2 of 13)

In the second class Dave Ramsey explores the psychology of money through two simple dichotomies, men and women and nerds and free spirits. He also spends a good part of the class teaching basic principles for teaching children how to relate to money. There are two things about these classes that are difficult to convey with the written word. Dave Ramsey is big on repeating basic principles over and over. At the beginning and end of each class and sometimes in the middle of each class Dave makes the audience list some subset of the seven baby steps. I can’t adequately convey the level of emotion he engenders in the audience. Dave Ramsey is a master presenter who has perfected one speech. He really knows how to work a crowd. Since the class DVD is of a live event, some of that energy is transmitted to the classroom.

So in an attempt to give the reader a feeling for how Dave reviews the prior class, here are the first three baby steps for a second time. You will see them again and again in this series.

1)$1,000 in an emergency fund ($500 if combined family income is under 20,000)
2)Pay off all debt except mortgage using the debt snowball
3)Complete emergency fund containing 3-6 months expenses

Dave Ramsey begins by observing that, “The flow of money in a family represents the value system under which that family operates.” Indeed if one were to examine the check register and credit card statements of a given family it would produce a very clear picture of that family’s values. Police detectives and investigative journalists are both fond of saying, “If you want to know the truth, follow the money.”

Dave Ramsey contends that men frequently find the idea of 3 to 6 months in something like a money market fund extremely boring and unsophisticated. They are often tempted to invest that money in something that produces a greater rate of return. However, women tend to view a $15,000 safety net in an insured bank account as the key to an intelligent financial plan. Other aspects of this dichotomy are explored. The difference in how men and women go shopping is almost a joke. Men know what they want to buy, where to find it, how much in costs, and how long it will take to drive to the store, buy the item, and return home. Men plan shopping trips like a military operation. Women, on the other hand, find shopping a source of entertainment and pleasure. They wander around malls looking at and touching everything, even things they do not want or need. When a family finds itself in desperate financial straits men tend to feel that their self esteem, which is based on the ability to protect and provide for their family, is threatened by the crisis. Women tend to view such problems with fear. Dave Ramsey’s wife would say terror. When they faced bankruptcy early in their marriage she viewed the problem as one of security.

Money issues are the number one cause of divorce in America. If a husband and a wife can agree on a value system for handing money questions they are well on their way to a healthy marriage. Dave contends that a partnership is the most effective method of achieving this goal. The other options are one in which one partner is the driver and one partner is just along for the ride or a division of labor based on expertise. Frequently one partner is what Dave terms a nerd, a detail oriented individual who could be accused of being a control freak. The other partner is apt to be a free spirit who is not interested in the details of a budget. Dave believes both individuals are necessary in a marriage. The nerd to watch over and herd the flow of money and the free spirit is there to make certain the nerd actually has a life. Imagine Ebenezer Scrooge in his empty freezing apartment before the ghost of Jacob Marley appeared. At this point Dave encourages singles in the audience to find an accountability partner with the expertise and moral authority to review their budget even if it hurts their feelings.

Dave challenges parents to teach their children about money. He points to the odd proximity of two verses in proverbs 22 wondering why no one ever preaches on the obvious meaning if these verses are considered as a pair.

[6] Train up a child in the way he should go: and when he is old, he will not depart from it.
[7] The rich ruleth over the poor, and the borrower is servant to the lender.

In a nutshell, Dave insists that money is connected to work even from a very early age. Children should be given a reasonable number of age appropriate tasks outside of their normal family chores. If they do this work they get paid. If they do not work, they do not get paid. The second part of this equation is that then parents allow their children to spend their money on what they value, whether that would be a Celebration Barbie or a car. In fact Dave offered a 401-Dave plan for his children’s first car purchase. He matched their savings dollar for dollar. He concluded this was a mistake since the younger children saw this as a good deal and saved unexpectedly large sums of money. Dave told the audience to put a cap on their matching plan, lest they end up buying a Maserati for an ingenious highly motivated child.

Friday, April 8, 2011

Reinventing Yourself

“We judge ourselves by what we feel capable of doing, while others judge us by what we have already done.”
Henry Wadsworth Longfellow

Almost 30 years ago I made a decision to leave the world of the American factory where I had toiled for 9 years and make a move to a research and development laboratory. I reinvented myself. Recently I came across an article entitled “Reinventing Your Personal Brand” by Dorie Clark, in the Harvard Business Review. The author is the CEO of a consulting firm that specializes in helping clients build brand reputation and increase sales. As I wish to reinvent myself once again when I retire, I found the article quite interesting.

The author has reinvented herself on numerous occasions. Besides her current position in the consulting business she has been a journalist, a political operative, the executive director of a nonprofit, a filmmaker, and she has studied theology at Harvard. Dorie Clark has found there are five steps to successful transition to a new personal brand.

1)Define Your Destination

In order to achieve goals, I believe we must set goals. We must start with a clear understanding of what we truly desire before we can work towards achieving that end. If we lack goals, then life just happens to us, like a ship without a rudder, drifting where wind and current would take her. I am still playing with retirement possibilities. I do not yet have a clearly defined goal. The author would suggest that I experiment with these possibilities, read trade journals, volunteer in related positions, or take a VocationVaction that enables a brief apprenticeship with a surprisingly diverse group of professions. She also suggests seeking out a mentor in an area of interest or taking a sabbatical from your current life.

Once we have a goal, it is necessary to obtain the skills and certifications necessary for that profession. Sometimes that would require formal training either in an educational institution or directly from a qualified practitioner. Sometimes moving to a new profession requires a portfolio. For example if I was considering journalism as a post retirement career, I would currently have over 180 examples of my craft on this blog. It is important to remember that success in one area often requires skills in many areas. I have observed that successful artists are often skilled sales and marketing professionals even if they would never admit that such a thing was true.

2)Leverage Your Points of Difference

Why are you unique? The author believes that the answer to this question is what people will remember and what will give you a foot in the door. Never completely abandon your old brand, use it to make yourself especially valuable in your new world. After I decided I wanted to move to research and development, I went back to school to earn a BS in Mechanical Engineering. When I arrived at my new place of employment I tried to become the hardware and operations man in my group. With 9 years experience in Industrial Engineering, plant scheduling, and direct supervision I knew how to get things made and how to run a test. The author points to the example a woman who moved from working for a nonprofit to traffic engineering. I might add there are not many women in Civil Engineering and related construction intensive businesses. At her new job, she pointed out she could add value by looking at problems from a different perspective. She told her coworkers, “You know how to build roads. But I worked in the community where you’re building the roads, and here is how it impacts people.”

3)Develop a Narrative

Given the authors explanation of this point, I believe I would have termed it, Develop a Believable Narrative. The author points out that an individual with many interests is frequently and often unfairly viewed as a dilettante. She proposes the example of a business journalist who wants to write restaurant reviews. He could explain how his past led to the present by stating, “I use to write about the business side of many industries, including food and wine. I realized my big picture knowledge of agricultural trends and business finance uniquely positioned me to cover restaurants from a different perspective.”

Never, ever, explain your transition in terms of your own interests. No one cares if you are bored in your current job or attempting to discover your true inner self. Instead focus on the value your prior experience offers your future employer or customers. The author believes this is particularly important for young people graduating from college into today’s economy. If the only job you can find is flipping burgers at a fast food restaurant your resume might point out that you have been “learning valuable skills on the front line of a customer service organization,” as you try to move into your desired field of endeavor. The author emphasizes that your narrative must be consistent with your past. She points out the example of politicians who are eviscerated by their enemies and the press for attempting a “poll-driven personality change.”

4)Reintroduce Yourself

The author believes this is the hardest part of any personal transformation. She points out the most people you have known really aren’t paying much attention to you. Their perceptions are based on experiences that may be far out of date. It is necessary to reintroduce yourself to your network of friends and clients as these contacts are likely to provide you with your first leads to a new job. They might even become the nucleus of our new customer base. Make sure all your Facebook, LinkedIn, and personal website are consistent and up to date. Dorie Clark suggests the use of personal messages rather than email blasts as you move into your new profession. Tell your contacts, friends, and acquaintances about the new direction you are taking, and then ask them for help, advice, or business as appropriate. In reintroducing yourself, it is inevitable that you will have to address some negative perceptions. Avoid the trap of falling into old behavior patterns when provoked, but stick to a behavior pattern that is consistent with your new aspirations. The author encourages the reader to look for high visibility, strategic opportunities to leverage the unveiling of your new interests and abilities. Examples would include volunteering on political campaigns or major new “bet the company” projects. Don’t be afraid to take jobs that no one else wants such as administrative or clerical duties to get an opportunity to meet crucial movers and shakers in your new field.

5)Prove Your Worth

This almost goes without saying. A degree from a prestigious university might get you your first job, but from then on you are ultimately responsible for your own success or failure. Repeated studies have pointed out how many senior executives came from public institutions (often second tier public institutions) rather than Ivy League or similar elite universities. Clark points out that in the new world of electronic media everyone is required to have a portfolio. Present examples of your unique intellectual property on your website by means of blogs, podcasts, and videos. Once you have successes, don’t be afraid to ask for endorsements from your customers. Other methods to advertise your worth include, publishing in respected journals, speaking at conferences, or taking on roles in your trade association. The author observes that consistent effort to improve your visibility, connections, and credibility can produce significant results. Clark recommends considering this process a “search engine optimization for your life: The more connections you make and the more value and content you regularly add to the stream, the more likely it is that your new brand will be know, recognized, and sought out.”

Sunday, April 3, 2011

I Am Part of the Problem

Unfortunately, I am part of the problem. In the near future I hope to retire. I am one of the few remaining Americans who still possess the three legged stool for retirement that was once a near guarantee to any working American. The first leg was Social Security, a guarantee of a minimal standard of living provided to the elderly by those still in their productive years. It was sold to us as an investment wrapped in a form of insurance. We were told it was not a tax. It was our money. It would be invested in Government securities and in time our principal would be returned with interest. In those days, not so very long ago, most Americans had a job in a wealth creating segment of the economy, construction, farming, fishing, forestry, manufacturing, mining, and utilities. The assumption, the social covenant, promised the good employee more or less lifetime employment interrupted by a few inevitable layoffs during recessions and a pension in their old age. This pension combined with social security would allow the average American the ability to maintain their lifestyle into their golden years. Finally, for those who were diligent or favored by fortune, the addition of the third leg, savings and investments, would allow for occasional luxuries like cruises and travel to interesting places. All of these assumptions were based on an American economy that produced a huge surplus of wealth mostly from a manufacturing base that was the envy of the world.

That has changed. According to a recent article in the Wall Street Journal, more Americans work for all levels of government than work in construction, farming, fishing, forestry, manufacturing, mining, and utilities combined. Government, by its nature does not create wealth. It can encourage or discourage the creation of wealth by the private sector, but it does not create wealth. Attempts by governments to seize the means of production have inevitability ended in financial failure, slave states, or both.

Today there are 22.5 million Americans working for all levels of government compared to 11.5 million Americans working in manufacturing. Combine this with the fact that there are currently over 20 million unemployed or underemployed Americans and you have to ask who will generate the wealth to pay government employees, pensioners, and those collecting Social Security or provide the funds for other forms of entitlement, most notably Medicare.

The problem is monstrously complex. The article notes that the average American farmer is three times more productive than in 1950. Automation, robotics, computers have reduced the need for semiskilled employees not only on the factory floor but in the offices that order materials, schedule the machinery, perform accounting, and billing procedures. Due to differences in environmental regulations and wage arbitrage between the developed and developing world, our manufacturing base has gone to Mexico, China, and other developing nations.

One of the tipping points that indicate that a nation is in decline occurs when more individuals benefit from government payments than make those payments. We are approaching that number and will undoubtedly surpass that number as the baby-boom moves into retirement. I can only hope that we find a way to once again create the surplus of wealth necessary to provide for the social contract that we have promised to ourselves and to our children.

May God have mercy on our nation.

Saturday, April 2, 2011

Dave Ramsey Super Saving (Class 1 of 13)

Last night I presented Lesson 1 of 13 in Dave Ramsey’s Financial Peace University at our church. In this first lesson, Dave presents the general outline of the course (the seven baby steps)

1) $1,000 in an emergency fund ($500 if combined family income is under 20,000)
2) Pay off all debt except mortgage using the debt snowball
3) Complete emergency fund containing 3-6 months expenses
4) 15% of your gross income into a pretax retirement plan
5) Save for your children’s college education
6) Pay off your mortgage early
7) Build wealth and Give

In order to accomplish all these worthy goals, one must first develop a habit of adding to savings every month. Unfortunately this is a novel idea in a culture that has been programmed to spend first then pay. Accumulating debt turns the power of compound interest against the consumer.

The first step in breaking this pattern is setting a goal of $1,000 in an emergency fund. Breaking the chains of spend then pay is so important that Dave Ramsey recommends taking a temporary part time job or selling household items on Craig’s List or a yard sale to reach that goal in 30 days or less. An emergency fund is for emergencies only. Its purpose is to cushion a household from unforeseen events, like unexpected automobile repairs. This is much better than paying for the emergency with plastic money at a rate of 18%-24%.

Dave Ramsey also introduces the idea of saving and then paying cash for depreciating assets such as furniture and automobiles. I have always paid cash for such items. It was the way I was raised, but most Americans believe they will always have a car payment even if they pay cash for furniture, clothing, vacations and other such items.

Finally, Dave Ramsey introduces the third reason for saving money, seed capital for investments. In order to make money one must first have money. Investing, even a little money, consistently over a long period of time turns the power of compound interest in your favor. A number of Suze Orman type Starbuck’s examples are presented. Investing $100 a month from age 25 to 65 (a normal working life) at 12% in a growth stock mutual fund will build up to over $1,156,000. The bottom line is that every American household has the potential to build significant wealth with consistent disciplined effort.

Early in presentation, Dave Ramsey takes time to examine unhealthy attitudes towards money, typically money and people who have money are evil. Dave Ramsey points out that there are rich selfish jerks and poor selfish jerks just as some poor people are generous and saintly and some rich people are generous and saintly. He builds the case that money is just money, an amoral commodity. Evil and good come from the hearts of those who use it.

A metaphor that I find useful compares money to energy. I believe I first heard Maria Nemeth use this example, although she attributes it to Joseph Campbell. It takes a lot of energy to bring money into your world. Your time, physical exertion, mental exercise, and emotional energy are all stored in your money. It is potential energy, like a battery, that can be used in any device you choose. If you choose not to control it properly, like electricity your money can go where you do not want it to go. The results can be shocking, even fatal.