Friday, June 28, 2013

Find Your Life Purpose in 20 Minutes

I think I will go out on a limb. This is not the usual fare you can expect to see in this blog. This blog deals with the money equation.

Money In = Money Stored + Money Spent

Most of the time I discuss money stored or money spent. I spend less time writing about career paths, education, and job search strategy. Today I want to look at “money in” from a different angle, life purpose.

Life purpose can require compromise. Family commitment, practical necessities, morality, can all conflict with your ideas of an ideal life, if in fact such a thing even exists. Steve Pavlina contends that you can discover your life purpose in twenty minutes. I haven’t read enough entries to endorse his personal development blog. So far I seen some stuff I like and some stuff that seems questionable.

Here are the instructions.

1)Take out a blank sheet of paper or open up a word processor where you can type (I prefer the latter because it’s faster).

2)Write at the top, “What is my true purpose in life?”

3)Write an answer (any answer) that pops into your head. It doesn’t have to be a complete sentence. A short phrase is fine.

4)Repeat step 3 until you write the answer that makes you cry. This is your purpose.

I recently went through a similar process in informal counseling. For the first time in my life, I don’t have to work. I still need to manage money wisely but I don’t have to work. After a lifetime this is something of a shock. I have the luxury of asking (God, the universe, or my inner self, your pick), “What do I do now that earning a living is not a primary driver?” In exploring options I found one that caused me to cry. Really this skeptical old realist who has been known to watch episodes of Penn and Teller’s Bullshit cried.

Pavlina suggests that for most people it should take about 20 minutes for your answers to converge. It took him about 25 minutes and 106 answers to find his life’s purpose. He felt that he came close on answers 17, 39, and 53. He believes these near misses are important insights that can lead to your final answer. If you are carrying around a bunch of psychological baggage, pain, cultural preprogramming, or the expectations of others the author suggests this process may take as long as an hour.

I hope this works for you. I hope you find your purpose and a way to work that out in this material world. I hope you find the strength and self discipline to make it happen.

Thursday, June 27, 2013

Be the First!

Don’t ever let anyone tell you can’t do it. If you are above ground and functional, you can to something to make your life better. You can become a blessing to those around you. A dream starts with intention. A dream begins to find its roots with your first step. Your dream grows as you continue in the path. Then one day it will bear fruit that no one, not even you could have ever even dreamed possible.

You can build that emergency fund. It can start in a cigar box or an empty mayonnaise jar. Just put money somewhere and leave it there, even if it is a small sum. You can pay off your debts. It may take some time but persistent effort will reap significant rewards. You can buy the home of your dreams. Start saving for that down payment as soon as you clear out the miscellaneous debts that trouble your life. You can retire with dignity. It may take a decade or longer after the children leave home, but you can do it.

You can learn to give, to be a blessing to others. It begins in a heart that looks for small opportunities to make the world a better place. Be a polite driver. Be a good employee. If it is in your power, don’t miss the opportunity to help someone in need. You can even learn to give money. It starts out with your left hand prying money out of your clinched right fist. That is OK as long as it lands in the plate. As you practice, you will learn that giving is natural like breathing. As you exhale carbon dioxide plants are blessed. As you inhale the Oxygen they produced you are blessed. You will learn that money given without expectations has a way of returning in unexpected ways. Finally you will learn to give as a king or a queen. When Solomon and the queen of Sheba met, they gave one another great gifts, gifts suitable for kings.

“Then she gave the king one hundred and twenty talents of gold, spices in great quantity, and precious stones. There never again came such abundance of spices as the queen of Sheba gave to King Solomon. Also, the ships of Hiram, which brought gold from Ophir, brought great quantities of almug wood and precious stones from Ophir. And the king made steps of the almug wood for the house of the LORD and for the king's house, also harps and stringed instruments for singers. There never again came such almug wood, nor has the like been seen to this day. Now King Solomon gave the queen of Sheba all she desired, whatever she asked, besides what Solomon had given her according to the royal generosity. So she turned and went to her own country, she and her servants.”

Kings and queens can give like that because they know that taxes will continuously provide for their needs.

Believe it or not, God can provide for your needs.

The things those politicians, the media, and your friends tell you aren’t the limits of truth. You can get ahead. You can get out of debt. You can find a better job. You can graduate with a university degree. Be the first in your family or your circle of friends to break what seems like an inescapable curse.

Show others the way. There is nothing in this blog or any number of reputable personal finance books and courses that is rocket science. If you know grade school math and own a cheap calculator you have all you need to start. The library and the Internet are filled with free resources. Make today the first day of the rest of your life.

Tuesday, June 25, 2013

Emergency Fund 101

Once again I am horrified at how ill prepared many Americans are for even the simplest unexpected or untimely expenses. The latest numbers hot off the press indicate that 27% of American households have no emergency savings at all.

If you don’t have at least $1,000 to $2,000 in an emergency fund, consider it an emergency that requires immediate action.

What if you have a flat tire? Then what? The most likely answer is the credit card at 18%, an option that will almost assure another emergency. Every family or individual adult living on their own needs an emergency fund. This is absolutely basic. If you have less than $1,000 in free cash ready to fund an unexpected event you are playing with dynamite.

If you are starting with nothing or worse—start today. This is important enough to radically alter your behavior. Sell some of your stuff, especially items that you no longer use or luxury items. These could include children’s clothing and toys, electronic gear, jewelry, motorcycles, tools, or firearms. Take a part time job, not for the rest of your life, but until you have a couple of thousand in the bank that you don’t need to tap on a weekly or monthly basis. If you have the opportunity to pick up some overtime at your current job, volunteer. Back in the day when I worked at a textile mill, I discovered that if I always worked overtime when my boss needed me I could get overtime when I wanted it but the boss really didn’t really need me. Time and a half is a quick way not only to build your emergency fund, but a way to bump your salary.

Until you have built a basic emergency fund, I would recommend that you go out of your way to cut your living expenses to the bone. This would include going cheap on cell phones, cutting the cable, giving up restaurants, and especially lottery tickets, cigarettes, and beer.

Keep this money in the bank or credit union. A simple federally insured savings account or money market fund is all you need. It won’t pay much of any interest, but it is safe. In such an account it is easy to get at your money when you need it, but not too easy.

The emergency fund is for emergencies, nothing else. Imagine that this money is sitting in a glass box marked for emergencies only. If there is any other way to pay for something other than debt, don’t tap the emergency fund. As you build up savings for special purposes, such as automobile repair, vacation, Christmas, and (yes) medical expenses you will be less likely to need money from the emergency fund. Even though we are blessed with very good health insurance, my wife’s recent cataract surgery involved over $5,000 in unexpected expenses that were not covered by our policy.

For as long as I can remember, a six month emergency fund has been recommended by financial experts. That means your long term goal is enough money to cover six months of expenses if you lose your job. Don’t beat yourself up if you are not there. Just keep building up your savings until you reach that goal. Always keep the emergency fund money in something like a savings account or a money market fund. These dollars are not for the purpose of investment. They are a life raft that will keep you afloat if something happens to sink your ship.

Saturday, June 22, 2013


For a number of different reasons I have been thinking a lot about student debt. What started out as a flea bite has become a trillion dollar nightmare. I believe that government policy and the greed of the education cartel, public and private have both contributed to the scope of this problem. Guaranteed student loans that can not be dismissed even in bankruptcy have allowed the universities to increase their tuition rates at 5 times the rate of inflation. The educational institutions have no skin in the game. They get all their money up front. This is true if the student is immature or incompetent and flunks out. This is true if the student has no realistic opportunity of ever finding a job in his field. This is just plain wrong. The success of the student should in some way be tied to the repayment of the loan and some percentage of that loan should be held by the institution that is responsible for educating that student. Furthermore, bad judgment by an eighteen year old should not sentence that individual to a lifetime of debt slavery. This is just plain wrong. Student debt, like other forms of debt should be dismissed in bankruptcy.

As a society we are really pretty schizophrenic about eighteen to twenty one year old children/adults. That extends to twenty two if we are talking about college students. At eighteen you are old enough to vote, volunteer for combat, go to prison as an adult, or star in a porno film, but you are not old enough to buy a beer or a handgun. In some states the age of consent is as young as 16. Without any knowledge of compound interest or the realities of the workplace at eighteen you are old enough to sign a student loan, a contract that could ruin your life.

Young women have an additional complication. At some point in life it is likely they will become mommies. Mothers for perfectly valid reasons are genetically predisposed to want to stay very close to their babies. A six figure student debt will eliminate that option. It is very possible to rack up $160,000 in student debt at a private university. At 6% interest that will run you $1,146.29 a month over 20 years. It is very unlikely that you will ever marry well enough to ever be a stay at home mom with that kind of debt hanging around your neck. You wanted to be a professional woman? Good luck finding a job.

It was easier once. A person from another country once told me a story that he heard from his father when it was time for him to leave the nest. His father told him that in the old days, it was the responsibility of a father to buy his son a good wife and a new canoe. He then would take the young couple and their boat down to the river. Once the newlyweds were in their canoe, he would give the boat a shove and tell his boy, “Son you’re on your own now.”

Unfortunately we live in a society where higher education is still an important factor in quality of life. The top paying degrees are pretty much limited to medical, engineering, and computer disciplines. If you want a degree in anthropology, be prepared to work at Starbucks.

Parents and their children need to develop both a plan and a plan B. This planning needs to start at least two years before graduation. Possible career paths and schools need to be approached as a business decision, because that is what it is. Is it really necessary to go to a “name” school? There are very few schools where knocking a class ring is really important. If you want to command warships at sea, I would suggest The U.S. Naval Academy in Annapolis. If you want to be a Wall Street high roller a Harvard MBA still has real meaning in finding your first job. But remember, that landing that first job is all even the classic ring knocker degrees will get you. After that performance outweighs credentials. Texas A&M graduates are proud to point out that more flag officers in World War II graduated from Texas A&M than from the United State Military Academy at West Point.

Check out the difference between how schools are rated and the mid-career salaries of their graduates. There are some interesting discrepancies out there.

The Most Underrated Colleges in America

If you are out shopping for a college check out this site.

Center for College Affordability and Productivity

Are you even really good enough to attend one of these ring knocker schools? Not every high school quarterback is going to start for Notre Dame or Alabama. The old five school rule of thumb is still a good starting point. Go ahead and apply to that dream school. You never know, you might hit the jackpot and get a full free ride. Then apply to three schools that are just about right for you goals, your abilities, and your family finances. Finally, have a backup that you are sure will accept your application, a school you know you can afford.

Plan B works something like this. Attend a local community college on a Pell Grant. Make certain those credit hours will transfer to the schools that really interest you. Go ahead get high grades in your basic required courses in this low cost less competitive environment. Take that academic record to a school that will offer you instate tuition. Apply for every scholarship under the sun. With something close to a 4.0 at a junior college you are very likely to receive significant student aid. With low instate tuition and serious scholarship money it will be much easier for you and your parents to cover the difference. If you graduate with honors from a respected state school, it is more likely that you will find a job in your field or a position as a teaching assistant in grad school. If you find a job in your field, many employers will pay for your graduate degree.

The goal here is a full free ride, all the way. Know what you are getting yourself into. A bachelor’s degree in psychology is pretty worthless. However, with a Ph.D. in psychology you can teach or open your own practice. Apply constantly for every scholarship imaginable. Like the lottery, “You can’t win if you don’t play.” If school A isn’t offering you enough money to avoid debt, particularly if you are majoring in something without much commercial potential, forget school A and apply to school B. Graduate debt free. If your daddy is rich or has diligently been saving for this day, this goal will be pretty easy to obtain. If your daddy is poor or had some bad luck along the way it is going to be up to you to become an adult, perhaps before you are ready for that burden.

Now go ahead and have a good scream with Alice Cooper.


Thursday, June 20, 2013

Trends in the Data

I have seen the graphs tracking the trends. Some of the numbers are presented in Men are Disappearing From the Workforce by Tami Luhby. The participation rate for men ages 25 to 54 peaked in 1956 at 97.7% but has gradually drifted down to 88.4% by the end of last year. We all know that the kind of jobs traditionally performed by men such as construction and factory work have taken a beat down over the last two decades, but the article reports that the percentage of college educated men in the workforce is also on the decline. The participation rate of those holding at least a bachelor’s degree dropped from 87.2% in 1992 to 80.2% in May 2013. This hard for me to believe but those are the numbers that are reported. We all know that at one time any college degree could get some kind of a white collar job in an office, but many of those midlevel jobs have been replaced by computers.

There is an aspect to these disturbing trends that I have never really considered. I knew that our country has a growing prison population. However, I was shocked to learn that the British newspaper The Daily Mail reports that 1 out of every 100 Americans are in prison. Over 90% of prison inmates are men. Luhby reports that by 2004 1.2% of white men and 9% of black men born shortly after WW II (the baby boom) had served time in prison. The rates of incarceration for those born in the late 1970s? 3.3% for white men and an astonishing 20.7% of black men have served time in prison. Almost all of these men will be released back into the general population. Most of them will have no job skills. There are a large number of jobs that require background checks or security clearances. The former convict, even if he had the skills could not qualify for these jobs.

CNN reports that in 1982 1.9% of working age men received disability benefits. In 2012 3.1% of American men are on disability. Luhby reports that in the first quarter of 2013 only 2.2% of those on disability left the program. Most sources estimate that about 10% of those collecting disability checks are guilty of fraud. Even if that estimate is true the growth in these numbers is difficult to explain especially in the light of fewer jobs in fields that are accident prone such as mining and manufacture.

Many men, it seems, have just given up. High structural unemployment and diminishing numbers of full time jobs that pay a decent salary, not to mention a prison record are causing large numbers of American men to just quit trying to find work. The long term social consequences can’t be good. Women don’t want to marry men who don’t want to even look for a job. I have no doubt this fact contributes to the large number of women who are struggling to care for a family as a single parent. The odds against these children are pretty high. It has been said that, “An idle mind is the Devil’s workshop and that idle hands are the Devil’s tools.” This is true. Unemployed unmarried men, particularly unemployed unmarried young men are a socially destabilizing force in any culture. It seems to me that rebuilding job opportunities for the average man remains our nation’s most urgent political, social, and financial problem.

Wednesday, June 19, 2013

Reverse Mortgages

Hopefully, the day will never come when you will need to tap your very last line of defense, your home. What does an 80 year old widow do if the last of her savings and investments are disappearing because Social Security is just not enough? More than likely she still has her home, her very last line of defense. The equity in that piece of residential real estate might generate enough income to carry her to the grave. In most cases the best course of action would be to sell the house and invest the proceeds, then move to a nearby apartment, perhaps in a senior community. Unfortunately, 80 year old widows do not tend to view a house filled with a lifetime of memories and treasures as residential real estate. They tend to view their house as a piece of themselves. There is an option, reverse mortgages. However, this relatively new investment tool is dangerous. Reverse mortgages are often sold by slick con artists who take advantage of frightened desperate old folks who sometimes are hampered from making good decisions by cognitive issues. If Grandma or Grandpa is thinking about one of these things, it is your duty as a child or grandchild to make certain they will not be exploited. It is also your duty to tell them if they are incapable of maintaining a home; that it is time to move on. It is quite likely your parents or grandparents will ignore you if you are the bearer of bad news, but it is your duty to tell them the truth.

So what is a reverse mortgage? The correct name for these financial instruments is a Home Equity Conversion Mortgage (HECM). They are offered under FHA guidelines to allow older Americans to withdraw some equity from their homes to fund their living expenses. The National Council on Aging offers a booklet entitled Using Your Home to Stay at Home to explain the basics. This booklet is approved by the U.S. Department of Housing and Urban Development.

Using Your Home to Stay at Home

In order to qualify for a FHA HECM, you must be a homeowner 62 years old or older. You must own your own home or have a very small mortgage balance that can be paid off at closing. The applicant must also receive information on reverse mortgages from a HECM counselor before a loan can be granted. A low cost or free HECM counselor can be found by phoning (800) 569-4287.

The amount of money you can receive from the reverse mortgage is limited to the value of the home or $625,000 (whatever is the smaller number). The amount that you can borrow will also be dependent on the age of the youngest borrower, current interest rates, and the specific terms of the loan. Needless to say, the older the borrower and the lower the interest rates the more you will receive from your home.

According the HUD website, you can select from five payment plans:

Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. This is recommended as the safest option as the owner of the home will need a source of income to pay bills for the rest of her life.

Term- equal monthly payments for a fixed period of months selected. This is a more dangerous option, as payments will end and most likely Grandma will lose her house. On the plus side payments are higher than with the tenure option.

Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted. Think of this option as a Home Equity Line of Credit that never has to be repaid. It is considered more dangerous than either tenure or term. Undisciplined use of this money could quickly exhaust your credit. Then Grandma will need to sell the house and pay off the reverse mortgage at a time in her life that would be extremely inconvenient.

Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home. This option offers lower guaranteed monthly payments, but maintains a reserve line of credit for financial emergencies.

Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower. In my eyes, this option seems to combine the worst features of the other options. In You Can Do It, The Boomers Guide to a Great Retirement, Jonathan Pond notes, “This combination is only appropriate when the borrower knows that the need for additional monthly income is temporary.”

Remember the companies that offer these products are not in business to help out little old ladies. They are in business to make money. The amount of money you can expect to receive is pretty disappointing. The reverse mortgage only makes sense for the elderly who can remain in their homes, need additional monthly income, and have given up the possibility of leaving the old home place to their heirs. This is an area filled with charlatans and cheats. Be careful when your parents or grandparents are comparing products and offers. Again from Jonathan Pond, “Finally, be particularly wary of anyone who encourages you (or your parents) to take out a reverse mortgage to purchase and investment product, such as an annuity. Those who pull this charade should be pilloried.”

Reverse mortgages have high up-front costs when compared to normal loans. The interest rates on reverse mortgages are higher than on conventional mortgages. It is important to note that since no monthly payments are made on these loans, the balance grows very quickly as compound interest is applied to both the principal received and the interest that has already been assessed to previous payments.

Reverse mortgages are complex financial instruments that are not easily understood by the customers who actually need them. I hope that a combination of Government regulation, responsible journalism, and a growing market fueled by the aging Baby Boomers will, in time, improve the reverse mortgage marketplace.

Tuesday, June 18, 2013

Do You Want to Change?

How badly do you want to change? The more I try to help people improve their financial condition, the more convinced I become that the key for most people is a desire to change. You have to want it. Not everyone really wants to change. If you are doing what you are doing there is a reason. Your behavior is providing you with some kind of a psychic reward. There are basically three ways to improve your financial condition. You can earn more money. You can spend less money. Through budgeting and investing you can learn to manage your money wisely.

About 12 years ago I decided I wanted to change. I wanted to retire. It didn’t start as a passion, just a realization if it was going to happen I was the one who was going to make it happen. I set out to learn the basics of investment. It is important to accept responsibility for your condition. You are the one living your life. Expecting others to take care of your problems will result in failure almost every time. As time past what began as a realization became a passion, a consuming passion. I focused more and more energy and time on planning for retirement and investing my money. We even used three annual vacations to scope out potential retirement sites. I reached a point where I didn’t have any idea what people were watching on TV, but I could tell you the 10 year bond rates to ± 0.1%. Now that I have reached the goal, I am beginning to rediscover interests and pursuits that were once part of my life. I wonder if I sacrificed too much of myself for those years. But would I have reached the goal if I wasn’t ready to cast aside all those distractions?

Change not only takes desire, it takes hard work that is uncomfortable at times. I like barbecue, salty snacks, and my evening beer. I don’t enjoy exercise. Is it a mystery why I have a problem with weight?

I wanted to take better care of my body. I wanted to lose weight. I hope that someday my heart will return to a normal sinus rhythm. I thought that once I was retired I would have more time to exercise and prepare better food than can be purchased at fast food joints. I have lost about 20 pounds. My body feels better than it has in years. I walk 2.5 miles most days. Some days I walk 2.5 miles two times. I have improved my diet. I eat less.

I have two friends that have remarkable weight loss and fitness success stories. However, they were willing to make changes I can’t imagine. Both have adopted a more or less vegetarian diet. I don’t really like vegetables with the exception of spinach and broccoli. Eating two servings of vegetables a day seems a difficult goal to me. One of them, inspired by the story of an American P.O.W. in Japanese camp, found he could live on a lot fewer calories than most any American would believe possible. Not only is he living on less. He is living better. He has made a study of nutrition to the point he has a reason for eating almost anything that goes into his mouth.

I am so not there, but I am getting better.

Start where you are.
Accept responsibility for yourself.
Set a goal.
Keep learning how to reach your goal.
Turn realization into passion.
Work hard.

You just might discover that fortune favors the bold.

Sunday, June 16, 2013

Financial Literacy

Yesterday I had some good news. Young people are starting to live without credit cards. Today there is some bad news to report. Americans are becoming less financially literate. Below is a basic 5 question financial literacy multiple choice test.

The results are totally depressing.

National Average:
2.88 Questions Answered Correctly
0.81 Questions Answered Incorrectly
1.26 Questions Answered Don’t Know

Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?

More than 102
Less than 102
Exactly 102
Don’t know

Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?

Don’t know

If interest rates rise, what will typically happen to bond prices?

Stay the same
No Relationship
Don’t know

True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.

Don’t know

True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.

Don’t know

According to the Wall Street Journal (Americans Short on Financial Know How) author unknown, the scores on this financial literacy test have dropped a little over the last three years. However, patterns of spending and savings haven’t changed.

41% of respondents still say they spend less than their income
19% spend more than it
36% spend roughly what they earn.

In spite of a frightening lack of financial acumen, Americans are confident they are well able to manage their financial affairs. Many of the people who gave themselves high marks use payday loans, borrow money from pawn shops, rent to own, or frequently overdraw their checking accounts.

Once again the studies find that the lack of an emergency fund is often a prelude to disaster. When participants in one study were asked if they could come up with $2,000 for an unexpected expense such as a car repair within one month:

49% of 18-34-year-old respondents said probably not.
42% of those between ages 35 and 54 said no
27% of respondents age 55 or older who said they couldn’t

Over all age groups surveyed only 40% had a three month emergency fund.

There is a failure of both our educational system and a lack of responsible parenting in the area of finance. I suspect in part because neither teachers nor parents are sufficiently knowledgeable in financial matters nor do they provide good role models in their own financial behavior. We live in a society that is becoming more complex and less trustworthy. Americans are being forced to make difficult long term financial decisions (such as investing in 401K accounts) that were not necessary even a generation ago. Student loans have turned into a national disgrace, as 18 year olds with no knowledge of compound interest are selling themselves into long term debt slavery for degrees that are often worthless. In 1970 credit cards were still something of a novelty. Now they are the norm.

I still have a great deal of work to do.

Saturday, June 15, 2013

Credit Cards Make You a Bad Person

Finally, some good news. A recent poll on Yahoo Finance notes that the number of Americans under 29 years old living without credit cards doubled between 2007 and 2012. It then asks the question, “Is this a good sign?”

Participants are offered three possible responses:

1)Yes, younger consumers are being more responsible. Surprisingly, this is the number one response at 47%.

2)Maybe, if they’re not too far in debt already. I was one of the 21% that choose this response. I have seen quite a few young people becoming more responsible. However, this maturity often seems to be forced upon what is sometimes called generation debt by student loans and limited full time job opportunities. To be fair, I worked with some remarkable young men who, viewing the results of their elder’s foolish behavior, are avoiding credit card debt, putting 20% on their homes to avoid mortgage insurance, and contributing surprisingly large amounts of money to their 401-K accounts. Now if I could just get them to pay cash for their cars and pickup trucks. Sigh….

3)No, things are so bad they can’t get credit. This response came in at a depressing 32%. While I am sure this is true for a minority who are truly maxed out, even the poor can get credit. Unfortunately, it is credit at terms that no sane person would accept. I have railed at the exploitation of the poor and the ignorant by financial institutions in the past and will certainly do so again in the future.

Whatever the reasons, our use of credit cards is beginning to decline. In an article entitled, Yes, Credit Cards Are Making You a Bad Person, Derek Thompson looks some of the competing forces at work in our society. Worldwide, there is a drive towards a cashless society. He notes that Sweden plans to eliminate cash within two decades. Even in Africa merchants accept debits through their mobile phones. In spite of the good news in America, somewhere between 70% and 80% of the adult population has a credit card, even though psychologists tell us that credit cards are making us bad, irresponsible consumers. This is particularly true of, “Lower-income people, consumers who are worse at math, people who self-report emotional instability, introversion, or materialism.” These are the people studies indicate should not use credit cards.

We have long known that the easier it is to buy something the more likely it is that we will spend the money. Counting out money is inconvenient. It is much easier just to swipe the card. People who use credit cards spend more money at stores, more at restaurants, and leave bigger tips. That is why merchants generally encourage the use credit cards. It is getting worse. Now cards with imbedded chips and cell phones can be used with a wave of the hand.

The article reports, “In 2001, two business professors from MIT organized an auction for Boston Celtics tickets where one group bid with cash and one group bid with credit. The credit card group offered nearly twice as much for the tickets. "Framing hypothetical purchases as credit card payments may significantly increase likelihood of purchase and willingness to pay," the researchers wrote. They put their cheeky credit card advice right there in the headline: "Always Leave Home Without It."

Credit cards also teach us the lie that we have an unlimited supply of money. When we take cash out of an envelope, put it in our wallet, then spend it, we watch our supply of money dwindle in real time. With the credit card, we forget what we spend, until the bill comes due. Then too many consumers just look at the minimum payment block.

The author notes studies show that the use of credit cards make us fat, really. Consumers are more likely to buy junk food with credit cards than if they pay in cash. While this may be true in grocery stores they studied, they never watched me put cash in the snack vending machine at work. Bottom line, this study discovered that, “the permissiveness of credit cards weakens consumers' judgment in more subtle ways than total amount spent.”

The article notes that credit cards are exacerbating income inequality. Richer families are more likely and better able to use credit cards responsibly. Poorer, often less sophisticated, consumers are more likely to run up credit card debt, leading to higher interest rates and numerous fees and penalties. The wide spread use of credit cards also increases prices for the necessities of life. Merchants are charged fees for processing credit card charges. They are not going to pay these fees. The merchants roll them into the price of their goods or service and pass it on to the consumer. I went looking for what I thought would be a simple number. However, it turns out these charges vary widely between processors. If you are interested in the tangle of fees confronting your local merchant, here is a link describing one of the hidden costs of credit cards.

Card Processing Fees

Wednesday, June 12, 2013

Doing Nothing

“Sitting quietly, doing nothing, Spring comes,
and the grass grows, by itself.”
Matsuo Basho (1644-1694)

I am in one of those periods of quiet before the storm. In less than two months I will close on a new house and move to a new city. Shortly after that I will repaint and re-carpet my existing home and (hopefully) sell it at a good price.

I am ready.

I have prepared my portfolio for this day. I am at the extreme low end of my range for stocks (around 40%) because I will need the cash to pay for the move, the new house, and the cosmetic upgrades that real estate agents say are necessary to make a home; Pop!

I also think the market is overpriced and due for a correction. But I don’t know what the future will hold. I can only guess.

It is a time for me to do nothing.

That is very difficult. I always want to do something, but now is not the time. For most investors, nothing is sometimes the best action. If you are making the right amount of regular automatic additions to your 401-K and other investment accounts; if your sector balances and diversification are just about where you want them to be, leave well enough alone.

Once or twice a year is generally often enough to rebalance your investments. Of course, if you are an active investor there is no law against picking up a bargain or two along the way.

But just for today,
I need to breathe deeply,
Close my eyes,
And quiet my mind.

Saturday, June 8, 2013

Buying on Margin

If you have a brokerage account, you can borrow against the value of your stocks and bonds to purchase additional investments. If you choose to do this, you are gambling with borrowed money.

Here are some examples from Margin: How Does It Work? by Rande Spiegelman, Vice President of Financial Planning, Schwab Center for Financial Research.

If you have $5,000 you can buy 100 shares of a stock that sells for $50.00 a share. If you then choose to borrow $5,000 from your brokerage firm you can buy an additional 100 shares. If the value of the stock increases to $70.00 a share and you then sell the stock you have made $2,000 on your initial investment, plus another $2,000 on the shares bought on margin (with borrowed money). Of course you have to pay back the $5,000 loan with interest, in this example $400. This leaves you with a profit of $3,600 using margin Vs a profit of $2,000 using only your money.

What happens if the trade goes wrong?

If you have $5,000 you can buy 100 shares of a stock that sells for $50.00 a share. If you then choose to borrow $5,000 from your brokerage firm you can buy an additional 100 shares. If the value of the stock drops to $30.00 a share and you then sell the stock you have lost $2,000 on your initial investment, plus another $2,000 on the shares bought on margin (with borrowed money). Of course you still have to pay back the $5,000 loan with interest, in this example $400. This leaves you with a loss of $4,400 using margin Vs a loss of $2,000 using only your money.

That is a loss of $4,400 out of your original $5,000. Pretty bad. That is the danger of buying on margin.

There is something else to worry about when using margin, the dreaded margin call. Often when you see a sharp drop in the market, prices continue to fall as investors using margin have to sell shares at distressed prices to get enough money to cover their margin requirements, usually around 30%.

Once again you have bought 200 shares of a stock at $50.00 a share using $5,000 worth of margin. If the value of your shares falls to $60.00 a share, you only have $1,000 in equity left in that position. Since $1,000 divided by $6,000 is a little less than 17%, your brokerage firm is going to ask you to come up with another $800 in cash right quick to meet their margin requirement of 30%. $1,800 divided by $6,000 is 30%.

From the article:

“Your brokerage firm may initiate the sale of any securities in you account without contacting you to meet margin call.”

“Your brokerage firm may increase it “house” maintenance margin requirements at any time and is not required to provide you with advance written notice.”

“You are not entitled to an extension of time on a margin call.”

“In fact, in a worst-case scenario it's possible that your brokerage firm will sell all your shares, leaving you with no shares yet still owing money.”

You should not be surprised to learn that I would never recommend the use of borrowed money to buy an investment that may decline in value. A house is different. You have to live somewhere. A house is both an investment and a necessary living expense. Margin caused the crash of 1929, a world wide depression, and was one of many causes that triggered World War II.

I am not going to play the market with borrowed money. Period.

Friday, June 7, 2013

The Hindenburg Omen

The Hindenburg Omen is not a new conspiracy thriller by Robert Ludlum, the master of the three word title. It is a technical indicator that has lately been in the news. Some believe the omen cause the most recent drop in the stock market.

Technical analysis is a method of predicting the movement of stock prices by studying past market data including opening prices, closing prices, daily highs and lows, market volume, as well as historical averages and derivatives calculated from this data using various mathematical formulas.

There is a great deal of controversy over the efficacy of technical analysis. The proponents believe that without even knowing the name of the stock they can predict the future by studying the past performance of those shares. Studies have indicated these claims are at best a bit far fetched. Practitioners of technical analysis sometimes called elves, counter that their predictions are statistical in nature. A particular indicator might work 70% of the time, enough to be effective but not perfect. Elves have been given “stock” charts generated by coin flipping graduate students of academic proponents of the random walk hypothesis. The elves happily give buy, sell, and hold orders based on nothing but coin flips.

I try to be objective. I view most elves in the same light as I view astrologers. However, some of them win often enough that perhaps playing poker might be a more charitable analogy. Three queens over two tens might win most of the time, but that guy across the table is betting pretty heavy. What to do?

I need to add that if a large number of people believe in astrology and will most likely act on a particular planetary alignment, I would be a fool not to at least be aware of such things. I watch 50 and 200 day moving averages and Bollinger Bands, a mathematical method of placing a stock price within 2 standard deviations of its expected movement adjusted for different time periods. A Golden Cross occurs when the 50 day moving average goes over the 200 day moving average. Good juju. The Death Cross occurs when the 50 day moving average drops below the 200 day moving average. Bad juju. These indicators do not make my investment decisions, but they might cause me to delay the purchase of a particular stock. I am pretty good at buying stocks. I am still learning when to sell stocks. My preferred holding period is forever.

So what is The Hindenburg Omen? According to Zero Hedge these conditions must be met.

1)The daily number of New York Stock Exchange new 52-week highs and the daily number of new 52-week new lows must both be greater than 2.2% of total NYSE issues traded that day.
2)The smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3,126). This is not a rule, but more like a checksum. This condition is a function of the 2.2% of the total issues.
3)The NYSE 10-week moving average is rising.
4)The McClellan Oscillator is negative on that same day.
5)The new 52-week highs cannot be more than twice the new 52-week lows (however, it's fine for new 52-week lows to be more than double new 52-week highs). This condition is absolutely mandatory.

Sometimes the Hindenburg Omen works. Sometimes it does not. Maybe it predicts at least a 2% drop in the market something like 75% of the time. Claims and conditions used vary somewhat from analyst to analyst.

Wikipedia concludes, “Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that do not really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.”


If you have the mind of a Ph.D. statistician, the self discipline of a German soldier at the siege of Stalingrad, and ice water flowing through your veins, technical analysis might be for you. Technical Analysis for Dummies by Barbara Rockefeller is a good place to start. The author is a well regarded expert in the field. Her writing style is entertaining and easy to understand. The book also contains a very good bibliography for further study.

For Heaven’s sake, Let’s be careful out there today.

Wednesday, June 5, 2013

A Man has to Know His Limitations

In the movie Magnum Force, Dirty Harry unravels a series of mysterious murders that look like a gang war. The killers turn out to be a group of vigilante police assassins led by a seemingly by the book bureaucrat. In the scene where Dirty Harry first meets this villain, the outlaw police lieutenant brags that he has never had to use his service revolver in the line of duty.

Dirty Harry’s iconic reply has become a part of movie history, “Well, you're a good man, lieutenant. A good man always knows his limitations.”

Good advice. A man has to know his limitations.

Like Lieutenant Neil Briggs, I too have my limitations. I am always looking for a bargain, a stock that is out of fashion and under valued by the marketplace. Basically, I try to buy stock in companies the same way I buy stereo equipment or any other normal consumer product. I look for the best acceptable product at the lowest cost. I have learned the hard way that I can not be trusted to evaluate technology companies because I have a habit of falling in love with beautiful technology. If you add a low price earnings ratio and what appears to be a sustainable dividend to beautiful technology I am likely to step into something called a value trap.

Definition of 'Value Trap' for new readers from Investopedia:

“A stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period. Stock traps attract investors who are looking for a bargain because these stocks are inexpensive. The trap springs when investors buy into the company at low prices and the stock never improves. Trading that occurs at low multiples of earnings, cash flow or book value for long periods of time might indicate that the company or the entire sector is in trouble, and that stock prices may not move higher.”

I bought Cisco Systems (CSC0) after the dotcom bust had run its course. I thought, “The backbone of the Internet! Beautiful technology! Low price earnings ratio! What could possibly go wrong?” It went up. It went down. After a number of years I sold it for a small profit. I also bought shares in Corning (GLW) about the same time. Same story; I still salivate whenever I think about Corning’s technologies. However, their management does not seem capable of tying their shoelaces and chewing gum at the same time. This time I lost a few hundred dollars.

My first serious love affair with a classic value trap was Merck (MRK). They had a wide moat of patents and brilliant researchers around their business. They were considered one of the best managed companies in the world and they had plenty of free cash to pay those dividends. Add in a low price earnings ratio to a historically low price, “Winner! Winner! Chicken dinner!” Nope. I disregarded the fears of an empty pipeline. There were no new blockbuster drugs on the horizon to replace those with expiring patents. I was in love with their existing technology and the quality of their scientific personnel and management. There was a reason the stock was selling at a low price. It wasn’t worth very much. I lost money.

My worst beat down came at the hands of GE. Talk about technology! From jet engines to Magnetic Resonance Imaging machines, they got it. Once again a basic analysis of the fundamentals looked good. What I didn’t know was I wasn’t buying a technological conglomerate. More than one third of the company was a second rate finance company run by irresponsible gamblers. When the subprime crisis hit GE dropped from 35.00 (where I bought my first shares) to 6.00! Ouch! I still believed in GE, because they have good management and beautiful technology. I even bought more on the way down. Trying to catch a falling knife can pay serious rewards, but it is a dangerous pastime. I have just about broken even on GE. This morning I was about $400 down including the cost of dividend reinvestments. I am sad to report I am still in love with their technologies.

Since I now know at least one of my limitations, I stay far away from technology stocks. I have done well with consumer non-cyclicals, utilities, integrated oil, and even some wide moat specialty business like gas and oil pipelines. These are all companies that produce products and services that I understand, but I don’t fall in love with things like gasoline and toilet paper.

By the way, I don’t consider cell phones technology. I consider them consumer discretionary stocks since they seem to be in business of making fashion accessories. It is simply a business I don’t understand. Why is a Motorola Razor the last word in cool for six months? Why is a big screen Samsung cooler than an iPhone, or is it? None of this makes any sense to me, so I stay away from such things.


Even the great Warren Buffett understands he has his limitations. Here is part of his statement to his shareholders following the US Air debacle.

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You've got huge fixed costs, you've got strong labor unions, and you've got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: 'My name is Warren, and I'm an aeroholic.' And then they talk me down.”

Oh, one more thing, Let’s be careful out there today.

Tuesday, June 4, 2013

Getting Your Second Wind

Sometimes it is hard to keep doing the right thing day after day, week after week when you know the deck is stacked against you. You waited too long to start saving for retirement. You found yourself with too much debt and not enough job. You’re a single mom working two jobs. One day you woke up with a major medical problem and no insurance. How do you keep on keeping on, when the future looks bleak?

First, accept the fact that you have a problem. Without self judgment, without guilt, shame, or regret look deeply into your problem as though you were a dispassionate expert advisor. Accept yourself. It will take some time and effort to sort through all of the emotions associated with your financial problems. When you find yourself involved in any kind of self loathing extend loving kindness and forgiveness to yourself. Ask for God’s hand of favor. His promise is that if you acknowledge him, He will direct your path.

When you are ready, begin to develop a plan. It won’t be perfect, but as you begin to implement your plan, you will find ways to improve it. If you delayed preparation for retirement, double down on your 401K. If you are strangled by debt pay them off as rapidly as humanly possible. The debt snowball (starting with the smallest debt first) or the debt avalanche (starting with the highest interest rate first) both work. Choose one and implement it. If you need a better job or a temporary second job, go find it. I won’t tell you it is going to be easy. Do it because it needs to be done. If you need more support because you are at the limits of your time and energy, seek out a good church or an appropriate support group. Begin to build a network of relationships that can help when you find yourself at wits end.

Be realistic. If you haven’t started preparing for retirement and you are now 55, you won’t be retiring at 62. If you really drop just about all discretionary spending and really buckle down you might just make it when you reach Social Security Full Retirement Age at 66 years and 8 months. Take advantage of anything that is tax sheltered. That would include your 401K. Go ahead and add the “catch up” percentage to the max. By all means contribute as much as possible to a Roth IRA.

If you have to get rid of 30 years of accumulated debt, it probably won’t happen in a year. Become aware of your debts. Know the balances. Especially with hospital bills make certain you are not paying for the same service twice. If you have insurance, ask both insurance company and medical provider why it wasn’t covered. If you don’t like the answer ask again. If you don’t understand, ask.

Make certain you are paying enough on all of your debts that none of them are continuing to grow if you only make minimum payments. Don’t expect to find a silver bullet. Stay away from anyone calling themselves a debt counselor who is asking you for cash up front fee or a large fee. Don’t rely on family or debt consolidation loans to undo years of bad practice. Negotiate, negotiate, negotiate. You can get a better rate. You can even get some of your debt forgiven (this is also true for medical debt). There are debt settlement companies who can help with this process. Be careful. Not all of them are ethical.

There is good news. If you just put one foot in front of the other foot, you are one step closer to your destination. The hardest work is starting the journey. Tell yourself that when it seems like you just can’t take another step. Experts tell us that the phenomenon runners describe as your second wind is real. At some point you will experience a sense of increased confidence. It will be easier to breathe and you will find that you are less fatigued. Like a runner, as you learn how to pace yourself, as you learn the limits of your body, as you put sound training principles into practice, at some point your body will tell your mind, “I can do this.”

Sir Winston Churchill, Speech, 1941, Harrow School

“Never give in--never, never, never, never, in nothing great or small, large or petty, never give in except to convictions of honour and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.”

Monday, June 3, 2013

Four Kinds of Money

When I graduated from college in 1973 there were basically two kinds of money cash and checks. A few rich kids had credit cards, but that was an anomaly. Anything that was under $20.00 or thereabouts was a cash purchase. Rent, utility bills, and major purchase required a check. Now these two forms of money have been overtaken by credit cards and debit cards. They are certainly more convenient, but are they an improvement?

I write this blog for a wide audience. Some of my readers are just starting out on the path to financial freedom. Some of us are further down that road. No matter where you find yourself in this material world, let me ask you to stop to consider how you use the four kinds of money.

I once knew a man who was skilled at his trade. He was a nice guy, everybody liked him. As far as I could tell he was a decent caring husband and father, but he had a problem. Alcohol destroyed his marriage and his career. Today, I am told, he lives by himself in another city in a dumpy apartment. He rides around on some kind of moped because he lost his license. Sometimes he finds work at a fast food restaurant. Multiple DUI convictions have landed him in jail on more than one occasion.

If you find that you are carrying a balance on your credit card or you are a frequent victim of late charges, please put it away. Consider the possibility of cutting the thing up. Like a couple of beers didn’t exist for the man in the previous paragraph, credit cards might not be for you.

I would give similar advice to those who use a debit card. If you find it is too difficult to balance your checking account using a debit card for multiple minor purchases on a daily basis, put it away except for major purchases and travel expenses. I know of a number of college students who got themselves in serious trouble with debit cards because they didn’t understand the concept of a balanced checkbook. Turn off the overdraft protection feature. If you don’t have the money in your account, don’t spend it. You don’t need to have $35.00 overdraft fees added to a $5.00 cup of coffee. If your overdraft fee machine doesn’t have an off switch, find a new bank.

There are a lot of good things to be said about the two old kinds of money. As I work with more people, I have found that I return again and again to the concept of an envelope system for some parts of their budget. There is something physically and mentally reinforcing about using cash taken from an actual envelope. If you find you have a problem with some particular financial area (like eating out too often) decide how much you want to spend this month. Put that much cash in an envelope.

When it is gone; no more restaurants until next month.

Psychological studies indicate that parting with cash lights up the pain centers of the brain to a greater extent than using plastic. Letting go of cash is hard. Using plastic is easy. The judicious use of cash will probably help limit your discretionary expenses. Golf money, poker money, and entertainment generally are good candidates for a cash envelope.

Writing checks is also a painful and time consuming process. If you are attempting to limit the cost of your lifestyle consider writing more checks. Be sure to enter the check in the check register when you write it, even if there are people behind you in line.

It seems the greatest danger with the checkbook is the illusion of a balance. Even though there are a couple of thousand sitting in your account, that money is really already gone. Even though the checks haven’t been written, those funds are already allocated to rent, utilities, and groceries. That money can’t be used for a new set of golf clubs.

If you can handle balancing debit card activity on a daily or near daily basis, adding automatic debits to pay your regular bills and fund saving programs can really help simplify and automate your financial life. I am particularly a fan of automated savings. A debit of even $25.00 a month to a low cost index fund can produce very significant results over time. Likewise, sending predetermined amounts automatically to special funds, like vacations or Christmas will guarantee the money will be there when you want it. I am too old school to take advantage of all the options available to people who use electronic banking. I still want to feel the pain of writing a check for my monthly electricity bill. However, I have seen wise young people use debit cards and electronic banking with considerable skill.

I don’t have a debit card. Today I use my credit card for things like gas, groceries, sit down restaurants, and travel expenses. I still pay most of my bills by paper check. After we move in a couple of months, I think I will set up automatic debits for at least some of my bills. I still use cash for anything under $20.00, but $20.00 ain’t what it used to be. I am fanatical about paying off my credit card balance every month, sometimes so early the computer isn’t quite sure what to do with me.

The only reason I am sticking with the credit card is security. Debit cards are not covered by the Fair Credit Bill act that protects customers from fraudulent charges to their credit cards. If a debit card is compromised, the customer is liable for $50.00 of unauthorized charges if reported within two days. If such a report is filed after two days, that amount increases to $500. If reported after 60 days the customer could be held responsible for the entire amount. Some banks offer their debit card customers the same coverage as their credit card customers, but they are not required to extend this protection to your debit card. They can change the terms of this offer whenever it suits them. Because credit card companies can end up footing the bill for a compromised card, they are pretty quick to shut your card down if they suspect fraudulent activity. Banks are slower to react if a thief might be spending your money from your checking account. Credit card thieves recommend checking your credit card balance on a daily basis. I should check on my credit card more often than is my current practice. I do go through every charge on my credit card every month, reconciling each charge to a physical receipt. I recommend this practice no matter how automated your accounts.