Opportunity Cost

Opportunity Cost: "The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action."
Investopedia

Opportunity cost is something that we all implicitly understand starting at an early age. If I had a quarter, I could buy a comic book and a Coke (really I’m that old), but I could not buy a comic book, a Coke, and a package of Hostess Twinkies. In such an instance, I would always go for the comic book. The difference in perceived opportunity cost between the Coke and the snack would generally favor the snack. If it was hot enough outside, I might go for the Coke. If there were a good war movie at the local theater, my buddies and I might forego all of the aforementioned options to watch someone shot or something blown up by a team of brave Americans led by John Wayne.

Yes, I remember when Saturday matinees cost a quarter. When I was older, I reflected on how this inexpensive gift of privacy to our parents might have contributed to the size of our generation. Let’s save that line of reasoning for another day, but do consider the opportunity cost involved in that particular transaction.

As we grow older, we make more complex decisions with more long term consequences. In a brief blog post entitled “Making Big Decisions About Money,” Seth Godin explores how our minds work. This is usually to the advantage of the marketer. His first example, “Do I buy a $500 stereo option on a new $30,000 car?” Personally, if I am spending that kind of money on a new car, it will have a good stereo. I would never consider the $500 option. But I remember when my neighbor’s kid had a $3,000 stereo in a $1,000 car. I could hear it through the walls of my house over the noise of a box fan at 3:00 in the morning. Our perception of the opportunity cost associated with car stereo equipment was radically different. Who was right? It all depends on the perceived opportunity cost.

In a rather fanciful and unrealistic thought experiment, Seth then considers the opportunity cost involved in higher education. Consider, you are 18 years old. You have $200,000 in cash. You can choose to expend the entire sum on an education at a famous school or you can go to a slightly less well recognized university on a full scholarship. Let’s say you pay for an engineering degree from MIT or go for free to Penn State. Seth observes, “If you go to the free school, you can drive there in a brand new Mini convertible, and every summer you can spend $25,000 on a top-of-the-line internship/experience, and you can create a jazz series and pay your favorite musicians to come to campus to play for you and your fifty coolest friends, and you can have Herbie Hancock give you piano lessons and you can still have enough money left over to live without debt for a year after you graduate while you look for the perfect gig.”

What are the opportunity costs associated with this example?

In fact the choice of a college degree is often the first decision made by a young adult that will have long term consequences for both the student and the parents. Most parents will fund as much of their children’s education as possible. Generally this comes at the expense of funding their own retirement. This is not a good idea. There are no retirement loans. Neither the parent nor the child will want the monetary burden of old age to fall on the younger generation.

Unfortunately, often neither parents nor child has $200,000 for a college education. Then the opportunity cost of education loans becomes a factor. $200,000 at 5% for 20 years works out to a monthly payment of $1,319.91. That cost is way too high for any education. An education under such terms postpones marriage; it means no children; no house; no life. In short it guarantees the recipient 20 years of debt slavery with no guarantee of a job.

Ultimately, as Seth observes we are not comparing dreams to abstract numbers (the dream of driving down the Interstate with a $500 deluxe stereo booming in our ears with the abstraction of $500 added to a 5 year car note). We are comparing dreams to dreams. Or sometimes we are comparing dreams to nightmares.

And please! Let’s be careful out there.

Invest In Others

When I was in engineering school, I had to take two semesters of chemistry. During the second semester a small fat girl who liked romance novels was my assigned lab partner. She wouldn’t help with the experiment. I don’t think she liked chemicals very much, nasty smelling things. In spite of my offers to let her participate in the experiments she obviously preferred to read her romance novels. Yes, she actually read romance novels during the lab. It was one of those classes that required a fill-in-the-blanks kind of lab report, rather than the more formal documents required in more advanced classes. I just filled in my lab report as I performed the experiment. When I finished my lab report my partner made a duplicate copy. Once she got a better grade on her lab report than I got on my lab report, but then the lab TA was a small fat woman.

It was one of those defining moments that test our character. I had to ask the question, “What kind of person do I want to be?” I decided that if my lab partner could derive any benefit from my efforts; so be it. I concluded it would all work out in the end. I got a B+ in the course. I have no idea what grade my partner received, but I rather suspect it was somewhat lower than a B+.

This was about the same time I started doing a little tutoring on the side, mostly for free. Sometimes I received cash or in kind payment. I had a pass key to the engineering building that allowed me access to the computers when the building was closed. I was given it as a gift by one of my “students.” He got it from a graduate student in exchange for a tank of gas. It was a very valuable asset that gave me a significant advantage in time flexibility back in the days before the Internet and the personal computer. I also discovered one of the most effective ways of learning a subject was teaching the subject. In order to explain Laplace Transforms to a struggling student you really need to know your stuff.

Invest what you have in others. You can give away your wisdom, your knowledge, your experience. It will never cost you a penny. You still have it and your gift may change someone’s life. It just may make you a richer man. If you know something that could help a coworker, a fellow student, a neighbor, share it. Don’t worry about competition or protecting your little rice bowl. If you plant enough seeds you will have a harvest. It may not come to you in the way you expect. Perhaps a coworker will be promoted into a position that you deserved with your help. It’s OK. Really, it is. If you have consistently given more than you have received to those God places in your life you really don’t need to worry about the harvest. Counsel. Support. Encourage. Share your wisdom with others. You will find healing in your mind, your body, your soul, and your spirit.

Ecclesiastes 11:1

Cast your bread upon the waters, for you will find it after many days.

Matthew 10:42

And if anyone gives even a cup of cold water to one of these little ones because he is my disciple, I tell you the truth, he will certainly not lose his reward.

Deuteronomy 15:10

Give generously to him and do so without a grudging heart; then because of this the LORD your God will bless you in all your work and in everything you put your hand to.

Right Brain Wrong Brain

The right brain is the reactive brain. It is the part of your brain that sees something you want including an intangible dream then buys it without any further thought. It is the part of the brain Wall Street brokers and investment property salesmen hope you will use.

Back in the late 80s and early 90s I was intrigued with the rebirth of the Harley Davidson Motorcycle Company. I even visited their factory in nearby York, PA. It was well worth the trip. I correctly concluded that Harley Davidson was not selling motorcycles. They were selling a dream. Well heeled middle aged men who always wanted a Harley could finally afford a Harley. In their dreams they could be Peter Fonda in Easy Rider, at least for a few hours.

In the article, “Are You a Right Brain or a Left Brain Investor?” Rick Ferri states, “I quickly learned that Wall Street isn’t about sound judgment and making prudent decisions for clients – it’s about selling to people who make impulsive right brain decisions. During broker boot camp, I was instructed to forget that facts – sell the sizzle, not the steak. Our text book was The Art of Selling Intangibles by Leroy Gross, a successful stockbroker in his day. Gross wrote that the key to successful selling is greed, and that we should use this to our advantage:”

Several years ago we were vacationing in the American Southwest. My wife had selected a nice looking motel on the Internet. It turned out it was not a motel but a front for a timeshare company that owned a resort elsewhere in the city. We were given the choice of a nasty little room or a suite overlooking the canyons. To get the suite we had to go to a timeshare pitch. Were heard beautiful stories, looked at the glossy photographs, and visited luxurious condos in that particular development. I never heard such a pitch in my life, the guy was good. However, I had read more than enough horror stories to know timeshares were a very bad idea.

The Federal Trade Commission warns against buying timeshares. You will almost always loose money, sometimes a lot of money. The property might be desirable when it is new but it will age. If the area is profitable competitors will build newer more luxurious timeshares to get in on the action. There are usually hidden fees the salesman failed to mention. It is a thoroughly disreputable business. When I returned home from our vacation, I investigated that particular company. The Internet was full of negative comments from angry victims and listings of law suits and court actions against the company.

Federal Trade Commission Timeshare Link

Of course the ultimate right brain financial decision is the lottery ticket. For a couple of days you hold the winning ticket. In your mind’s eye you can visualize the seaside mansion somewhere on the coast of Maui, just South of Wailea Makena. Hey, I have dreams too. Then the drawing is held and your ticket joins its brothers in garbage cans all over the country.

Ferri warns us, “Many investment advisors and financial planners are no better than brokers. They pitch their skill at beating the market by saying they have the ability to choose the right mutual funds at the right time. I am sure that a handful of these advisors do have luck or skill, but most don’t. History shows us that the real winners are few and far between, and it’s not possible to know who the winners will be in advance.”

Don’t become infatuated with the possibility of a big payday without judiciously considering the probability of loss. When you hear a hot stock tip on TV or read about it on the Internet, that is only the first step. Now, do your research. If you have an online brokerage account, you have access to at least a half a dozen investment reports from reliable companies on any major corporation. The same sorts of reports are available for mutual funds. Generally you will find that two of the reports will recommend buy, two will recommend hold, and two will recommend sell. If it was that easy a decision everybody else would have already made it. You would be too late to the party.

Back when I bought my Coca Cola (KO) stock, every research company, all of them, were recommending buy. Even Warren Buffet, the genius, was adding to his gigantic position in this company. Coca Cola stock promptly dropped in value. It didn’t come back for over two years. However, it did come back. Not because of what any financial seer wrote in his book of secrets, but because it is a well managed company with a wide moat that has a long history of taking good care of its shareholders. Today KO is one of my happy stories.

Please! Let’s be extra careful out there today.

Floss One Tooth

After the death of my father in law, my mother in law asked me to balance their checkbooks. It took about two minutes to balance my father in law’s checkbook. It was up to date and error free. The same could not be said about my mother in law’s checkbook. It was a mess. It was full of errors and oversights. After several hours of effort going back through six months worth of statements, I gave up. While I found a lot of errors and missing checks, I could not account for something like $63.00 in discrepancies. I entered a line in the check register for the missing amount. Under transaction description I wrote error. My mother in law could not believe her checkbook was in such bad shape. She never had to worry because my father in law consistently deposited more money than she spent, leaving her with an unusually large balance to absorb any accounting irregularities.

A great deal has been written about the careless use of credit cards. In the wrong hands they are truly weapons of mass financial destruction. However the careless misuse of a checking account, particularly with the use of a debit card for small purchases, can lead to a lot of pain. I have heard stories about the $40.00 latte from angry debit card holders. That would be $5.00 for the latte and $35.00 for overdraft “protection” fees. Al Capone didn’t make a fraction of what the major banks realize in profits from the protection racket. U.S. Banks are raking in $31.5 Billion a year in overdraft fees as of June 2012!

This is a real problem.

If it takes too long to straighten out your checkbook at the end of the month or if you have never balanced your checkbook, try the floss one tooth method. I have seen this in a couple of different places. Evidently it is an old idea. If there is something you need to learn how to integrate into your life that you just can’t stand, start small. No one could complain about flossing one tooth after brushing. Once you are successful with this comical little step, one tooth becomes two teeth until the habit is fully established.

Instead of making balancing the checkbook a feared ordeal, begin small. Use duplicate checks. For debit card purchases; save all your receipts for that day. Men put those receipts in your wallet. Women keep an envelope in your purse for your receipts. They will get lost in the clutter found in most purses. At the end of the day, say first thing after dinner sit down at the computer or with your smart phone. Call up the charges for the day, match them to your receipts and check copies, enter the information into your check register, recalculate your balance, and your done.

This practice will not take you longer than 10 minutes on most days. As you establish this kind of habit you will invariably find ways to improve the process, like using cash for more of your purchases so there will be fewer records to keep. This could lead to a bonus. Studies have shown that psychologically it is significantly harder to spend cash than it is to use plastic. At the beginning of each day try budgeting your cash needs for that day. Then try to live on that amount of money. Say, $8.50 for lunch at the cafeteria, $4.00 for coffee and doughnuts, $5.50 for cigarettes, and $7.00 for a drink after work. You might then find yourself asking the question, “$25.00! For what?” It might give you a little more encouragement to quit smoking. Perhaps you will decide not to stop at Tony’s Bar and Grill every night after work; all because you decided to floss one tooth.

By the way, dentists tell us you only need to floss the teeth you want to keep.

Be Careful What You Ask For

And when Jesus departed thence, two blind men followed him, crying, and saying, Thou Son of David, have mercy on us. And when he was come into the house, the blind men came to him: and Jesus saith unto them, Believe ye that I am able to do this? They said unto him, Yea, Lord. Then touched he their eyes, saying, According to your faith be it unto you.

And their eyes were opened;

Tony Robbins tells a little story from the early days of his career. He had just finished teaching one of his first seminars. He was excited to have a paying audience so he couldn’t sleep. He decided to go for a walk in an area near his hotel. Along the way a drunken panhandler asked him for some money. Tony decided to give the bum some money, but he wanted to make sure it was a teaching moment. He asked the drunk, “How much do you want?”

The bum said, “Just a quarter.”

Robbins asked him, “Are you sure that is all you want?” The panhandler assured him that a quarter was all he wanted. At the time Robbins, at the suggestion of his mentor, carried a roll of small bills wrapped with three hundred dollar bills. His teacher wanted Tony to get used to handling money. So Tony fished this wad out of his pocket with a great flourish. Unwrapping it, he fished a quarter out of the middle of the roll. He made a show of handing the quarter to the vagrant with these words:

“Life will pay any price you ask of it.”

The bum’s mouth dropped open. He looked back and forth between the quarter in his hand, the pocket containing the roll of money, and Tony Robbins’s face. Finally, in confusion he announced, “You’re weird.” With that he shuffled on into the night.

The blind men at the beginning of this post didn’t ask our Lord for a handout, as was their custom. They asked him for their sight, a miracle. Now don’t expect me to sing a chorus or two of, “Lord Won’t You Buy Me a Mercedes Benz.” There is a balance in these teachings. Consider the prayer of Solomon, perhaps the richest man in history.

Two things I ask of you; do not deny them to me before I die: Remove far from me falsehood and lying; give me neither poverty nor riches; feed me with the food that I need, or I shall be full and deny you, and say, “Who is the LORD?” or I shall be poor, and steal, and profane the name of my God.
Proverbs 30.7-9

I was reading a web discussion on some of Dave Ramsey's teachings. One woman stated she was disturbed by his focus on growing rich. She didn’t want to be rich. She wanted to learn how to manage her money well enough that she could concentrate more of her energy on what she loved, being a school teacher. I don’t know the entirety of her story, but it sounds to me she is asking for something good and healthy to come into her life. May her prayer be answered.

If God has trusted you with riches, remember that ultimately it all belongs to him. You have been named caretaker of a portion of God’s wealth for a very short time. As you earn money, save it, invest it, spend it, and give it away, keep this in mind.

The Tony Robbins video, if you are interested.

The world will give you exactly what you ask of it

Stop! Look! Listen!

Back when I attended Baker Elementary School, we were taught, “Before you cross the road, Stop! Look! Listen!” Since there are still a pretty large number of us boomers hanging around, most of us must have listened to that advice.

I think that, “Stop! Look! Listen!” Is also pretty good advice before making any significant purchase. What is a significant purchase? I would suggest for most of us that would fall around $100 for a single item. If you prefer $200 or $50 as a threshold that sounds OK to me. If you would suggest $500 you are either rich enough that you don’t need to be reading this blog or you need to rethink your threshold.

How long to stop? At least overnight. Are there exceptions? Of course. If your washing machine made a horrible noise and spewed large quantities of transmission fluid all over the floor you need to do a little quick research on the web then go out and buy a replacement. Most of the time whatever you want will still be there tomorrow. This is particularly important in purchasing items like cars that involve a lot of excitement and a salesman going for the close. I love cars.

After stopping, what should you be looking at? Alternatives. Say that you want to buy a pair of LeBron James Miami Cannon basketball shoes at $260 a pair. Perhaps you can find them cheaper at another source. You could even buy a used pair on eBay at $230 (really). Maybe you could look at perfectly good alternatives at $80 a pair.

Then spend a little time listening to your heart or your wife. Ask yourself will your life really be improved by a $260 pair of basketball shoes? Examine your motivations and the deeper questions that underlie your decision. Are there some emotional security issues that require the envy of your friends? As you go to sleep the fires of buying fever are likely to be quenched. Then in the light of the morning sunshine you are likely to make a better decision.

As you practice restraint in the art of making a purchase, you are also setting an example for your children. It will help them escape the trap of debt slavery, giving them a huge edge over the average American consumer.

Remember What the Dormouse Said

All of us need to learn to deal with disappointments and even outright failure. It is part of the human condition. This blog deals with the particular problems of financial literacy, debt, budgeting, investment, and unemployment. There is a subtheme to everything that I write. You can choose to change your life. You can make it better.

Basically there are three ways to confront a problem. The most common human reaction to unfortunate circumstances is blame. It is very comforting to blame our financial problems on evil rich people whom we can hate or the power of economic events that are simply beyond our control. Even if it is true, even if we have been victimized by evil rich people or the ebb and flow of global economics, dwelling in a state of hatred and blame is not productive.

A popular song of the 1960s ends with the line, "Remember what the dormouse said: feed your head, feed your head". While we will not dwell on that particular song or its place in cultural history, it is a great line to remember when you choose to turn your back on disappointment, failure, fear, hatred, and bitterness.

There are two ways to move towards the light, change your life or change your goals. Unless you are totally incapacitated, you can do something to change your life. It starts with what you choose to feed your head. The web is full of valuable information on almost any subject you can imagine. If you need to improve your financial situation begin to change your mental diet. Find material that will help you. Find teachers who have solved problems that were probably worse than your own. Both Suze Orman and Dave Ramsey have pretty gnarly stories of personal bankruptcy, failure, and victimization. What they teach is just the beginning there is so much more out there.

There is something else you feed your head. Some call it self talk. Consistently reminding yourself of your weaknesses, shortcomings, and failures is not likely to lead to self improvement. Once you have the basic tools, tell yourself you can change your life. As you apply those tools to your life you will have successes. Then celebrate those successes reminding yourself of your past victories even when you face defeat.

Setbacks will occur.

Finally, there is a time to let go of our desires. All professional athletes come to the day when they can no longer play the sport that has been the center of their entire life. So they move on. Some apply the same focus and intensity that brought them fame and fortune to other areas of life. Byron "Whizzer" White won fame both as a football halfback and as an associate justice of the Supreme Court of the United States. Others just enjoy a comfortable retirement with their family and friends, playing golf and remembering the good old days. Some become drug addicts. We shake our heads in dismay when their dead bodies are discovered in some random alley. How you deal with the end of a dream is up to you.

How you deal with the end of a dream will be determined by your self talk.

These truths apply to every problem we confront, not just finances. I am overweight. I could complain about my age, the arthritis in my knees, the old injury to my lower back, or my heart condition. All of those complaints would be perfectly true. I am limited. However dwelling on my limitations has not been helpful. I know what I need to do. Eat a better more balanced diet. Eat less. Exercise more.

In retirement, I have started to consciously attack this problem. I am eating less and I am eating better. I have a long way to go in this area. I will need to take it easy on myself. I can walk. I walk 2.5 miles on most days. Even when it is nasty outside; I dress appropriately, then I tell myself, “You can walk.” Once a week I have been attending a senior exercise class. My performance is, well, dreadful. I am losing weight. I am down about 15 pounds. I have a long way to go. Will I continue to fight the good fight or will I give up, again?

Time will tell. The outcome is in my hands.

QUEENSRYCHE - RIGHT SIDE OF MY MIND LYRICS

Hey, are you okay? better luck on another day. this path some weren't meant to follow.
You're curious I can see, always looking behind the trees. keeping one eye on tomorrow.
Re-engineer your head, is really what the dormouse said. push the lies away.
If you take time and look for clues ...scrape the shit off your shoes, you'll feel the real today.
I'd love to take you to see what I see there, on the right side of my mind.
On the right side, on the right side ... of my mind.
Hey, one more thing, these things are hard to explain. for some, it seems strange to swallow.
The frontier of our minds is the last place we find, but maybe the first place we should go.
I'd love to take you to see what I see there... on the right side of my mind.

Do or Do Not! There Is No Try.

Mark Twain Quote:
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.

I think this is a dangerous time to invest. I could be wrong, but I see a stock market at or near historic highs for no particular good reasons. The underlying economy, in spite of massive infusions of borrowed money from the Treasury and Federal Reserve, is stagnant. Unemployment is stuck at unacceptable levels. The unemployed do not buy many big ticket items. The American consumer, generally the prime mover in recoveries, is carrying a crippling load of debt. He is trying to get rid of debt not take on new debt. The real income of the average American after factoring in inflation and taxes is on a decline that began before these current difficulties.

There are some rays of sunshine. The market for new housing is beginning to recover from a depression level disaster. However, taken as a whole, the picture looks pretty bad. Yet I continue to invest in the stock market. Earlier this week I invested a small amount of money (about 0.5% of my net worth) in a new position. Was that a good decision or a bad decision? Time will tell. As is my practice, I will continue to share my failures and my victories with you, my readers.

I am currently studying “One Up on Wall Street” by Peter Lynch. It is considered a classic. He begins the book with a warning that sounds a lot like Yoda, “Do or do not! There is no try.”

Peter Lynch, “It’s best to define your objective and clarify your attitudes…beforehand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss…Ultimately it is not the stock market nor even the companies themselves that determine an investor’s fate. It is the investor.”

Long ago, I decided I was going to invest in things that I understand. I understand oil. People buy gasoline for their cars. I understand regulated utilities. I am using electricity from the grid to power the computer I use to compose these articles. I understand consumer staples. People buy toilet paper and bar soap no matter the condition of the economy. I understand telephones. I use them. I understand health care. Sick people spend lots of money on medicine. This is a partial list of things I understand, but I think it is long enough for the purposes of this post.

This limits me. I understand that, but this is what I have decided to do.

I understand the concept of a wide moat. Coca Cola has the most valuable trade name in the world. No other company, not even Pepsi Cola has that kind of moat around its products.

I believe good management is terribly important but very difficult to define. I understand results. If I see a consistent sustainable dividend stream, I am inclined to believe that it is generated by the wise decisions of a competent management team that has my interests at heart. That is why I held on to General Electric in 2008. I even bought some more at depressed levels. Certainly not the best decision I ever made but at least I am back to a little better than even. General Electric still has some of the best managers in what is left of American industry. They also have some of those wide moats. There are only three significant manufactures of gas turbines in the world. GE is the largest.

I understand that not losing money is sometimes more important than making money. That is why I hold on to a lot of cash, bonds, CDs, and the like. If the stock market loses 50% of its value (it very nearly did that in the last crash) that would be a personal disaster if all my money was in the market. However losing ½ of less than 50% of my money, while extremely unpleasant would not be the end of the world. Remember if you lose 50% of you money, it has to double (100% gain) just to get you back to even.

In the past I have written about the contract you make with yourself before you begin to invest in anything. Decide who you are. Decide what you are going to do. Decide why you are going to do it. Put it in writing if you need to. Consider any change to your underlying philosophy or fundamental issues of strategy a matter of serious importance that requires serious thought.

And please, let’s be careful out there!

Mark Twain Quote:
There are two times in a man's life when he should not speculate: when he can't afford it and when he can.

You Can't Have It All

In the United Kingdom Mrs. Moneypenny is a well known and respected columnist for the Financial Times. She has recently published a new book, “Career Advice for Ambitious Women.” In this book she provides a great deal of advice to women on subjects from dress and deportment to qualifications and financial literacy. However, she considers the most important advice she can give ambitious women is this, “You can’t have it all, at least not all at the same time.” This advice particularly concerns women who want both a family and a successful career. Mrs. Moneypenny knows whereof she speaks. She has a MBA and a Ph.D. She was a successful investment banker. She has been described as, “as a multi-talented superwoman,” yet she has regrets. She feels as though she neglected her three children and her health.

She begins the little interview (link at the bottom of the article) with a reflection on the London Olympics. She greatly admired the success of the American swim team. Their haul of Olympic medals was simply amazing. They dominated the world. However, she observed these young athletes have not lived normal lives. They have sacrificed their childhood, friendships, and even their own families to be the best at what they do. Mrs. Moneypenny then states a truth that applies to both men and women. There are only 168 hours in a week. She sleeps 7 hours a night, probably about average. That leaves her with 119 hours in a week. This is also true for you. It doesn’t matter if you are the CEO of a major corporation or an unemployed factory worker. You both get the same amount of time.

In suburban Washington, D.C. it is common for both partners in a marriage to have full time jobs. Just about nobody in this area works an 8 hour day. Commutes of 45 minutes or longer are common. Let’s say Jack and Jane work 9 hours a day, take a half hour for lunch, and have a round trip daily commute time of 1 ½ hours. That is an 11 hour day. That leave our typical urban professional with 64 hours a week to do the shopping, cook the meals, take their two kids, Brandon and Jennifer to swimming lessons, ballet lessons, soccer league, karate lessons, and private tutoring for Brandon. He seems to be slipping a bit in his studies. Let’s say that will cost Jack and Jane another 21 hours a week each. If they attend church, which is unlikely; that will cost Jack and Jane a minimum of 4 hours a week.

We are now down to 39 hours a week or less of flex time. If you want to be a star Olympic athlete or a successful investment banker a 45 hour week isn’t going to cut it. This is also true for a successful attorney looking to rack up billable hours on the road to a partnership or a successful small businessman. Now we are talking about a minimum 60 hour work week, six ten hour days or more.

That leaves 24 hours a week for higher educational degrees, the gym, the golf course, TV, beer, and life’s little emergencies like flat tires and trips to the emergency room. Brandon wants to be a stunt man. He didn’t quite jump the ditch at the bottom of their yard with his bike.

Something has got to give. You can’t have it all. If husband or wife really wants to succeed at their profession some compromises will be required. Most of the financial teachers recommend a formal monthly budget to control the flow of money in a couple’s life. I think maybe another budget is required, a time budget. This budget will need to be reviewed pretty often, as either husband or wife feel they are getting the short end of the stick as their children and the demands of their professions change with time.

I have added Mrs. Moneypenny’s column to my favorites. It’s the good stuff.

Mrs. Moneypenny’s Financial Times Column

The Daily Ticker Interview

FiOS Comes to My Little Town (I am keeping my landline)

Hey, I admit it. I am old school. I like my land line. Most of the younger folks I know have disconnected their land lines. They view them as redundant, since they talk on their cell phones and use a broadband connection for the Internet. Our neighborhood seems to prefer satellite for TV. However Verizon is just now moving FiOS onto my block. It appears that some of my neighbors are going to give fiber optic cable a try.

I tried to discover how much FiOS really costs. The billing process is so complex and contains so many options determining what FiOS will actually cost once the initial offer runs out is very nearly impossible. Then there is the $20.00 a month in taxes and fees that does not appear in any of the advertisements. My former coworkers who have FiOS universally praise its speed, quality, and reliability when compared to their former cable or satellite provider. Then I ask them, “How much does it cost?” They roll their eyes and make funny faces. Then they give me a number like $125.00 a month. I think I am getting the truth but not quite the whole truth. Given the eyeballs and the facial expressions I expect that number does not include the $20.00 in taxes and mystery charges or their teenagers’ pay for view bill. If they are in the mood to gripe the number seems to go up to $150.00 a month.

I looked on the Verizon web site. They list FiOS options between $110.00 a month and $210.00 a month depending on the speed of the connection. There are also additional monthly charges for cable boxes, digital video recorders, and the like.

I pay $72.99 a month for unlimited local, long distance, and DSL. That is the total price including fees and taxes. I don’t have cable or satellite TV. My land line always has good voice quality except when I am talking to someone on a cell phone. It works when the power goes out. It tells 911 where my house is located (your cell phone doesn’t do that) and I always know where the wall phone in the kitchen is located. While DSL is fine for viewing HULU and Youtube videos, I have discovered it is marginal for streaming University of South Carolina football games. If I ever want to download movies, I expect I will need to go broadband, but for now I am happy.

Again finding hard numbers is a difficult task, but it appears that if sometime in the future I choose to switch to broadband I could keep my landline for somewhere between $20.00 and $40.00 a month. I am not sure it would be worth it if I selected the broadband digital voice option.

Below is an actual FiOS bill from an Internet discussion of (you guessed it!) FiOS bills.

Hey, Let’s be Very Careful Out There!

FiOS® Triple Freedom: Full Month $99.99
FiOS Triple Freedom
Includes:
- Verizon Freedom Essentials
- FiOS TV Premier
- FiOS Internet

Voice Additional Services $0.95
International Flat Rate Plan TV Additional Services $14.98
Standard STB Rental
High Definition STB Rental

Taxes, Fees and Other Charges $18.04
Voice
Federal Excise Tax $0.20
MD Local Tax $2.12

MD Federal Universal Service Fund Surcharge $0.64
Gross Receipts Tax - Long Distance $0.40
Federal Universal Service FundSurcharge Long Distance $0.73
MD 911 Fee $1.00
Telecommunications Access of MD Fee $0.20
Gross Receipts Tax - Long Distance -$0.22
MD Gross Receipts Tax Surcharge $0.55

Federal Subscriber Line Charge $5.70

Federal Universal Service - Long Distance $0.09
MD Tax Surcharge $0.02
- Long Distance
TV
State Sales Tax* $0.90

Video Franchise Fee* $2.83
Surcharge $0.98

Miscellaneous
Late Payment Fee $1.90 *this one's my fault!

Total Charges $133.96

Earn All You Can. Save All You Can. Give All You Can.

"I say unto you, Make unto yourselves friends of the mammon of unrighteousness; that, when ye fail, they may receive you into the everlasting habitations." Luke 16:9

Over this weekend I read three long articles on the plight of temporary warehouse workers, the victims of “just in time” delivery chains perfected by Walmart, Amazon, and other new generation retailers. In order to avoid legal complications, these organizations use independent contractors operating warehouses not owned by their corporation. In turn these organizations use temporary service agencies to supply cheap labor that is provided on an as needed basis. The workers are mostly displaced refugees from the collapse of the American factory or immigrants with questionable legal status. Over the last 20 years, many American workers lost health insurance, retirement benefits, and the most fundamental aspects of traditional job protection rights when their factories were closed and sent to other countries. The immigrants will basically tolerate just about anything rather than return to their country of origin. It is a very bad situation.

We live in a time of economic, cultural, technological, and moral flux. The America of the 1950s and 1960s, the world where I grew up is gone. The high paying secure factory jobs of the past are gone. Traditional white collar jobs as well as brick and mortar stores have been destroyed by the PC and the Internet. Even the three networks, PBS, and the local newspaper are no longer the gatekeepers of our perception of the news.

With the collapse of what I term “The Covenant” between all the well defined and understood elements of society, moral certainty has collapsed along with material certainties, and cultural trust. Almost half of all marriages end in divorce. Abortion is common. Today in America, 29% of white children are born to unmarried women, 53% of Latino children are born to unmarried women, and 73% of black children are born to unmarried women. The use of addictive drugs is epidemic. Immorality of all sorts is tolerated, even accepted, at every level of society.

John Wesley was faced with a situation that is very similar to the situation that the Church in America faces today. Over the course of his lifetime, England changed from a rural, agrarian, feudal society to a more urban, industrial, proto-capitalistic society. Peasants were driven from their land into what Blake described as “Dark Satanic mills,” and into coal mines that were even more dangerous and horrible. Cut loose from their cultural roots and moral standards, Englishmen reacted as any humans would in such a situation. Drunkenness and prostitution were common in the lower classes. The upper classes were corrupt and equally degenerate. Somehow Wesley found a way to speak Jesus into this mess. Wesley equipped his followers with the tools necessary to face the disruptions of the industrial revolution. By championing hard work, sobriety, and thrift Wesley gave the criminals and uneducated laborers who came to Jesus as a result of his ministry what they needed to escape the mines, the factories, and the gallows. Instead of finding a short unpleasant route to death and eternal damnation, they became small businessmen or land holders capable of supporting themselves and their families.

The proper use of money was an important element of John Wesley’s Methodism. He taught, “Earn all you can. Save all you can. Give all you can.”

Earn all you can has its limits. John Wesley taught that your occupation should not harm your mind or your body. Guess warehouse temp fail the first test. He taught that in our occupation we should treat others according to the Golden Rule. He opposed gambling, usurious interest rates, pawnbrokers, and physicians who would prolong a sickness to maximize their profits. Opium was a common drug in those days, sound familiar.

In teaching the principle, save all you can, Wesley is preaching against gluttony, drunkenness, costly apparel, the spoiling of children, or anything that promotes the pride of life. His own life was a model of Christian poverty. I have read that he lived on the same amount of money he spent as an undergraduate during his entire adult life. This might have something to do with his unhappy marriage that ended in permanent separation. If I tried to force my wife to live like an undergraduate, my marriage would be justly short, nasty, and brutish. Exercise some common sense. If you buy a house that is valued at about 3 times one of your annual incomes, if you limit the cost of a car to 1/3 your annual income, if you graduate from college with less debt than you will earn in your first year on the job; you will probably be OK. If you live extravagantly on borrowed money your financial life will not end well.

Give all you can. The early Methodists were dead serious about this principle. They were famous for supporting and encouraging the poor found in their numbers. They not only provided material goods but they also provided the poor with an education and the social support system necessary to extricate the new believer from a life of poverty.

John Wesley Quote:

"[Wealth] is an excellent gift of God, answering the noblest ends. In the hands of his children it is food for the hungry, drink for the thirsty, raiment for the naked. It gives to the traveler and the stranger where to lay his head. By it we may supply the place of an husband to the widow, and of a father to the fatherless; We may be a defense for the oppressed, a means of health to the sick, of ease to them that are in pain. It may be as eyes to the blind, as feet to the lame; yea, a lifter up from the gates of death."

Problem Definition

The first step in solving a problem is the understanding and accepting that you have a problem. I have learned this does not require a deep knowledge of finance or even widely quoted rules of thumb. The hard part is calming the mind, looking deeply into the problem, and accepting the truth of your situation. If you are carrying a mortgage that is more than three times your annual salary, things are likely to be tight. If you still owe $40,000 on a car that is now worth $28,000 you probably made a mistake. If you are using future money (a credit card you can’t pay off every month) to cover current expenses (groceries) you are in deep trouble.

Albert Einstein Quote:
If I had one hour to save the world, I would spend 55 minutes defining the problem and only five minutes finding the solution.

Once you accept that you have a problem begin to define the problem. Histrionics won’t help; reacting with learned helplessness is probably part of the problem. Accept the problem as it is, but don’t make it worse than it is.

Ask, “What is the problem?” How you frame this question is very important as it will likely lead you to a particular solution at the exclusion of other possibilities. The Harvard Business Review reports that the Exxon Valdez oil spill cleanup was difficult because the oil became extremely viscous in the low temperature sub-arctic Alaskan waters. In defining the problem, the Oil Spill Recovery Institute Request for Proposals put the question in terms of material viscosity rather than an oil cleanup problem. As a result they received proposals from many fields of study, not just from the petroleum industry. A chemist in the cement industry found an answer in a simple modification to existing commercial construction equipment. By vibrating the frozen oil, it stayed fluid. Now it could be pumped out of the ocean.

Is your problem too many bills? Perhaps you need to sell the car and buy a beater. Maybe you need to apply for Government assistance if you can’t pay for groceries. Those programs are there to help people who are really in serious need.

Is your problem not enough money? Perhaps you need to find a better job, or if unemployed, any job. That could include doing yard work or providing maid service for your neighbors until the crisis is past.

Rephrase the problem in various ways. See how that changes your answers.

Litemind suggests that you list and challenge your assumptions. For example: say a 50 year old man expects to fund his retirement by working until he is 78. By the way, I have heard this kind of reasoning in real conversations. One must ask, “Is it likely that you could still perform your job at 78?” Although there are exceptions, even if they are still alive, most 78 year old men can no longer perform their jobs at an acceptable level. There is also a problem with age discrimination. Why should an employer keep a sick old man on the job when he can hire a healthy young man for half the money?

Break the problem into many sub-problems. Listing and organizing the causes of a problem even has a name, an Ishikawa diagram. I didn’t know that. Study Guides and Strategies suggest this list could include other people or organizations. Again, consider every sub-problem from positive and negative viewpoints. If the credit card company won’t negotiate with you is there a third party counseling service that could represent your interests? Is stress part of your problem? What practices (meditation) or services (your pastor) could help control your stress?

Here is a link to some information that might help in the search for resources that can help.

888-995-Hope

One of the classic methods of problem definition divides a problem into three parts, challenges goals, and opportunities. So far we have focused on the challenges. The goals are implicit in the challenges, but they need to be stated with clarity and in detail. Here is a partial list from a 12 month goal list (author unknown). Write down an answer to each question. Be as specific as possible.

1.What will you be doing for work?

2.Who will be paying you?
a)What kind of clients are these?
b)Will you be drawing a regular pay check from employer?
c)What’s your boss like?

3)How much money are you making? 4)Where will you be working?
a)What does your office look like? (really)
b)What kind of commute do you want?

5) How many hours will you work?

As you unfold a problem, breaking it into manageable chunks, opportunities will begin to present themselves in your mind. The next step will be creating a frame of mind that will lead to action. As you implement even the smallest step, watch the problem redefine itself with greater clarity, leading you to better solutions, more opportunity, and greater action.

Begin this virtuous circle today.

Betwixt and Between

I have received the last paycheck from my employer of the last 27 years. It will be something like two months before I can expect to receive the first check from my pension. My wife has applied for Social Security but it will be about two months before she gets her first check. Of course I knew this was coming. I have spent the last 12 years preparing for this day. Still, while it is exciting to be free, it is a little unnerving to be facing a lot of ill defined expenses without a regular pay check.

I need to make some known and unknown repairs to the house before I put it up for sale. Most should be small, but I think I will need to replace the air conditioner. That will not be cheap. Of course there will be the cosmetic work, carpet and paint. That is expected. I will be buying a house in another city. Then there will be the expense of moving. When the dust settles, I should be showing a profit, but a lot of cash could be flowing out over the next few months without any guaranteed return.

Once the move is complete I will be officially, at least in my mind, finally retired. Right now between planning the move, taxes, and my mother in law’s estate I still feel like I have a job. Once I am “really” retired I will need to live on a budget. A normal budget, such as taught in financial literacy courses will not quite work in retirement. It will be time to enjoy all that money I have so carefully saved and invested. Most retirees will spend more than they earn over the 20 or 30 or more years the Lord sees fit to give them. Farrell Dolan, a principal at Dolan Associates, David Blanchett, the director of retirement research at Morningstar Investment Management, and John Olsen, the president Olsen Financial Group have proposed a four box solution to the question of a retirement budget.

Box one contains the essentials of life. That would include food, clothing, house, utilities, transportation, medical care, and taxes.

Box two would consist of discretionary expenses such as entertainment, travel, and hobbies.

Box three would consist of guaranteed income; defined benefit pensions, annuities, and Social Security. This box is getting pretty small for most Americans.

Box four would consist of 401-K accounts and their tax favored kin as well as any investments held in taxable accounts. I would also add the value of your home to this box. It is likely that the time will come when one or both partners in a marriage are no longer capable of living in their own home. Then that money can be used to support the cost of assisted living.

Dolan et al. propose funding box one expenses with box three money; then funding box two with box four money. This sounds like a pretty good idea if you have a sufficiently large amount of money in box three. If an individual only has Social Security in box three that may not be sufficient to cover all the expenses found in box one. Then some of the money from box four will need to flow into box one expenses.

Let’s assume that you have enough in box three to fully fund box one. There is the simple 4% rule for withdraw from savings during retirement. For new readers that means if you draw 4% or less from your retirement cache per year there is a better than 90% chance you will not outlive your money. There are really four sides to this problem. If I expect to live only 5 years after I retire, my lifestyle would be radically different than if I expected to live another 30 years. If you are alive and kicking at 62 the Social Security actuarial tables gives you another 19.40 years above ground. At 66, full retirement age that number drops to 16.48. It isn’t just that simple. Besides longevity risk there is quality of life risk. Is it better to take that cruise of the Eastern Mediterranean and visit the Aegean Islands while I can still easily walk 3 miles without a cane and have at least most of cognitive abilities intact or should I save that money for a nursing home I may or may not ever reach?

Before retirement the purpose of a budget was to increase your net worth. It seems that in retirement the purpose of a budget is to responsibility spend that hard earned money in a manner that will make all that effort worthwhile and at the same time living responsibly, so that you will never become a burden to others.

Moneyball

In the movie “Moneyball” the viewer is introduced to Sabermetrics, an advanced statistical model for measuring the relative value of different possible combinations of players. When first introduced by the Oakland Athletics it revolutionized the way scouts and managers built baseball teams. With a payroll of just $41 Million Oakland was able to compete with the New York Yankees who then had a payroll of $125 Million. Today all the teams in professional baseball use some variation on these techniques.

Somebody else is playing Moneyball, your credit card company. According to a 2009 article from the New York Times entitled “What Does Your Credit Card Company Know About You?” the revolution began back in 2002 at Canadian Tire. One of their executives, J.P. Martin began to analyze every single credit card transaction from the previous year. As he sorted through this data he discovered our purchases were “a window into our souls.” What we bought as well as the brands we bought were in and of themselves very good predictors of our willingness to pay off our debts. Some his discoveries seem pretty funny, “People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.”

Go figure.

Credit Card companies began to turn over their data to research psychologists, specializing in advanced statistical methodologies. They discovered that, “the biggest profits didn’t come from people who always paid off their bills but rather from less-responsible clients who never paid their entire balance, and thus could be milked through silently skyrocketing interest rates, late fees and other penalties.”

But how to separate the high desirable slightly irresponsible ideal victim from the total deadbeat?

The credit card companies began all kinds of experiments, trying different colors on their card to changing the size of their envelopes as well as more understandable experiments involving test groups of recent immigrants and native born Americans.

They also applied different therapeutic models to the collection process. Collection agents were taught how to illicit information based on Abraham Maslow’s hierarchy of needs to tailor an approach that would most likely work on a particular victim who had fallen behind in his payments. An example given in the article involves a man and his ex-wife. Rather than attempting to bully or threaten the card holder, the collection agent started with a pitch based on the “love/belonging” level of Maslow’s hierarchy. Then based on the client’s response he changed midstream to the “esteem” phase where self respect is the primary drive. It worked.

Moving forward in time to 2013, Business Insider reports on “Five Little Known Ways Credit Lenders Keep Their Eyes On You.” The author begins with a personal story. He finally paid off two of his credit cards. After months of not using one of these cards he received an amazing offer from his bank, a 5% refund on any travel related purchases made before a certain date, “Go ahead you deserve that vacation. You’re bored. We’ll help you.”

The credit card company was using something called your Behavior Score. They are not only looking at how much you are using the card, they are also evaluating how you are using the card. If you are paying down your balance, they will make you an offer you can’t refuse. If you switch from Nordstrom to Walmart for your clothing purchases the credit card company will suspect you are in trouble. They will begin to find ways to limit their exposure to your problems.

Your credit card company is using something called a Revenue Score to find those ideal victims who carry a large balance and put up with rising fees and interest rates. They will use this score as a basis to incentivize your spending habits and exploit your weaknesses.

Your Bankruptcy Score doesn’t have anything to do with whether or not you are currently in or recovering from a bankruptcy. It predicts how like you are to go bankrupt. Not surprisingly this score is important when opening a new credit card account. It will be used to set your credit limit and your interest rate. Adrian Nazari, CEO of CreditSesame.com advices in order to have a good Bankruptcy Score, "Pay your bills on time, keep debt balances low, open accounts only when necessary to avoid excessive inquiries on your credit report, and monitor your credit report regularly to ensure it is accurate."

Your Collection Score will be used by the credit card company to tailor a method to collect as much as possible using their existing resources. If your score is low enough they will not waste their time with sophisticated telephone “counseling.” Adrian Nazari comments, "The lower your collection score, the less likely a debt collection agency is to aggressively pursue you because the agency doesn’t want to waste valuable resources trying to collect debt that is unlikely to be recovered.” This is not a problem if you debts have not gone to a collection agency. If they have gone to collection talk to the collection agent, negotiate a better deal, and keep a complete paper trail of all communications.

The last score covered in the article is one called the Attrition Score. You don’t want to improve this score. It tells the credit card company you might jump ship by giving your business to one of their competitors. Nazari says, "When this score is high, it tells lenders that they may need to sweeten the pot and offer you various perks so they can continue to make you happy and committed," You can also annoy your credit card company by simply not using their card.

Hmm… Now there’s an idea.

The credit card companies never rest. They have hired the some of the best minds available in fields of finance, psychology, and statistics to separate you from your money. These people, many of whom have Ph.D. after their name, know what you are doing. They can predict your actions and reactions with great accuracy. They know you better than you know yourself.

Don’t mess around thinking you can outwit this machine. Don’t use a credit card unless you pay it off every month, on time. If you can’t, lock it up until you have paid your balance down to zero. If you have a history of credit card problems, cut them up. Use a debit card instead of a credit card. There is less risk. You might even think about using cash more often. The credit card companies issue debit cards but they don’t track cash. There is a psychological benefit to using cash. It is very much harder to let go of a hundred dollar bill than it is to use a credit card. If you use cash more often you might actually spend less.

If this post didn’t creep you out enough, check out this one.

Are You Pregnant Target knows

Four Years With The Silver Eagle: A Meditation

It is hard to believe four years have passed since I first brought the Silver Eagle Experiment to my church. It is hard to believe that during that time I have written over 350 articles for this blog. I hope you have benefitted from all that I have learned over those years.

I am a Christian. I believe God answers prayer and watches over his children.

On the other hand, for over 27 years I worked as a research engineer. In this capacity I lived in a world of probabilities. I can not state with certainty that your carefully selected, well diversified portfolio won’t go belly up tomorrow. I can not state with certainty that if your retirement savings plan consist of lottery tickets you won’t hit the jackpot allowing you the option of retirement in Hawaii.

I wish I had easy answers for the personal finance crisis that has overwhelmed so many of my brothers and my sisters.

There are two sides to the money equation.

∫ (Money In) d/dt = ∫ (Money Stored + Money Spent) d/dt
(This equation is integrated over your lifetime)

It is kind of hard to store much money if there is no money coming into the system. Unemployment, long term illness, and accidents do happen to good people trying hard to do the right things for the right reasons.

Matthew 10: (NIV)

29 Are not two sparrows sold for a penny? Yet not one of them will fall to the ground apart from the will of your Father.
30 And even the very hairs of your head are all numbered.
31 So don’t be afraid; you are worth more than many sparrows.

Still the sparrows fell to the ground along with a considerable amount of my hair. Yet we are told, “Fear not.”

Lately I have been studying motivational speakers. I want to become more skillful at helping my readers take those first uncomfortable steps towards improving their situation, whatever it may be. Remember, I am one of my own most frequent readers. There are times when I am giving myself a kick in the backside. I also read the critics in an effort to avoid some of the excesses and questionable content found in the teachings of some notable personal financial gurus. Recently one woman has written a book attacking some of the better know names in this field. She is gaining some traction in the commercial financial press both print and television. Actually, she questions some of the same issues I have questioned in this blog. However, I must ask the question, “What is she doing to help people improve their condition in this material world?” Unfortunately the answer is absolutely nothing.

So what can I offer my readers or even myself in a world where there are no certain answers and no easy answers? Old truths, like deferred gratification and the Protestant work ethic. They don’t provide guarantees but when applied properly and consistently offer a high probability of improving your financial situation.

First of all accept that success is possible. Somewhere there is someone who is like you who is succeeding with problems that are just as bad as your problems.

Become a master learner. Study your models of success. Breakdown what those people are doing and then apply the lessons to your own life. The best way to learn what they are doing? Ask them. Not only will you learn but you might add an important node to your network.

Bruce Lee observed, “Absorb what is useful, Discard what is not, Add what is uniquely your own.” You don’t need to become someone else. If some person you do not respect even has one grain of truth is his life that could benefit you, jump on it.

Clean the garbage out of your mind. That would include things like the seven deadly sins. If you are having money problems some mix of envy and pride is going to be a temptation. If you are spending time reading something like this, I doubt that you have a problem with sloth.

Christians are not alone in stressing the importance of the interior life. “According to Buddhist psychology, major depression is itself not regarded as a “mental affliction” (kilesa) per se but is rather a symptom of the underlying afflictions of craving, hostility and delusion.”

Face the truth. Hiding your head like an ostrich will not make your troubles go away. Bruce Lee again, “What is” is more important than ‘what should be.’ Too many people are looking at ‘what is’ from a position of thinking ‘what should be’.”

Look for one easy win. This is why Dave Ramsey recommends that his students work their way out of debt starting with the smallest debt, no matter what the interest rate. That quick win will build confidence. Bruce Lee taught, “Choose the positive. You have choice, you are master of your attitude, choose the positive, the constructive. Optimism is a faith that leads to success.”

Then take the next step. There is always a next step. Along the road you will make mistakes but one last time from Bruce Lee, “Mistakes are always forgivable, if one has the courage to admit them.”

Now let me finish where I began. I am a Christian. I believe God answers prayer. Even if you don’t believe, will saying a prayer hurt?

Philippians 4: (NIV)

6 Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God.
7 And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus.

As you walk the path towards both your short and long term goals with faith, gratitude, and generosity, I believe that the God who owns all the silver and all the gold hidden in a thousand hills will share some of it with you, no matter who you are or how desperate your circumstances.

Isaiah 45:

I will give you the treasures of darkness, riches stored in secret places, so that you may know that I am the LORD, the God of Israel, who summons you by name.

Don't Forget the Dividends

Back in February of 2008 I bought 400 shares of AT&T (T) for $14,448.95. That works out to a cost basis of $36.12 a share including brokerage fees. Today those shares sell for $35.51, a loss of $244.00.

In November of 2008 I bought another 100 shares of AT&T for $2,713.95, or $27.14 a share. Combine the two buys for a grand total of $17,162.90. Today 500 shares of AT&T would be worth $17,755.00. That would be a profit of $582.10 or 3.4%.

However, I do not current own 500 shares of AT&T. I own 651.5847 shares valued at $23,137.77.

AT&T pays a dividend of $1.80 a share. That works out to 5.1% at its current price. I elected to reinvest my dividends back into more shares of AT&T. This is commonly called a Dividend Reinvestment Plan (DRIP). It is free and it is automatic.

In this case dividends and the magic of compound interest turned a meager profit of $582.10 (capital gains) into a total profit of $5,964.87 or 34.7%, nothing to write home about but not too shabby.

Before the last crash, dividends were out of fashion. They are taxed at a higher rate than capital gains. Instead of increasing dividends with increasing profits companies were using their extra money to buy back shares. This tends to increase the value of the shares left in the market. Of course the company can dump those shares when they need to raise some quick cash. This would tend to lower the value of your shares. Dividends are money in your hand. You can spend it, reinvest it the stock that generated the dividend, or you can choose to invest it in something else entirely, but that money can not be taken away from you.

History shows that roughly ½ of all stock market profits are generated by dividends. A good dividend is not a sufficient reason to buy shares in a particular company. There are many other things to consider before making that decision. However, don’t forget the dividend. The rule of 72* tells us that a 6% dividend all by its lonesome self will double your money in 12 years with no increase in the value of your shares whatsoever.

And…Hey! Let’s be careful out there.

*The rule of 72 states that the value of an investment will double in the number of years given when 72 is divided by the interest rate.

Just Because Everybody Else is Doing It.....

Your mother said it, “Just because everybody else is doing it doesn’t make it right.” Your mother was right.

Dave Ramsey is fond of saying he doesn’t want to do what everybody else is doing, everybody else is broke.” Dave Ramsey is right.

Now I am going to say it too.

Let’s start at graduation.

Most likely you already have your first credit card. Just because everybody else is running up a balance buying a bunch of stuff for their clothes closet and new furniture for their apartment doesn’t make it right. If you can’t pay your balance off every month, lock up that credit card.

Most likely you already have a used car that your parents bought for you or at least helped you buy. Just because everybody else is taking out a car loan for a new car doesn’t make it right. It is almost always cheaper to repair a used car than it is to buy a new car. When the cost of the repairs exceeds the value of the car once repaired then you can look for a new….used car.

Most likely you will want to get married. Just because everybody else is spending an average of $27,000 (really) on a wedding doesn’t make it right. Perhaps some of that money could be better used to pay down those student loans that are essentially a mortgage payment without a house.

Most likely you will want to buy a house after the marriage. Just because everybody else is maxing out the house they can buy based on two incomes doesn’t make it right. In the next paragraph you may want to start a family. Perhaps mom might want to stay at home with her babies. If you bought the biggest house the two of you could possibly afford on a 30 year mortgage with 10% down this will not be an option.

Most likely you will want a family. Just because everybody else is having children out of wedlock or before they can afford to care for them doesn’t make it right. Modern birth control in the hands of responsible adults is almost 100% effective. Wait until your marriage is stable and your finances can cover the basic needs of your child. Children are a blessing from God. Debt is a curse. We live in a society that has that backwards.

Most likely you will now need to balance your personal self realization, the legitimate needs of your family, and life’s little luxuries. Just because everybody else is working and commuting 60 or more hours a week to pay for a house they can’t afford and a SUV they do not need doesn’t make it right. There are no easy answers to this one. It is something that you need to work out with your God and your spouse. I have seen some of my young coworkers suck it up and make some hard decisions for the good of their families. May they be blessed.

Most likely you will want to send your children to college, pay for their weddings, and still retire sometime before you die. Just because everybody else is living for today, taking no steps to save for these goals, hoping that good fortune and the Federal Government will take care of everything doesn’t make it right. Start to save for these goals today! If you are tempted to max out anything at the cost of something else, max out savings when you are young. The power of compound interest plus time is absolutely amazing.

Finally, whenever you look at your life; whether you are just starting out of school or reflecting on life and career at your retirement luncheon, avoid envy, regrets, and bitterness. How much other people earn, the cars they drive, or what they did to you doesn’t matter. What does matter is that you walked before your God with honesty, integrity, compassion, and love to the best of your abilities. It doesn’t mater what everybody else was doing.

In the final analysis it is about you and God.