Tuesday, December 31, 2013

New Month's Resolutions for the New Year

Leo Babauta author of the Zen Habits blog recommends making 12 different “new month’s” resolutions rather than the usual list of New Year’s resolution. Earl Nightingale recommends establishing new habits by practicing them every day for 30 days. If you miss one day, the clock starts over. If you persist for 30 days, Nightingale would consider your efforts a success. Psychologists teach that behaviors are best changed in small incremental steps that establish a pattern of success. I noted this was certainly true in studying and tutoring math. Giving a student a larger number of problems he could reasonably be expected to solve rather than a smaller number of more difficult problems, tended to build confidence that lead to success.

Let’s start with a financial problem since this is a personal finance blog. Perhaps you are one of those people who have a little too much month at the end of the money. If you are not up to living on a budget take a little step in the right direction. See where it leads. Focus your attention on your spending habits without judgment or anger, as though they belonged to a total stranger. If you are honest, you will find at least one glaringly obvious problem. Let’s say you discover that you are eating out at restaurants too many times in a typical month. In this busy two income world, I have noticed restaurant bills are a common problem in many family budgets. For 30 days, limit your visits to restaurants to a level that will likely to lead you to successfully freeing up money for more important matters. For the sake of argument let’s say one visit to a restaurant per week. Could you do that for 4 weeks? How much money would that free up in your budget? By the way, improve your finances comes in at #2 on the list of top ten New Year’s resolutions.

Lose weight is America’s #1 New Year’s resolution. I am certainly working on that one. There are basically two ways to lose weight improve your diet or increase your amount of exercise. Not surprisingly, exercise comes in at #3 and eat healthier comes in at #5. In the past year I have done a pretty good job of establishing a pattern of consistent exercise by walking almost every day I am not on travel. When I started, 1.1 mile was all I could do on a consistent basis. A year later, I am walking four miles or occasionally more for weekly totals that come in between 20 and 28 miles. In the next month, I would like to add sit ups to walking to improve my core for other possible physical activities. I also, obviously, need to add stretching to keep my leg muscles from getting too tight.

My diet is pretty embarrassingly bad. Eating a least one serving of green vegetables other than what is normally found in a salad every day for 30 days would be good new month’s resolution for me that could lead to successfully overhauling my diet. Attempting to give up fatty meat and beer (what I really need to do) would likely lead to failure in less than a week.

Get a new job comes in at #4. If this is your goal begin with something simple you can control. Resolve to fill out one job application every week for a month or make at least one new contact a week with someone who might be able to help you with your search. You can’t control the results of a job search since the outcome is in the hands of the employer. You can choose to study the problem and do those things that are proven to help move the numbers in your favor. Think of a salesman making cold calls. There is some number associated with this activity, perhaps 20 phone calls will lead to 1 face to face meeting. Perhaps 5 face to face meeting will reasonably result in one sale.

Manage stress better is number six on America’s list of New Year’s resolutions. Number 10 is set aside time for yourself. Why not do both at the same time? I find listening to peaceful music while just sitting helps me deal with stress. There are numerous meditation techniques from various traditions that are all proven to lower pulse, blood pressure, and respiration rates. Psalm 46 comes to mind, “Be still and know that I am God.” Begin by setting aside 10-20 minutes every day for one month just for healing your soul from the overstimulation of our technical age. Sit alone in a room; let peaceful music or better yet silence, restore your heart.

The rest of the list from Parade Magazine, if these items are on your list of New Year’s resolutions, what small thing could you do for just 30 days that could change your life?

7. Stop smoking

8. Improve a relationship

9. Stop procrastinating

Monday, December 30, 2013

The Night They Drove Old Dixie Down

Now, I don't mind chopping wood
And I don't care if the money's no good
You take what you need
And you leave the rest
But they should never
Have taken the very best
(From The Night They Drove Old Dixie Down)

This year at Christmas, my parents decided it was time to pass on a few of the family treasures to the next generation. We went to the bank to retrieve several Confederate bank notes issued by the Commonwealth of Virginia from the safety deposit box. They belonged to my mother’s grandfather.

How he came to possess them is a lost bit of family history.

In 1861 the southern states seceded from the Union starting almost five long years of bloody fighting that left much of the nation in ruins. The new Confederacy needed money, a lot of money, to fight a war against the larger, more populated, better industrialized states that remained in the Union. All the gold and silver the Confederacy possessed went to Europe to buy badly needed war supplies. For this reason there are not many Confederate coins in circulation. They did what any nation would do in such a situation. The Confederacy, the individual states of the Confederacy, and even some towns printed paper money backed by nothing but a promise to pay the bearer off after the war ended. At the beginning of the war the new currency circulated at a reasonable value. As the war dragged on, it became clear that the Southern states would be defeated, so the value of Confederate currency declined until, “By the end of the war, a cake of soap could sell for as much as $50 and an ordinary suit of clothes was $2,700.” (wikipedia) At the end of the war, Confederate currency was worthless.

My mother’s grandfather lived in West Virginia, a border state. At the start of the war Virginia seceded along with the other 10 states of the Confederacy. The western counties of Virginia resented the financial and political power of the Tidewater plantation owners of the eastern counties. As there weren’t very many slaves in the western counties and their citizens were looking for a reason to leave Virginia anyway, these counties seceded from the Commonwealth of Virginia to form the free state of West Virginia. At the beginning of the war, these bits of paper would have been legal tender. My ancestor would be legally obligated to use them. While West Virginia was firmly a part of the Union, it was never completely pacified. The war ebbed and flowed across the area around Harpers Ferry, leaving that once important industrial center in ruins. Guerrilla bands of irregular Confederate sympathizers roamed the hills of West Virginia until the end of the war. Perhaps a band of these fighters forced my ancestor to take them in payment for goods stolen at gunpoint. Maybe somebody threw them away at the end of the war and he just picked them up and put them in a drawer as historic curiosities. I would love to know the truth.

The richer more powerful Union states had their own problems with paper money. Even with California’s gold flowing into Federal coffers, Lincoln needed more money to prosecute the war. First the Federal Government forced loans from the major New York banks, but they ran out of money. European bankers wanted 24%-36% interest on any war loans, an impossibly high rate. The United States issued the so called “Greenback Dollars.” Unlike regular U.S. Bank Notes there was printing on only one side of the paper on the Greenback Dollars. The back of the notes were blank, just green paper. Unlike regular currency these notes were not backed by gold, just a promise. Their value rose and fell with the fortunes of war. Their value fluctuated between 129 greenbacks to 100 dollars to a low of 258 greenbacks to 100 dollars. At then end of the war the ratio was 150 greenbacks to 100 dollars. A lot of Americans forced to use this war currency lost a lot of money they never recovered.

The song, The Night They Drove Old Dixie Down, captures the pathos and despair of the South in the final days of the war and the suffering of the common working class Southerner during Reconstruction, the military occupation of the defeated nation. I wonder how the composer of that song could so perfectly capture a moment in history over a hundred years after the fact.

As you enjoy this amazing performance of this classic song, think about the history of paper money and the only major failure of the American genius for consensus, the Civil War.

The Night They Drove Old Dixie Down

Sunday, December 22, 2013

The Richest Man in Babylon

The Richest Man in Babylon George Samuel Clason, published as a series of pamphlets in 1926, is one of the first self help books ever written. Today’s reader will find the parables about wealth set in ancient Babylon to be hopelessly old fashioned and mawkishly sentimental. However, this little book that can be read in a couple of hours contains enough truth to change your life.

I am not exactly sure how or when it happened, but somewhere along the line we Protestants began to associate wealth with virtue and poverty with vice. Not only is this theologically unsound, but we know it is not always true. There are good rich people and bad rich people. There are good poor people and bad poor people. Money is neither good nor bad. It is just money.

The dichotomy is inappropriate. Rather than associating poverty with sin and wealth with eternal merit, let’s try a different descriptor. Although very bad things happen to very good people and very bad people prosper, in even a halfway just society those examples are exceptions rather than the rule. There are certain behaviors that build wealth. There are certain behaviors that destroy wealth. I would prefer to call them wise and unwise actions. A very good person can find themselves in a very bad financial situation because they are a good person who consistently engaged in unwise behaviors. I know a generous Godly woman who found herself in just such a predicament because she gave too much of her money to lazy irresponsible family members. In the end this action did not help her family, because she was only enabling their bad behavior. These actions also left here deeply in debt.

The basics of wise financial actions are both simple and timeless. This silly little book from a different century has more than enough wisdom to set you on the road to financial freedom. It contains a number of parables about such subjects as wise investment, the importance of insurance, avoiding scams, extricating yourself from debt, and the goddess of luck who favors the bold.

This book also contains two important lists.

The Seven Cures for a Lean Purse

1. Start thy purse to fattening-live on 90% of your income, save 10%
2. Control thy expenditures-live on a budget
3. Make thy gold multiply-invest your money to produce income,
4. Guard thy treasures from loss-avoid scams and get rich quick schemes
5. Make of thy dwelling a profitable investment-own your own home
6. Insure a future income-save for your retirement
7. Increase thy ability to earn-be a lifetime learner

THE FIVE LAWS OF GOLD (quoted from the book)

I. Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earngs to create an estate for his future and that of his family.
II. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
III. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
IV. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
V. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

Here is a link to a free PDF copy of this classic. Don’t be too cool and too sophisticated to learn something from another century.

Free PDF Copy of the Richest Man in Babylon

Thursday, December 19, 2013

Is Social Security a Ponzi Scheme?

A Ponzi scheme, named for Charles Ponzi, creator of the first significant fraud of this sort is an operation that pays old investors with money from new investors rather than with profits from actual investments. Usually the con artist running a Ponzi scheme promises unusually high profits from some sort of mysterious financial mechanism that sounds reasonably plausible. For example a Ponzi operator may claim to have a secret computer program that allows him to predict the short term movements of the market with an unusually high degree of accuracy. He promises his marks a reasonable but high rate of return on their investment, perhaps 12%-15%.

The money starts to come in. The monthly account statements show a 12%-15% return compounding on a quarterly basis just as the charlatan promised. However, there is no magic computer program and no investments, just numbers printed on a page of paper. As word gets out new investors plow more money into the scheme. Most of the old investors are happy with the promises and their returns so they leave their money sitting inside the Ponzi scheme. Occasionally an old investor who wants to withdraw his money is paid off with some of the new money. All the time the operator of the Ponzi scheme is skimming big bucks off the action that are going into his pocket.

Finally, the Ponzi scheme reaches its day of reckoning. The operator takes all the money and vanishes into a South American sunset; too many investors get nervous and decide to withdrawal their money at the same time. Since the money isn’t there, the whole edifice comes crashing down in a single day. Innocent dupes lose all their money. Sometimes the perpetrator goes to jail. Sometimes he manages to escape justice.

I have been reading The Predictable Surprise (The Unraveling of the U.S. Retirement System) by Sylvester J. Schieber, former chairman of the Social Security Advisory Board. It is a difficult read due to the complexity of the topic, as well as my emotional reaction to the content. Without any particular political ax to grind, the author simply recounts the facts that have led us to where we stand today. It is truly disturbing that the players in this game knew the predicted outcome of their actions decades before the resultant problems became front page news.

I think I will need to read this book more than one time before I could write a complete coherent review. However, I did latch on to one key take away concerning Social Security. In 1935 when FDR began the Social Security System, he envisioned an insurance pool operated on sound actuarial principles. Money taken from workers’ paychecks would be invested in Government bonds. Interest would be paid on this principal. Then in old age the worker or his widow would receive his money plus interest. FDR knew if he sold the idea that Social Security was not a tax, no one could unravel what he had created. It was your money invested on your behalf for your retirement by the Government. When you were old you would receive, not a handout, but your money with interest.

Starting in 1939, a second view of Social Security funds gained the upper hand in Congress. Instead of an insurance pool, Social Security would be operated as a pay as you go system. Today’s retiree would not be receiving “his money” with interest, but instead would be receiving money directly from today’s workers. The benefit of this method was that the Government could spend the surplus collected on behalf of future worker pensions on today’s Government expenses. This would allow lower taxes or higher expenditures than might otherwise be politically palatable. The downside is that there was no pool of savings. Because there was no pool of savings, there was no interest being collected on any of these funds.

Like a Ponzi scheme, old investors were paid off with new investors’ money. The Social Security rate started at 2.25%. Today it stands at 12.9% with an additional 2.9% for Medicare on the first $113,700 of the taxpayer’s annual income. FDR and his associates did not believe that the American economy would tolerate anything in excess of 10% for Social Security. Gradually, the Social Security System included more and more workers until today almost all Americans are covered. The Baby Boom, the increase in the percentage of women in the workforce, and the increasing tax rates made everything thing appear that the Social Security System was indeed as some proponents of “pay as you go” method boasted, the Ponzi scheme that worked.

All Ponzi schemes work, until they don’t. Unlike the operator of a Ponzi scheme, the Government can demand higher taxes, change promised benefits, or just print more money that is worth less. As the Baby Boom moves into retirement, the retiree/worker ratio that started at 1 retiree for every 9 workers is headed for 1 retiree for every 3 workers. Starting in 2000 our remaining work force, due to stagnant wages, began to lose their traditional share of our nation’s GDP.

Fewer workers earning less money will be asked to support more retirees at the highest level of benefits ever paid in the history of the Social Security System. Let me add that life expectancy has increased from 64 years in 1935 until today it stands at 78 years. This would not have been a problem if our nation’s leaders had paid attention to FDR or even the parable of the grasshopper and the ant. In summer, prepare for winter. Instead, like the grasshopper in the story our leaders frittered away tomorrow’s money on today’s pleasures. Sometime in the next 30 years, depending on whom you choose to believe, the Ponzi scheme that has served this nation so well for so many years will begin to unravel. Taxes will be increased. Promised benefits will be taken away from old people who earned them. Already there is talk at the fringes of the American political system about nationalizing private 401(k) accounts to bolster the Social Security System.

I don’t know what will happen. I certainly hope that the Social Security System is preserved. My generation needs the money. The private pensions we expected to receive disappeared with changes in tax laws during the 1980s. This is another complex story covered in the book. For some of us options like the 401(k) and the Roth IRA arrived too late to do us much good.

I fear that Adam Taggart correctly commented on the potential effect of current levels of debt and unfunded liabilities in the developed nations of the world, like Social Security, when he stated, “We don’t have problems. Problems have solutions. We have predicaments. Predicaments have outcomes.”

Is Social Security a Ponzi scheme? There are certainly similarities, but there are also significant differences. I think sometime in the next 30 years we will receive a definitive answer to that question. I hope that sound actuarial science in the hands of politicians of good will from both parties will prove Adam Taggart wrong.

Wednesday, December 18, 2013

The 60% Solution to Budgeting

There are a number of subjects that fascinate me because there are no one size fits all solution. One is the never ending search for the portfolio for all seasons. Of course I understand there is no such thing. All model portfolios break down under some condition. However, thankfully, there are a number of model portfolios that work very well, at least most of the time. Another of these subjects is the monthly budget. Ultimately, we all have to live on a budget. Our money is a finite resource. Unfortunately nobody wants to live on a budget. When the financial class is over; when the emergency is resolved; the formal monthly budget goes out the window.

It is important that you live on a conscious monthly budget that is appropriate for your situation. The lowest level of rigor is the net worth method. Everyone should do this every month at a minimum. Calculate your net worth on the first of every month. If it is going up at an acceptable rate, everything is fine and dandy. If it is going down, ask why. If we are honest and reasonably disciplined it is pretty likely we know why. Perhaps the car required a costly repair. Perhaps you were hit with your annual property tax.

If you don’t know why institute the next level. Keep a detailed record of everything you spend over the next month, to the penny. No excuses. List every expense under the appropriate category on a piece of paper or on a spread sheet. This is enough of a pain that it will tend to lower your expenses. If you list that $5.00 cup of coffee, not only do you have to write it down, you have to explain it to yourself or worse yet, your spouse. I did this twice during the early years of our marriage. It really works.

The full formal budget remains the gold standard. There is no doubt that you will do better if you use it. Unfortunately, not very many people live on a formal budget, at least not for very long.

Richard Jenkins proposes the 60% solution as a sound method of budgeting that is actually easy to practice. The goal is to live on 60% of your gross income. This money covers the basics food, clothing, essential household expenses, insurance, charity, all bills (including nonessentials like music lessons for the kids or cable TV), and taxes.

The remaining 40% is divided up in priority order as follows:

1)10% Retirement. In the author’s case, this all went into his 401K.

2)10% Long term savings. This amount should be automatically deducted from your pay. You should never see it. It should be relatively illiquid. If it takes a little work and a couple of days to get at this money you are less likely to use it.

3)10% Short term savings for irregular but somewhat predictable expenses such as Christmas, vacations, car repair, and new appliances. This money should be held is something like a money market fund that makes it easy to spend when it is needed.

4)10% Fun money. This money can be wasted on whatever suits your fancy. Maybe you might want to think about a pink checkbook for the wife and a blue checkbook for the husband for this one.

The author admits that this method will not work in every case because more than 60% of your gross income is already spent at the beginning of the month. He suggests four possible causes that might need to be addressed before the 60% solution would work for your family.

• You have a more expensive home than you can afford.
• You have committed to car or boat payments that are larger than you can afford.
• Your children are in a private school that you can't really afford.
• There's just a big, ugly gap between your income and your lifestyle.

If you can not live on 60% of your gross income consider that number a goal. Start where you can start, say 80%. Then work your way to 60%.

Better yet if you can’t live on 60% of your gross, consider the full blown formal monthly budget.

Monday, December 16, 2013

Autonomy or Dependence?

Family legend has it that sometime around 1750 one of my ancestors lived and worked as a gunsmith somewhere out on the wild frontier of Western Pennsylvania. In those days families were truly autonomous. They grew their own food; hunted and fished for their table; their clothing was made from animal skins or was home spun; they built their own houses; they made their own soap, candles, and whiskey. One of your neighbors made your firearms, knives, and plows. These people did not have much access to goods from the outside world. If a Yankee peddler happened to come through the neighborhood, it was unlikely they had much money to buy whatever it was that was that was being sold.

I like to think that my ancestor made what became known as the Kentucky Long Rifle, a beautiful graceful weapon. In competent hands the Kentucky Long rifle was deadly accurate at a range of 200 yards. A few years later, during the American Revolution, a ragged band of frontiersmen defeated a superior British professional army that controlled the high ground, because the range of the Kentucky Long Rifle greatly exceeded that of the British Brown Bess Musket. In the rocky forests that surrounded King’s Mountain the British troops could not get into formations that would allow them to overwhelm the outnumbered backwoodsmen with their musket’s superior rate of fire.

So much for family legends and American history.

Friday evening that frontiersman’s humble descendant heard a funny noise coming from his home computer. I knew the sound was just fan bearings, not a serious problem. I discovered that if I started the computer with the case in a different orientation the sound went away. I will replace the fan sooner rather than later. Everything is OK for now.

But, just for a moment, I was afraid.

Without really knowing exactly how it happened, I have grown dependent on the home computer. I get my news from my home computer. I have just about quit watching TV, so I get a lot of my entertainment from my home computer. I get more education from my home computer than from books. I manage my bank and brokerage accounts on my home computer. I pay bills on my home computer. I am even writing this blog post on my home computer.

The reason for the stab of fear? I am currently dealing with lawyers, real estate agents, and a probate court through my home computer. Losing my home computer for even a week would be a major inconvenience.

How on earth did that happen? Although I started signing out computers from work for things like graduate school classes starting around 1991, I didn’t even own a home computer until 2000.

Freedom, autonomy, independence are all hard to obtain and maintain. It requires conscious effort, inconvenience, and sometimes pain to remain free. It is easy to drift into a comfortable delusional dream that your appliances; your bank; your government; your church will take care of all your needs; until you wake up one morning to discover the power went out.

I am not suggesting that you move to forest and live like the people in the scene from Conan the Barbarian at the top of this article. In my case I think I will buy a laptop, maybe a Chromebook. We need a reliable backup. After a year of retirement it is obvious that one personal computer is not enough for two people. When I was gone to work or on the commute for 11 hours a day there was plenty of available computer time for both of us. Now, sometimes, we both want to use the computer at the same time.

They don’t call them personal computers for nothing.

I know some people who are consciously moving towards freedom. I greatly respect and admire what they are trying to accomplish, but I am not ready to move back to the farm.

As the song popular at the end of World War I put it:

How ya gonna keep 'em down on the farm
After they've seen Paree'
How ya gonna keep 'em away from Broadway
Jazzin around and paintin' the town
How ya gonna keep 'em away from harm, that's a mystery
They'll never want to see a rake or plow
And who the deuce can parleyvous a cow?
How ya gonna keep 'em down on the farm
After they've seen Paree'

Saturday, December 14, 2013

A Better Way (Mad as Hell Part II)

In I’m Mad as Hell, I examined our current reality and our reactions to that reality. Because our current reality does not conform to our expectations it causes us confusion and disappointment. Humans, my self very much included, tend to respond with frustration and anger when our desires are met with disappointment.

There is a better way.

In I’m Mad as Hell, I sated that many of our conversations concerning the economy are the wrong conversation. Let me give an example. One of the angry debates I have witnessed lately concerns the minimum wage. Some say the minimum wage is not only far below a living wage, but it is at a historic low level given inflation. This is certainly true. Some say that the minimum wage should be low. Raising the minimum wage would eliminate many marginal jobs. This is certainly true.

However, whether our representatives choose to raise the Federal minimum wage or leave it at its current level really doesn’t address our central economic problem. There simply aren’t enough quality jobs for average men and women. By definition minimum wage jobs are not quality jobs.

Personally, I would be inclined to vote for raising the minimum wage if the proponents could convincingly demonstrate that such an increase would not adversely affect the economy. I feel a great deal of compassion for adults who are making the effort to work at such a low wage rather than living on the public dole.

But the question just doesn’t matter. Some states have a higher minimum wage than required by Federal law. San Francisco’s minimum wage is $10.55 per hour! In some states where the minimum wage is the federally mandated $7.25 per hour, employers can not find workers at that wage. In the town where I spent the previous 25 years, the local McDonalds had problems finding entry level part time employees at $9.00 per hour.

More importantly, the minimum wage is not a destination. For most, especially teenagers, the minimum wage is just the first step on the lifetime long climb towards something better.

I ended I’m Mad as Hell with a challenge, “Take responsibility for your own life. Do it today. As you begin to move forward, you will get stronger. You can make yourself a more valuable human being both in the marketplace and in areas of life that are more important than money.”

Start a search for a better job in the mind of your employer. As an employee, you are viewed as a liability. If an employer can replace you with contractor or machine that can perform your job better or for less money, you’re job is already gone.

The key in the marketplace is value. Not your time. Not your humanity. Nobody but your grandfather is going to hire you because you need a job. You will be hired because your employer needs you. If your value exceeds your cost by more than his expected Return on Investment (R.O.I), your job is pretty secure.

Blaming forces beyond your control for your situation doesn’t help. Dwelling on excuses to explain your failures doesn’t help. As the football players are fond of saying, “It is what it is.” Because the key in the marketplace is value, increasing your value to your employer will help. If you wish to increase your value, you will need to work as hard on yourself as you work on your job.

I graduated with a nearly worthless degree in history just in time for a nasty little recession. I wanted to stay near my girlfriend. The only job I could find was at a nearby textile mill, packing large rolls of cloth into burlap sacks. I don’t remember my exact salary but it was only pennies above the minimum wage. At least such jobs came with health insurance back in those days. I was a reliable cooperative employee. I showed up to work on time. My supervisor knew I would work overtime whenever he needed me, rather than just when I wanted some extra money. In entry level jobs, just showing up is really 90% of life. Add punctuality and a reasonably decent attitude there is nearly a 100% certainty you will get raises and a promotion.

After a couple of months I was promoted to a cloth inspector, a semiskilled job that paid something closer to a living wage. Two such jobs could support a family of four back in 1973. I continued to be a “good” employee. I worked on difficult cloth that contained a lot of flaws with fewer complaints than most of the employees. I continued to work overtime as required, once in another department where a second shift supervisor was caught shorthanded one night. In this kind of job a little more is expected. The quality and quantity of your work really matters both to your supervisor and to the ultimate customer. These jobs don’t require much more than average intelligence, but the employee really needs to care about their work.

I didn’t know it, but people in offices who wear ties were watching me. After about six months on the factory floor, I was moved into the plant’s industrial engineering office. My direct supervisor worked in another factory. Once a week he would spend most of a day teaching me the basics of industrial engineering. Then he expected me to both apply what I had learned and learn on my own. They did send me to a week long course on the basics of performing time and motion studies, but generally I was on my own. One day my boss showed up with a computer. I was told, “Learn how to program this thing.” He certainly didn’t know much of anything about that box. I took a course at the local community college and I learned how to program the thing. I automated the weekly production report, payroll time and error slips, and some other office functions. I also learned that when I was programming the computer, the plant manager would pass by my office mumbling, “Hmm. Him do big magic.” Then he would find someone else to go upstairs to track down problems with incoming shipments in the hot smelly bleach house, a valuable insight.

When I left that job after five years, I was the plant industrial engineering supervisor. Basically, I was a self trained industrial engineer. The reason I had the job without a degree is that I could do the job and I was willing to do the job at about half the going rate. At the time I thought my job wasn’t secure because I didn’t have a degree. Now I know my position was very secure. My value to my employer greatly exceeded my cost.

I think any definition of intelligence would include the ability to survive in an environment containing constantly shifting stimuli and problems. We call that reality the marketplace. We call that reality life.

If an ice age comes to your neighborhood, the grass in your yard will just die. The deer in the field just beyond your development will migrate south towards a more temperate environment.

Since you are a human, you can cut off a tree branch and tie a sharp stone to it, perhaps using vines or strips of wood. Throw the thing at the deer. After eating the deer, dry out its hide and use it to cover your wife, protecting her from the wretched arctic climate.

In this little story, the deer have shown intelligence by moving South. You have shown intelligence by killing a deer with something besides your car. Finally, your wife has shown intelligence by whining until she got a new fur coat.

Cursing the cold doesn’t help. Developing a plan, learning new skills, and taking action doesn’t necessarily change the environment. However it will change you and that changes everything.

Friday, December 13, 2013

I'm as Mad as Hell and I'm not Going to Take This Anymore

“I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth. Banks are going bust…..and there's nobody anywhere who seems to know what to do…..

All I know is that first you've got to get mad. You've got to say: 'I'm a human being, god-dammit! My life has value!'

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell: I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!”
Howard Beale from the Movie Network

The year was 1976. As a nation we were deeply divided over leaving Vietnam under less than honorable conditions. We were trying to recover from the first oil shock. The stock market was in a tailspin. Inflation and unemployment were both creeping upward at the same time. According to economists, this was impossible. The difference in rates between existing loans and current savings rates was pushing Savings and Loan institutions towards bankruptcy. Crime rates were at all time highs. We didn’t know it, but things would get worse.

In 1976, Network, a dark satirical film brilliantly explored the corrupting influence of television on everything it touched. Howard Beale, respected news anchor receives his two week notice due to declining ratings. Facing the end of his career, he announces he is going to commit suicide on the air. Instead he goes insane, live on the air, delivering the famous I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!” rant.

Over the last few days both on facebook and in real conversations with live human beings, I am hearing the same confused anger I heard in the 1970s. Things are bad. U-6 unemployment stands at 13.2%. Both our national and individual debts stand at all time highs. Young people burdened with student loans are unable to start their lives. Their parents can’t sell their homes because they owe more than their houses are worth. Tired old people in their 60s can’t retire because they were hit with a retirement bait and switch as defined benefit plans went bust or were closed to new employees. Health care is a terribly expensive mess that is crippling small businesses and individual policy holders.

And nobody seems to know what to do. The old answers, from both parties, simply aren’t working anymore.

Most of the conversations I hear are the wrong conversation. Our politicians face one overwhelmingly important question, how to create high value added jobs in the private sector for men and women of average intelligence who don’t possess any particularly valuable skills. Since 1973 we have exported on the order of 20,000,000 American jobs to places like China. Whole industries from primary steel to the garment trade have simply disappeared. We have failed to control our borders. Now we are being asked to provide jobs for an additional 12 and 20 million people.

Remember the law of supply and demand? The world has an oversupply of labor. If jobs are scarce and potential employees and numerous and desperate, guess what happens to salaries? These problems are only exacerbated by improvements in automation technology and the potential of “cloud computing” to revolutionize back office operations.

In the face of all these difficulties, it seems that every law our politicians enact just seems to make things worse. I wish I could convince our elected representatives to think before they voted:

If it creates more high quality jobs in the private sector it is important.
If it does not create more high quality jobs in the private sector it is not important.
If it is going to destroy high quality jobs in the private sector, it isn’t going to happen. Not on my watch.

To paraphrase the old Ford slogan, “Jobs are Job #1.”

Twenty million high quality, wealth producing, tax paying, jobs in the private sector would solve an awful lot of this nation’s problems. We could balance the budget. We could have more money for all kinds of desirable Government funded activities, like medical research. Fewer people would need social programs. More Americans could once again enjoy the kind of life we experienced in better years.

Until things get better, I want you to say, 'I'm a human being, god-dammit! My life has value!'

Like the Howard Beale character in the movie, I want you to get up right now and go to the window. Open it, and stick your head out, and yell: I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!

Get up! I pray (especially when I am in trouble). I vote. I expect you to do the same.

But don’t wait on God or the Government.

Take responsibility for your own life. Do it today. As you begin to move forward, you will get stronger. You can make yourself a more valuable human being both in the marketplace and in areas of life that are more important than money.

The I’m as mad as hell rant

Wednesday, December 11, 2013

Mortgages Good Debt or Bad Debt?

There is only one kind of debt, bad debt. There are unavoidable debts, such as a medical debt. Mortgage debt may at times be the lesser of two evils, but it isn’t good debt. Wikipedia notes, “The word mortgage is a French Law term meaning "death pledge", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.” Gage, the pledge part, is related to the word for glove. Think handshake. Your mortgage is a cold dead hand resting on your shoulder. Isn’t that a cheerful thought?

We have been sold a bill of goods by our genetic makeup, as well as the real estate industry. There is something in young couples that tells them they have to have a home to call their own. I expect that was true in the days when my ancestors were crawling around in the caves of Western Europe. The real estate industry told us that prices can only go up. Of course that is nonsense. In 2006 we learned that in a finite world nothing can go up forever. It was a bitter lesson. In 1960 it was a given that your home near the big city would help fund your retirement in Florida. Those days are gone, probably forever.

Like all Americans, we wanted to buy a home when we were first married, but it wasn’t in the cards. Interest rates were running as high as 18% in those years. We were still working on getting our educations. The numbers just didn’t work.

Years later we were still living in an apartment after moving to a new city and starting a new life with new degrees and new jobs. One year “they” bumped our rent either 10% or 12% (I forget which) in one year. Rent for a two bedroom apartment exceeded the mortgage payment for a three bedroom house. I told myself, “If you want to ride the train, you have to jump onboard.” And I jumped.

Turns out I had intuitively applied a rule of thumb to the 1987 Maryland real estate market.

Always remember that rules of thumb only work thumb of time.

Take the annual cost of renting a property then multiply the result by 15. If the sale price of the property is greater, rent. If the sale price is less, buy.


Renting a three bedroom home in a certain city costs somewhere around $1,000 a month.
Hence $1,000 a month X 12 months in a year X 15years = $180,000
Therefore, if this home sells for less than $180,000, buy it.
If the home sells for more than $180,000 rent.

Of course there are other considerations. Not only do you need to calculate the rent/mortgage trade off, you also need to consider the additional costs of taxes, utilities, and home maintenance. My days as a home handyman are just about over. Like most men my age, I have problems with my knees and lower back. I take a heart medication that occasionally makes me a little dizzy. My wife won’t let me work on roofs or climb trees with a saw anymore. She is correct in her assessment of the situation. The last time I trimmed the big hedge in the front of our house I fell off my ladder and landed in the hedge. Fortunately, only my pride was wounded.

The big deal killer for most young couples is the down payment. For many years prior to the real estate bubble of 2000-2006 a 10% down payment was standard. This was tough for a young couple. We had to come up with $10,000 cash when buying our $100,000 home. There were additional closing costs, taxes, fees, inspection, and bills that totaled another $8,000. I had to borrow $3,000 from my father in law to rebuild what I would now call an emergency fund. In those days I just called it working capital. Today, a young couple needs to put 20% down to avoid the dreaded mortgage insurance. You pay to protect the bank. Isn’t that special? In the Washington D.C. area, that amounts to $60,000 cash for a typical $300,000 starter home.

Over the years, I have added one caveat to my mortgage decision lecture. Calculate affordability on the basis of one income, not two. Young couples often decide to start a family. When babies appear on the scene young women want to stay as close as possible to their children. Fulfilling this perfectly normal instinctual desire is good for both mother and child. At least give your wife the option to be a stay at home mom for a few years if that is her desire.

Do the math. Talk to experienced knowledgeable people who will not benefit from your decision. Say your prayers. If all the signals are a go, take a deep breath, and jump onboard.

Monday, December 9, 2013

Student Loans in the Marketplace

It is beginning to appear that underwriting principles are being applied to granting, forgiving, and refinancing student loans.

The same kind of reasoning that traditional health insurance has applied to preexisting conditions is appearing in the student loan marketplace. Recently, students in a potentially lucrative major at a prestigious university are getting better rates with less administrative hassle than an average student majoring in the liberal arts at a second tier university. This makes actuarial sense. Would you rather lend money to someone majoring in petroleum engineering at Texas A&M or a film arts major from a small southern liberal arts school. While most student loans can not be discharged even in bankruptcy, the lender will not necessarily recoup all his money or get his money when he hopes to get it from a student that doesn’t have a job. There are programs that cap student loan repayment in such circumstances. Ultimately, you can’t squeeze blood out of a turnip. While these practices make sense to the originators of the loans, the investors who purchase products based on securitized student loans, as well as the Federal agencies who guaranteed those products, it exacerbates the problem of long term social inequality that student loans were intended to address.

Loan forgiveness programs are also structured on the basis of scarcity.

Nurses who agree to work 32 or more hours a week at a needy not-profit facility can recoup 60% of their student debt in just two years. A third year can bump that number to 85%. For all intents and purposes that takes care of the problem. Information on these programs can be found at the Health Resources and Services Administration website.

The National Health Service Corps is looking for doctors, nurses, physician assistants, dentists, dental hygienists, psychologists, and social workers. Volunteers can receive $25,000 a year in debt forgiveness for two years, then an additional $35,000 a year for a third year of service.

Science, math, and special education teachers working in low income schools can shed $17,500 after 5 years of service. Other majors are only looking at $5,000, a sum hardly worth worrying about.

The College Cost Reduction and Access Act of 2007 will trade 10 years working as a public service employee for total debt forgiveness in some cases. If you qualify that could mean over $100,000 in equivalent after tax income when compared to a similar job in the private sector, very interesting. Now we’re talking real money.

Of course as always the military, Peace Corps, and Americorps all offer various programs to avoid or pay off student debt.

These numbers come from Paying Off Your Student Loans with Forgiveness Programs by Lucy Lazarony.

Like every other kind of loan, student debt is more easily refinanced at lower rates and better terms for graduates with a good job and a high credit score. The students who really are in need of mercy are facing late fees and penalties that just continue to drive their balances higher. They are also receiving threatening (some times illegal) calls from collection agencies working as Federal contractors (really).

Lenders, even the Federal Government are reluctant to refinance when they are no more certain that these loans will be repaid at a lower rate or better terms. There are some degrees from some colleges that just aren’t worth what they cost. It is unlikely that the student will ever totally escape from their bad career choice compounded by bad financial decisions.

To be fair, the universities are responsible for a lot of this problem. They get their money up front. It doesn’t matter if the major has a future or no future. It doesn’t matter if the student graduates with honors or flunks out after two years. The university gets to keep all their money. There are way too many horror stories out their describing the actions of unscrupulous university employees who coaxed na├»ve 18 year old children or even desperate unemployed middle aged students into terrible life destroying decisions.

Mitchell D. Weiss identifies the biggest problem as the $500 Billon in student loans that are owned by private lenders and their investors. Roughly 60% of these loans are guaranteed by the taxpayer. Why on earth would a bank choose to refinance a guaranteed loan at a lower rate? If he doesn’t get the money from the student, he gets it from the taxpayer. If he restructures the loan for the student’s benefit it comes out of his hide.

The entire, well intentioned, student loan program has turned into a colossal embarrassing $1 Trillion disaster that is destroying the first decade of adulthood for way too many of our young people. Personally, I think the Federal Government needs to get out of the student loan business altogether. Lenders, students, and especially universities all need to have skin in the game. If the lender and the university stand to loose money if they lend to a bad credit risk, it will change their behavior. If a student can receive a better deal if they choose a major in nursing than in the liberal arts, this would help supply the country and the economy with an educated workforce who can actually find work.

There is no doubt that the taxpayer is going to end up footing a sizable portion of the bill for three decades of folly. I don’t know the best way to work out an equitable plan that makes students responsible for their decisions without destroying the lives, while protecting innocent investors and the overburdened taxpayers of this country. I hope our elected officials find a way to defuse this bomb before it blows up.

Saturday, December 7, 2013

Multigenerational Wealth and Poverty

Over the last several years, I have spent a great deal of time thinking about the causes of success and failure both in my life and the lives of others. More recently, I have begun to study the idea of multigenerational wealth. Finally, over the last few weeks, due to the plans of my church, I have begun to study the problem of multigenerational poverty.

I have identified 5 important factors that seem to lead to fulltime employment over most of the 40 or more years we can expect to be a part of the workforce.

1)Confucian/Protestant Work Ethic
2) IQ (there is a correlation between intelligence and income up to an IQ of 120)
3) Love of and Respect for Education
4) Supportive Social and/or Family Network
5) The Ability to take Calculated Risks

It is not necessary to have all of these traits, but a sufficient quantity of some combination of these traits seems to be evident in everyone who manages to stay in the workforce through good years and bad.

I have had considerable exposure to the working poor in the mills of South Carolina during the early years of my career. I have some understanding of the difficulties faced by single moms. I have met people with various sorts of money problems at almost every socio-economic level of our society. However, I have never had much in the way of contact with the victims of multigenerational poverty. My initial readings seem to indicate that they do not have a work ethic, they have no respect for education, their social networks encourage and engender failure, and while they may take risks of a criminal nature, they seem to be unable to calculate the risk reward ratio of these actions. IQ? That is the old nature or nurture question. Children of intelligent educated parents grow up in a culturally rich environment. Public housing is not a good place to find opportunities for educational or cultural enrichment.

There is another piece to the puzzle, the ability to defer gratification. As far as I can tell that is essential in building wealth over time no matter what the income or starting point. It is more than the obvious ability to live with a rust bucket automobile until you are able to pay cash for something better. It is your perception of time.

Just about everybody has seen videos of the Stanford marshmallow experiment. A two year old is alone in a room. An adult enters the room, offering the child a marshmallow. The piece of candy is placed on a plate in front of the child. Then the adult tells the child he can eat the marshmallow at any time. However, if the child waits until the adult returns she will get two marshmallows. The adult then leaves the room. It is funny watching the toddlers engage in any activity they can imagine in order to distract themselves from that little white blob of sweetness. They lie face down on the floor; they cover their eyes; they sing and wave their arms in the air. Some get the second marshmallow; some don’t. The researchers followed these children through life. The children that were able to wait to get the second marshmallow did noticeably better than the children who settled for one marshmallow in the present moment.

My mother worked as a teacher in a mine camp in West Virginia. She didn’t last very long. She couldn’t stand watching her children sucked into a life of despair, poverty, and self destructive behavior. She noted that when there was money, the children brought ridiculously expensive meals to school. When there was no money, they had no food. She correctly observed that these poor people spent money as soon as they had it for whatever they wanted without any thought for the future. More recently, in New Orleans following Hurricane Katrina, the Government issued unrestricted debit cards to the flood victims to help them during the recovery process. A depressingly large portion of that money was spent in places like liquor stores and strip clubs.

In order to defer gratification you must believe in a future reward that is great enough to justify the current denial. Otherwise, why bother? A young person who would really like to be out with their friends slogs their way through medical school, a very difficult and unpleasant experience, knowing that a pot of gold waits for them at the end of that rainbow. The diet that is most likely to be successful is the diet undertaken by a young woman looking forward to her wedding. It is easy for her to forgo bonbons today because she has a clear vision of herself in that wedding dress standing before her friends, family members, and her new in-laws.

No matter who you are or the particulars of your situation if you want to improve your situation; defer gratification; more importantly change your perception of time. If you are desperately poor, try to save something for tomorrow. If you are working poor, begin to think in terms of a month rather than making it to end of the week. If you are middle class, stop thinking in terms of making those monthly payments. Decide where you want to be this time next year. If you are rich change your focus from years to decades. Envision the world as it could be in 40 or 50 years. Perhaps long after you have passed from this world, your vision could still be a blessing to your children, your grandchildren, and the world.

Friday, December 6, 2013

UGMA, UTMA, and the Coverdell ESA

There are two other vehicles for college savings. Neither one is much worth worrying about for most Americans. However, since I am on the subject, I feel obliged to cover my topic.

Coverdell ESA

The Coverdell Education Savings Account (ESA) is nothing more than an IRA applied to educational expenses. As an idea, it is simple, straightforward, and easy to understand. You (the donor) put the money in the account for the child (beneficiary), the money grows tax free. It can then be used for just about any education expenses, including elementary or secondary schools.

With the Coverdell ESA you are not limited to state plans. You can select the brokerage firm you want and you can select the investments you want to include in that portfolio. As with the 529 the money belongs to donor until it is spent by the beneficiary. In emergencies you can get at your money after paying taxes and penalties.

So what’s not to like? The Coverdell ESA is limited to $2,000 per year per child. That is not enough over 18 years to fund one year at a private university, unless you happen to buy the next Apple as an IPO. The Coverdell ESA has been overtaken by events.

Too bad. I like the simplicity and flexibility of these accounts a lot more than the 529.


The Uniform Gifts to Minors Act (UGMA) has been replaced in most states by the Uniform Transfers to Minors Act (UTMA) which is basically the same thing. As far as I can tell it is primarily a tax loophole for the wealthy. Up to $14,000 a year can be put aside for a child without setting up a formal trust fund. On this point, the UGMA can allow higher contribution rates within certain limitations than the UTMA.

Like a trust, the money no longer belongs to the parent. The money is held in trust by a custodian (usually the parent) for the benefit of the child. If the parent dies while serving as custodian, the UGMA/UTMA will be considered part of the parent’s estate for tax purposes. Until the child reaches the legal age of maturity in that state (18 or 21), any income from account is taxed at the child’s income tax rate rather than the parent’s rate. If the child is still legally a dependent after the age of 19 or 24 depending on the circumstances, the so called Kiddie Tax Law kicks in; charging a higher tax rate.

On things like the UTMA be sure to visit your lawyer and CPA, before making any decisions.

Once the child reaches the legal age of maturity in that state, the money belongs to the child, period. There are no statutory limitations on that money. The child can choose to use it for anything.

Thursday, December 5, 2013

An Introduction to 529 Plans

Try to imagine what I would think about plans defined under not only the Federal Tax Code, but the different laws of the 50 different states that have made special deals with major investment houses, some of whom use commission salesmen. There is no single 529 plan for college savings. It is a snake pit of different sorts of offerings from 50 different states. If your state offers a really bad plan with limited selection of funds and high fees, it might be worth your while to consider another state’s plan even if your state doesn’t offer reciprocal tax deductions for your contributions.

As readers of this blog know, I consider saving for your children’s education to be a “nice to have” rather than a “must have.” It is more important that you escape all forms of debt and prepare for your retirement than it is to send your children to college. Many college degrees are at best a dubious investment. Due to the popularity of government guaranteed student loans that must be paid even in bankruptcy, institutions of higher education have run wild. Over the last 30 years the cost of higher education has increased at 5 times the rate of general inflation. Your financial independence in retirement would be a better gift to give your children than a college degree with the opportunity to support you in your old age. However, if you are intent on saving for your children’s or grand children’s education, 529 accounts offer a tax advantaged means of accomplishing this end.

There are two kinds of 529 plans. The least common is prepaid tuition. Eight states offer you the opportunity to buy future education at their universities at today’s prices. Maryland’s plan allows the money to be spent at any Maryland public college or university. It also allows the use of an amount equal to “weighted average tuition” to be used outside the state. This is pretty important. You may imagine that Junior will follow in your footsteps, selecting a major in electrical engineering at your dear old alma mater, when in fact he may have his sights set on a double major in art history and ecology appreciation at a private school in another state.

The more common 529 plan is a tax favored savings plan. These plans typically invest in mutual funds. Their value rises and falls with the market. Like retirement accounts, most authorities recommend an age appropriate balance between bonds and stock funds. Let’s say granddad starts a 529 plan for Junior on the day he was born. Since the amount of money is small (say $3,000) and the time frame is long (18 years) this money should be invested aggressively, even knowing that a market crash occurs once every ten years. Let’s say at age 17 the investments in the account are worth $150,000. Junior is going to need all that money over the next four years plus another $50,000. Now is not the time to be gambling a 4% difference in average return between stocks and bonds against a 1 in 10 chance of a 40% drop in the total value of the account.

Here is where it gets tricky. While states administer these plans under their own laws, they generally partner with a mutual fund company or a brokerage house. While some states offer a diversity of low cost products, some offer a few products loaded with high fees.

Let the buyer beware.

Here is a link to an article by the well respected Liz Weston of MSN Money listing some of the best and worst state plans. Again, it is not only necessary to evaluate different plans, but you also must consider the effect of the plan you select on your state tax return.

Best and Worst 529 Plans

529 Accounts have a donor (who manages the account) and a beneficiary (the child). Once the money goes into the account it pretty well has to be used for the education of the beneficiary. Otherwise, any gains are subject to taxes and penalties. There are exceptions, such as the death of beneficiary. However, consider that money as limited in use to tuition, fees, books, supplies, and equipment related to study at an accredited college, university or vocational school. These funds can also be used to pay room and board in most situations.

Warning: Paying tuition directly from a 529 account may reduce a student’s eligibility for need based financial aid.

Warning: Contributions to a 529 account fall under Federal Gift Tax Regulations. The donor is limited to $14,000 in a single year or a total of $70,000 over five years.

On the plus side, although money contributed to a 529 can not be deducted from your federal income tax, you might get a state deduction, and the money does grow tax free. The money still does belong to the donor. In an emergency the donor has access to those funds for any purpose after the payment of taxes and penalties. The states offer their own extra benefits to participants in their plans. For example Arkansas offers matching money to low income residents who have a 529. Maine offers $500 to start a 509 account for any baby born in Maine or a child who moves into the state before their first birthday. If your child is not interested in higher education, the money you saved can be used to benefit most other members of your family.

If you want to save for a child’s education, the 529 is the vehicle of choice. Once in place, it is basically a hands off tool that allows your money to grow protected from the ravages of the tax man.

But for heaven’s sake, Let’s be careful out there.

Wednesday, December 4, 2013

Nothing More than an Example of the Possible

I once read a post on a Christian personal finance blog that challenged the reader to give more to ministries and to their church. One of the examples given was a woman who never earned more than minimum wage but still managed to give more than $1 Million to charity over the course of her life. I raised my eyebrow a bit, but finished the article.

Down in the comments some skeptic did the math:

40 Years X $7.00 per hour X 2,000 working hours per year = $560,000

Conclusion: This story is mathematically impossible. The author of the blog answered the complaint by stating this woman invested her money wisely, so had more to give than she earned in her life. I had my doubts. In this business one reads a lot of dubious claims. You get used to it.

Yesterday while researching another question, I came across a link to this article in the Wall Street Journal.

Tin Can Collector Dies a Millionaire

In the town of Skelleftea somewhere up the coast of the Gulf of Bothnia, North of the Baltic Sea, a ragged old man know as “Tin Can Curt” spent 30 years picking up bottles and cans for cash. He looked and acted like any street bum. However, when he died he left his cousin $1.4 Million.

When Mr. Curt Degerman was not looking for recyclables to sell, he was in the town library studying the markets. Turns out he was something of a master investor. Over the course of 30 years he assembled a portfolio of mutual funds, physical gold, and cash. Since he didn’t have a mortgage, a car, or anything associated with the good life he was able to pour everything into building his net worth. Even with virtually no money coming in from his “job” he amassed a considerable fortune.

When Mr. Degerman died he left his money to his cousin, the only family member who visited him in his declining years. An uncle sued the estate under Sweden’s inheritance laws. After the lawyers of the two parties were suitable enriched, the cousin and uncle split up the loot.

Ah, the best laid plans of mice and men often go awry.

Please! Don’t live your life like Tin Can Curt. However, consider your excuses in light of his story. There are limits to what is possible, but not many of us are anywhere near our limits.

Tuesday, December 3, 2013

The Magician and Your Money

“Pay no attention to the man behind the curtain!”
― L. Frank Baum, The Wonderful Wizard of Oz

Charles Hugh Smith made an interesting observation based on the famous 80/20 Pareto Principle. For those of you new to this blog, The Pareto Principle states that in business roughly 80% of results come from 20% of the causes. The principle is named after an Italian economist, Vilfredo Pareto. In 1906 he observed that 80% of the land in Italy was owned by 20% of the population. Pareto also observed that 20% of the pea pods in his garden contained 80% of his harvest.

The more things change the more they remain the same. Smith determined that there is a key difference between the top quintile measured by net worth and the bottom 80%. The bottom 80% pay interest on debt. The top 20% receive interest payments from corporations and individuals.

It would seem the magic key to accumulating wealth is avoiding debt.

What does it mean to be in the top 20%? There are basically two ways to measure wealth, income and net worth. According to the famous Wall Street Journal Rich-O-Meter 3.0, $100,000 a year will put you in the eighty first percentile. Given the number of two income households in this country, I wish they measured household income rather than individual income. For comparison, the current median household income in the United States is $51,000.

A net worth of $500,000 will land you in exactly the eightieth percentile. Interestingly, using the formula proposed by Stanley and Danko, this would be exactly what one would expect for a single income family earning $100,000 a year, assuming a 50 year old breadwinner.

500,000 = (100,000 X 50) / 10

Now let me pull back the curtain and reveal the magic. Money is a shared illusion. It is created by Governments with printing presses or by Banks through fractional reserve lending. Fiat currencies are only more real than Bitcoins because more people believe in Dollars or Euros than currently believe in Bitcoins. Who knows? That may change.

Wealth is created by ingenuity and hard work, your ingenuity and hard work. Wealth is real. Think about it. The Government or the Federal Reserve has created a castle of debt built on a foundation of thin air. It is your ingenuity and hard work that keeps it afloat. When the interest on a debt comes due, (whether it is your personal debt or our public debt) it is your time and your effort that is actually putting your wealth into the hands of the top 20%.

Monday, December 2, 2013

When to Save? When to Give?

Proverbs 21:20
Precious treasure and oil are in a wise man's dwelling, but a foolish man devours it.

In personal finance, as in clothing, one size does not fit all. Exactly when to start activities like saving for retirement, college, or paying down a mortgage early are questions that are highly dependent on the particulars of the situation. What percentage of your income should be directed at a given project at a specific time in your life is even more problematic.

However, I believe there are some rules of thumb that at least work at least thumb of the time.

When to start savings?

No matter what your financial condition, start saving today. If at all possible, keep saving for the rest of your life, even in retirement. If you are broke and overwhelmed with debt, start an emergency fund today. Even $500 in a cigar box can mean the difference between an unfortunate event, like a flat tire, and a disaster that leads to an additional debt that is large enough to trash a tight budget for several months. If you can’t do any more than throw loose change into a drawer at the end of the day, do it. If you have anything you can live without, sell it. Put that money into your emergency fund. The ultimate goal is six months take pay in an insured account. Reaching this goal will take a long time. Don’t beat yourself up if the going is slow. Just keep saving.

Proverbs 13:11 ESV
Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

Once your situation has improved to the point you are not reacting to emergencies on a weekly basis, pay yourself first. Before paying your bills, put aside a little something. The goal here is 10% of take home salary into savings. When the number in savings becomes sufficiently large, that money becomes your seeds for long term investments in taxable accounts. Again don’t beat yourself up about what you can’t do. Rejoice and thank God for what you can do. That is an important principle in every aspect of life.

When to start saving for retirement?

Generally, one should start saving for retirement as soon as you receive what you believe to be your terminal degree, high school, college, or graduate school. If your employer offers matching money, I would lean toward taking the free money even if you are still paying off bad debt, like high interest credit cards. You simply can not beat a 100% instantaneous return on your investment.

The goal is 15% of your pretax income into tax favored accounts. For most this would be a combination of 401 (k) and Roth IRA. The Roth came into the game a little too late to do me much good, however it should be a powerful weapon in the arsenal of those under 50 years old. Start with the free money. Gradually, over time increase your contribution. A good way to achieve this goal is bump your withholding every time you get a raise. This is a relatively painless way to reach 15%. If you try to reach this goal too quickly, you will end up needing the money for something else.

Proverbs 10:4-5
A slack hand causes poverty, but the hand of the diligent makes rich. He who gathers in summer is a prudent son, but he who sleeps in harvest is a son who brings shame.

When to pay off the mortgage?

I consider making extra payments to principal on your mortgage to be a critical component in any savings plan. Larry Burkett, the godfather of Christian personal finance authors, was fond of stating that if you hadn’t paid off your mortgage you did not have a retirement plan. I was so frightened by my 30 year mortgage I paid it off in less than 10 years. That was the biggest raise I ever receive in my life. I had close to $1,000 extra, every month. It is amazing the world of options that opens when you have an extra $1,000 in your hand.

Don’t talk to me about losing your tax deduction. If you have a mortgage, you are giving the bank $3.00. Then the Government returns $1.00. It is better to give the bank nothing. Give the $1.00 to the IRS and keep the $2.00 in your pocket.

Again use a little common sense. If you have 23% credit card debt or even 6% student debt get rid of it before going after the mortgage. If you have a 3% mortgage and inflation is running at 6%, don’t worry about it. If you have a 6% mortgage and the current thirty year rate is 3%, refinance. One size does not fit all.

When to start saving for college?

I view this as “nice to have” rather than a necessity like the emergency fund or a retirement plan. Your children may not want to go to college. It will be much easier for them to find money for college than it will be for you to find a retirement loan. Once you have everything else under control, start socking away surplus money into a 529 tax favored education account for your children, grand children, or even yourself. Once you put money into such a tax favored account, this money has to be used for education.

Proverbs 13:22
A good man leaves an inheritance to his children's children, but the sinner's wealth is laid up for the righteous.

When to give?

There is another part to the question of savings, when and how much to give. Obviously, you can’t save money that you have given away. Fortunately, I am a Christian. Christianity is a religion of freedom and grace, not rules and law. I will never tell you how much you need to give. That is a question that needs to be settled between you and God. That said, if you aren’t already giving, start giving today. If all you can manage is a handful of change into the plate or the Salvation Army kettle, start today. If you don’t have money, donate your time to your church or some worthy charitable activity. If you show up at one of these places they will find something for you to do.

Look into your own heart, your attitude towards giving will tell you a lot about your relationship with God. After all, as a Christian you are just a steward of your Lord’s resources. Most of us don’t live like that because in our heart we really believe that is my money, not the Lord’s money. That’s OK. If you have to pry the money out of your left hand with your right hand, that is a start. Just keep looking for ways to become a blessing. If you are faithful in little things God will soften your heart. Then you will be given the opportunity to become a true blessing in this unhappy world.

2 Corinthians 9:6 The point is this: whoever sows sparingly will also reap sparingly, and whoever sows bountifully will also reap bountifully.

Saturday, November 30, 2013

Force Majeure

Force Majeure is a legal term used as the title for a specific clause frequently found in contracts. The term is French. It means a superior or irresistible power. The clause is included because forces beyond the control of the two parties can affect the outcome of the contract.

Below is a sample of a Force Majeure clause that might appear in a particular contract. (Wikipedia)

Clause 19. Force Majeure

A party is not liable for failure to perform the party's obligations if such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalisation, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity or telephone service. No party is entitled to terminate this Agreement under Clause 17 (Termination) in such circumstances.

I want you to notice that such events that are covered in the Force Majeure clause do not cancel the contract. They merely delay the completion of the contract.

Think of the money equation as a contract with yourself.

Money In = Money Stored + Money Spent,
(Integrated over the course of your lifetime)

The right hand side of the money equation is pretty easy to discuss. If you do the right things consistently over the course of your lifetime there is a very high probability of a good outcome. If you spend less than you earn, if you save the surplus, if you invest in a cautious systematic manner, you have a shot at becoming a prodigious accumulator of wealth no matter what your income. That number is a calculation based on your income and age.

The left hand side of the equation is where things get a little tricky. This is where you and nobody but you defines success. You write the contract with yourself. You make the decisions that result in the outcome we call life. If you choose a path with a low probability of a high income, you will have to live with the results of that decision. This may be easy for an artist with a nice garden living in an obscure corner of Hawaii. It is brutally hard on a football player who dedicated 15 years of his life to make it in the NFL only to be cut in his first training camp. Now what, a lifetime of selling cars in a college town, living on past glory?

Most of us never even make any serious effort to pursue our dreams. We look for a job that will provide a living. Sometimes just making a living is challenge enough. Some of us choose to make a conscious compromise with reality. We decide on an acceptable lifestyle. Then we find the least objectionable path that will provide us with whatever it is that we consider the good life. Jesus asked the question, “And what do you benefit if you gain the whole world and lose your soul?” I am afraid that most of us in this materialistic consumer culture, have lost at least a part of our souls by focusing too hard on the left hand side of the equation.

Sometimes events happen that force us to invoke the Force Majeure clause in the contract we have made with ourselves. Years of diligent effort can disappear in a flash. Even when facing overwhelming circumstances, considering yourself a victim is useless, even if you are a victim. Taking responsibility for your life, no matter what the situation, at least gives you a chance. Life is not always fair. The innocent suffer unjustly at the hands of the wicked. Sometimes we are the victims of our own bad decisions. Sometimes we are simply the victims of the impersonal forces of the universe we mistakenly term Acts of God.

If nothing else, choosing a courageous response in the face of the difficulties we face in this valley of tears gives us an opportunity to live a life with dignity and integrity no matter what the cost.

There are a special kind of people who don’t invoke that clause when any reasonable person would allow them to suspend that contract.

I call them heroes.

If I knew what gave them their courage, I would put it in a bottle and sell it. I don’t know where it comes from, but I know it and respect it when I see it.

I knew a man who suffered complete kidney failure. Nothing I had ever heard about dialysis was good. In my ignorance I believed that either a dialysis patient received a kidney transplant or they would die pretty soon from renal failure. He proved me wrong.

With a consistent courage that I have seldom seen in this world, he just continued to work day after day, year after year to the best of his ability. If he wasn’t able to get to work, he worked at home. He never complained. He never asked for anything more than a chance to keep fighting. He never gave up. It is a humbling experience to meet a man with that kind of character. I am certain I would have gone out on disability after no more than a couple of months of dealing with something as horrific as dialysis.

I saw more in this man than personal integrity in business and heroism in facing a major life threatening tragedy. I also watched him deal with other men. As is true for all of us, life was not always fair to this man. Others take credit for our work. Other men do not always treat us fairly. No matter what the provocation he always took the high road. He always did the right thing when dealing with others even as he was fighting a personal battle I can’t even imagine.

For over ten years he fought the good fight. Finally he succumbed to forces beyond his control. Today he lives in an Eternal Hall of Fame, a fitting place for a hero who faced life with consistent courage and personal integrity; no matter what the challenge; no matter what the cost.

Thursday, November 28, 2013

Resumes, Necessary but not Sufficient

In the good old days, one wrote a one page chronologically ordered resume. Since this resume was going to be printed by a professional, one size had to fit all. This generic resume was then placed in an envelope with a cover letter custom tailored for the particular target, sealed, and placed in the mail. During my 1978 job search I did my cover letters by hand in chancery cursive with a calligraphy pen to differentiate my resume from the competition. I sent out about 35 resumes. I got two interviews and one job offer. In 1985 at the dawn of the computer and laser printer age, I once again prepared two (as I recall) generic resumes one for factories and one for laboratories. Again I prepared custom cover letters. I printed them myself both to establish my computer literacy and because printing was free since I had a university computer account. I sent out over 100 pieces of mail. I received two interviews at one company, no job offers, and over 60 rejection letters. I saved this collection for quite a long time. I found it very amusing that all personnel offices use the same rejection letter, “While we are amazed and astonished by your skills and experience, we just don’t have any positions available for someone of your remarkable abilities.” I think that as early as 1985, the computer was devaluing the resume in the hiring process.

Today, while there is little agreement on what should go into a resume, how it should be structured (by chronology or major accomplishments), or even whether a resume is worth anything in the hiring process, everyone agrees that you absolutely need to have a resume.

Some of these questions comes from an article entitled “6 Controversial Resume Rules Even Recruiters Can't Agree On” by Vivian Giang some of it from my own experience and readings.

Everyone pretty much agrees that a one page resume is still the standard since the recruiter will spend an average of six seconds before tossing your resume into an electronic or physical garbage can. I think if you are applying for a position as director of research and development for a Fortune 500 company, you might need more than one page to build your case, hopefully you would need more than one page to list your publications. Maybe the one page resume is still the standard, but have a longer resume to offer your interviewer if she wants more information now that you are deeper into the hiring process.

Nobody seems to agree on an objectives paragraph at the top of the resume. On the one hand it lets the reader know what you really want. On the other hand it can pigeonhole you when what you really need is a job, any job that lets you get your foot into a desirable company. Maybe this is a good place to customize. Like the cover letter of yore, this part of the resume could be aimed at a particular target.

Chronology could be bad if you have long periods of unemployment on your resume. Everyone seems to agree (including personnel officers) that the longer you are without work the harder it becomes to find a job. Personnel officers recommend you tell the truth. List the months you were unemployed and tell them what happened. Professional resume writers (yes, there are such animals) suggest listing chronology by year. This makes it difficult to discover you were unemployed for six months in some given year or subsequent years. Maybe you could try using one of those accomplishment resumes that seem to have gone back out of fashion if you want to hide the blanks.

For a while photographs were in vogue. Now they seem to be out of fashion. Since most resumes are sent electronically, photos can cause problems with the formatting of your resume on an alien computer. Given universal formats like .pdf, this argument sounds weak to me, but photos also provide you age, sex, race, and appearance. That may not be a good thing at a very early stage in the hiring process. I will let you answer that question for yourself.

If you are older, how much of your experience should you include in your resume? Some believe that 15 years is the cut off point. Others suggest as long as it is relevant it should be included in your resume. For example if I was looking for work in management, I would include my experience as a factory supervisor and a supervisory industrial engineer. Even though for all practical purposes those experiences have disappeared into the mists of time, combined with my experience as an engineering project manager, I could show a lifetime of relevant experience.

In 1985, although I didn’t know it, the handwriting was already on the wall. I landed a job I really wanted, not because of what I knew, but because of who I knew. During a university job fair, I pitched my team’s junior design project, an all terrain wheelchair for a little crippled girl. It really worked well and actually appeared on the local TV news. It turned out that personnel officer was the specialist for recruiting handicapped employees. Because she thought our project was pretty cool, she put me in direct personal contact with six different managers each of whom had the authority to give me a job.

Go ahead, prepare your resumes. Send them out in both electronic and snail mail versions. Always carry paper copies of your resume when you are visiting a potential employer. Don’t expect that much of anything will come from all this effort, but it is still part of the process. If you want a job at a particular organization, in the current environment you need to establish some kind of personal contact with somebody on the inside. This will not only give you an obvious leg up on the competition, but it will also provide you with valuable intelligence data. You can learn how people in that company dress, talk, and behave. You can learn their value system. All this will establish you as a person of worth when it comes time for the interview.

Tuesday, November 26, 2013

Bank Fees! Don't Pay Them!

For 27 years I did not have a bank account. My savings, checking, and credit card were all handled through my little one branch credit union. I simply did not have to worry about fees and mystery charges. Everything was free if you followed a few simple rules, like pay your credit card bill on time. With the death of my mother-in-law we needed a bank with convenient branches in three different states. That meant one of the big four. Working with B.O.A. Citigroup, J.P. Morgan Chase, or Wells Fargo requires a different mind set. Unlike my not for profit credit union (still my primary financial site) they are in business to make money for their managers and share holders.

I started my relationship with one of these banks with a simple premise, I do not pay fees. Ever! You are borrowing my money at close to or exactly 0.0% interest. You then lend it out at rates between 4% and 23% to your customers or victims. If that isn’t enough profit, it is your problem. Not my problem! Over a year and a half they tried to slide charges into my accounts on three different occasions. In each case a phone call to the branch manager resulted in refund. If he did not refund my money, I would have certainly closed that account.

Let’s look at some of these fees. One of the oldest is the monthly checking fee. This can run about $10.00 a month. For most banks this fee is waived if you keep more than $1,500 in the account. Be careful not to get too close to the line. The way the bank calculates the minimum balance is not the way you calculate the minimum balance. True no minimum balance free checking still exists in credit unions and even some banks. If you can’t keep an acceptable minimum balance in your current bank, do a little searching on the web.

Overdraft fees are a veritable gold mine for the banks. Overdraft fees are currently running at $32 Billion a year. From the stories I have heard, these fees are generally triggered by the careless use of debit cards. Not only do you get hit with a $35 overdraft fee but at B.O.A. if you don’t make it right in 5 days you get hit with another $35 fee. If you can’t handle a debit card, lock it up. Use cash and paper checks. Be sure and enter those withdrawals in your check register.

ATM fees are totally unacceptable. You’re charging me to access my money? The average charge for using an out of network ATM is $4.00. Don’t pay them. Ever! Keep enough cash on hand, go to a brick and mortar branch, or find another bank. Schwab runs a bank as well as a brokerage firm. They will refund your ATM charges when you use an out of network machine.

Because I am an old school curmudgeon who still uses paper, I don’t really know about these things from experience but some banks charge $10.00 a month to download information to Quicken. Don’t pay the fee. Use mint.com, Money Strand, or Personal Capital instead. Again I have no experience with any of these programs, so don’t take my word on this without some research.

E Banking with the big four can have its disadvantages. B.O.A. charges its e-customers a $5.00 teller fee for using a brick and mortar branch. If, like me, you need two banks, go ahead. Open accounts with two banks. I still use my credit union as the central hub for various transactions to brokerage accounts, mutual fund companies, and the like. However, I need checks with a local bank as well as quick access to cash. The local branch of the big four bank that handled my mother-in-laws account seems much better than their other branches. I have opened a simple checking account about three miles from my house. That is a lot more convenient than 500 miles from my house. If they disappoint me with fees, I will fire them. They are not the only bank with a branch in my little town.

Start with the premise, “I don’t pay fees. Ever!” There is almost always a way to avoid paying a bank to use your own money. Recently, my wife wanted to help one of her friends who was in a bit of a bind. She needed $400 and she needed it fast. Normally we don’t do that sort of thing. Mixing money and relationships is a dangerous business. Here is a link to a post on the subject of loaning money to friends or family members.

Friends and Family Plan

This time we decided to make an exception. Western Union wanted $35 to move $400. That was not happening. Calls to my bank and credit union indicated that fees for electronic transfers to her checking account would run about $15.00 on my end. I was also told she would get hit with another $15.00 charge on her end. That was not happening. I considered overnighting cash for about $15.00. This would entail the risk of lost mail or theft. I didn’t like that option. Finally, I called her credit union. I discovered that her credit union belonged to a nationwide network of credit unions. One of them was located about eight miles from my house. I could carry $400 (in cash) over to that credit union. The money was directly and instantaneously added to her checking account with no charges. Problem solved.

You simply should not pay fees to have access to your own money. The banks are loaning your money to their customers at whatever rate the market will bear. They are not paying you even a fraction of what they are earning with your money. That should be enough. Other charges for their convenience and profit are not acceptable. Period.

Monday, November 25, 2013

500 Posts: A Time for Reflection

I knew that I was approaching 500 posts on the blog, but I didn’t notice I had past that milestone until I hit 502. It seems like a good time to pause and reflect both on the past and on the future. Those of you have been around for a while know the history of this blog. If not, here is a link to a post I wrote back in July 2010 at the 125 post marker. It seemed like a lot of writing at the time.

A Word About What is Happening Here

I saw so many people causing themselves so much avoidable pain I just had to do something to help.

It all comes down to the money equation.

Money In = Money Stored + Money Out

Pretty simple isn’t it? Over 500 articles fall under one or some combination of the three components to the equation. Some of this material contains very basic teachings. Some of these posts successfully condense complex subjects into simple metaphors. Some seem (at least to me) a bit tedious and academic in nature. Some are a bit abstract and philosophical. On rare occasions I write red faced rants aimed at some outrage or injustice.

I was fortunate enough to be raised in a family that understood how to make certain less money went out than came in. It is a joke in my family that we know how to squeeze a nickel so hard that the buffalo bellows. I was also raised with a third generation fear of debt. During a boom time when other farmers were taking on more debt to buy more land, my grandmother was convincing my grandfather to pay down the debt on the farm. She was right. My family was one of only two families in their part of the county to hold on to their farm throughout the depression. This story was told over and over again at our dinner table. In fact, at age 62 I am blessed to still hear the family stories from my parents. I was also raised by parents who believed whole heartedly in the Protestant work ethic. They might have gone a little overboard making certain that I understood the connection between work and money, but I wasn’t surprised by the world when I was finally out on my own.

I was raised to love and respect education. It is the only way I knew how to jump start the “money in” side of the equation as I moved through my life and my career. The rules have changed. Another degree is no longer a guarantee of anything for most people, other than student debt. I have spent a great deal of time in an effort to understand the rules of the new economy. I have tried to study what is working and what is not working. As I have learned I have tried to share my findings with you, my readers.

Finally, over the last ten or twelve years, I have learned a lot about the discipline of investing. A member of my family is born knowing how to squirrel away money in a bank account. I had to learn what to do with it once I had it. I have been blessed. I am thankful. Now I try to share what I have learned with others, particularly the young. The guarantees I grew up with are gone. I expected that health insurance would always come free with my job. That is no longer the case. Even though my former employer is paying two thirds of my health insurance premium, my share is my largest regular monthly expense. The guaranteed pension is a relic of the past. Saving for retirement is now your responsibility. Social Security? Well I think Social Security will remain in one form or the other no matter what happens, but expect the payments to get smaller. Expect the age for full retirement to increase.

I don’t really know all my readers. One of the disappointments I have faced as I have continued to write the blog is a lack of comments. I have found that people are just about as unlikely to share their money mistakes and problems as they are to share the intimate details of their sex lives. The only readers I am sure I have are the ones who communicate directly with me in person, by telephone, or other means of electronic communication. Some of the posts I have written were written for specific individuals facing specific problems. In some cases I know they have been read and I know the results. In other cases, I can only guess.

If you are having problems with money, I am writing this blog for you. If you want to jump to a higher level, I am writing this blog for you. If you stuck in a dead end, I am writing this blog for you. Overall, I address most but not all the components for a balanced life. Obviously this blog addresses personal finance, business, and career issues. It also touches on personal spiritual issues and how they interact with more worldly concerns. Finally, they consider your legacy. You will carry what you contribute to this world during your life into eternity. While I am writing as a Christian, I think my readers who walk other paths will understand the truth contained this passage.

1 Corinthians 3:11-15

For no one can lay any foundation other than the one already laid, which is Jesus Christ
If anyone builds on this foundation using gold, silver, costly stones, wood, hay or straw,
their work will be shown for what it is, because the Day will bring it to light. It will be revealed with fire, and the fire will test the quality of each person’s work.
If what has been built survives, the builder will receive a reward.
If it is burned up, the builder will suffer loss but yet will be saved—even though only as one escaping through the flames.

When I give away a Silver Eagle, it comes with a notebook. The recipient is instructed to write down something they have learned about money every day. If they face a problem they don’t understand, they are instructed to ask God for wisdom. One of the recipients asked me if I kept a notebook. The question caught me off guard, but I quickly realized this blog is my notebook. I am just sharing everything I have learned with you, my readers.

I am still learning. If you read all 500 posts you will notice my understanding of these subjects continues to deepen with time and experience. I don’t have all the answers, but I continue to study, every day. I even study authors with whom I have serious disagreements. Bruce Lee said it very nicely, “Absorb what is useful, discard what is useless, and add what is uniquely your own.”

Go thou and do likewise.