Friday, January 30, 2015

You Had a Bad Day

Back in 2005 the “Bad Day” song by Daniel Powter became a hit. In fact it became the most successful single release of 2006 and the first song to ever sell 2 million digital copies in the United States. (Wiki) I guess he hit a nerve.

We are all going to have bad days. That is a given in life. Obviously some of them are worse than others. Some of them are largely our own fault. Some of them were caused by forces beyond our control. The world is such a complex interconnected place sometimes it seems just about impossible to understand why what just happened—happened.

But we do live in a cause and effect universe. Even though we are affected by causes outside of our control or even the random events found in the extreme tails of a normal distribution, there is always something we can do to better our own situation and to be a blessing to others.

First of all take a deep breath and open your eyes. The world is the way it is. Pretending otherwise won’t help the situation. Before you can improve your situation you must understand your situation. There are unwise mental states that make understanding just about impossible. Of course these unwise mental states are our natural reactions to bad days.

Extend mercy to yourself. This is very hard, but blame, guilt, or shame are not likely to improve your decision making process. Extend mercy and forgiveness to others. Nelson Mandela observed, “Resentment is like drinking poison and the hoping it will kill your enemies.” Wise actions are more likely to rise out of mental states like love, peace, and joy than hatred, resentment, and blame.

Now look deeply into your situation. Keep asking the question, “Why?” starting with your motivation. Was your intention good? I am assuming if you are reading this blog you are not a thief or a swindler. Most likely your intentions were good. Sometimes our best intentions just go awry. Spend all the time you need to better understand the problem.

Once you feel that you understand the problem you will be ready to propose a new solution. This quote is often attributed to Albert Einstein, but who knows? “Insanity: doing the same thing over and over again and expecting different results.” Remember a plan consists of a series of actions. Some of these actions can be done at the same time. Some of them will need to be done one at a time. Once you start listing the actions required to reach a goal, you will be developing a schedule as you estimate the time required to complete each task. Now you have a plan and a schedule. Since we live in a material world, it is likely that most of these tasks will require some expenditure of money. Now you have a plan, a schedule, and a budget.

It is time to implement your plan with patience and persistence. This is where the teachers of “mind science” typically fall short. Yes, intention is the beginning of all things. Yes, visualization can lead to results in the material world. No, sitting on your behind and waiting for the universe to give you your desired results isn’t going to work. You need to take action. Sometimes you will need to hit that rock with your hammer more than once before it starts breaking up into manageable sized pieces.

Finally, as you continue on your journey, take account of what you are doing as well as your results. Are you following your plan? Are you on schedule? Are you within budget? Are any of these questions really important? If things are not working out as you hoped, go back to the beginning. Look into your own heart. Then reexamine the problem. Refine your solution and keep moving forward.

Don’t beat yourself up. Always remember, this too shall pass.

And you are having a bad day, maybe the song will bring a smile to your face.

The Bad Day Song

Monday, January 26, 2015

Family Treasures

In the 19th century, there was no standard time in the United States. Every town set their own solar time that was then maintained by the best clock in town, usually in a bell tower or a clock in the local watchmaker’s window. Obviously this was no way to run a transcontinental railroad. By 1883 U.S. and Canadian roads were operating on a standard time system using the familiar time zones that we still use today. The stubborn independent American spirit did not capitulate to common sense until the Standard Time Act of 1918 became law. We still squabble over daylight savings time.

Having a time standard was not enough if the train crews did not have instruments that could measure time with a high degree of accuracy. The railroad pocket watch was created to prevent accidents that could occur when trains running at different speeds and in different directions were all using the same tracks. These watches were standardized using large easy to read Arabic numerals. These watches are precision scientific instruments. Their accuracy was not equaled by a wristwatch until the introduction of the Bulova Accutron in 1960. After the introduction of this first all electric watch, railroad personnel were allowed to wear an approved wrist watch instead of carrying one in their pocket.

The investigation of one deadly train wreck that killed over 100 people determined that it was caused by a watch that was accidently reset in the conductor’s pocket. This led to the invention of the lever set railroad watch. To set this type of watch, the owner must carefully unscrew the bezel that holds the watch crystal in place. Underneath this metal ring somewhere between the 1:00 position and the 2:00 position there is a small hidden lever. Once this lever is lifted with a fingernail, the time can be set using the stem as in an ordinary watch. After setting the watch, the lever is returned to its retracted position. Then the bezel is carefully (no cross threading please) screwed back down. If a watch of this type was actually used by a railroad, it would have been set by a timekeeper using a master clock. A paper seal was then glued to the side of the watch to make certain that no one tampered with it until it was scheduled to be reset. If the owner of the watch allowed it to wind down and stop, he was fined $5.00, a huge amount of money at that time.

Because a lever set “railroad” pocket watch from a respected manufacturer was the best available product in the marketplace, they were popular with men who did not work on the railroad. This example was made by the Illinois Watch Company in 1923. It has a 19 jewel movement that is almost identical to the famous, highly collectable 21 jewel Bunn Special. The 10K gold filled case is described as “full dress” meaning that it is hand engraved; a process that would be too expensive to produce on a modern watch. The watchmaker who repaired and restored this watch told me that if tested, this watch would still meet modern standards for a chronometer. Although it will never be tested by the Contrôle Officiel Suisse des Chronomètres (COSC) or an equivalent body (such as the Japan Chronometer Inspection Institute), I will accept his opinion as factual.

I found this watch in my mother’s secretary in the general vicinity of some identifiable family memorabilia. There was no documentation identifying what it was or who owned it. When I found it, the watch wasn’t working. I thought it might have some potential value, so I sent it off to my watchmaker friend in Maryland for evaluation. Since then I have learned that my maternal grandfather carried a pocket watch. So far none of my cousins have been able to state with certainty that this is my grandfather’s watch.

Even if one of my relatives can identify the watch, the evidence chain is broken. No one put the watch in my hand and told me its story. That piece of family lore has been lost forever. The moral of this story is pass on family treasures while you are still alive and can remember what you own. Choose a family member who will understand and appreciate that what you giving to them is not a thing but a piece of their own identity. Timing is everything. A young couple might prefer modern stylish furniture from Rooms are Us. They won’t appreciate Aunt Martha’s desk until they are older. By the time they are in their fifties it is likely that they will understand there is a difference between furniture made out of stapled pieces of particle board and furniture made entirely out of real wood that was assembled by craftsmen who cared.

In so many ways we are who we believe we are. The stories, myths, and legends passed down by our family members are internalized and passed on to those who follow us on our journey down the road that never ends.

Sunday, January 25, 2015

Zero Sum Games

The zero sum game fallacy is one of the more annoying erroneous beliefs that discourage people from reaching financial freedom. They believe that there is a fixed amount of resources (including money) in the world. Therefore in any exchange of value, one person’s gain is exactly equal to another person’s loss with no net change in total wealth. Following this logic to its conclusion, these people mistakenly surmise that all the wealth in the world will end up in fewer and fewer hands. Since other players with more money and resources have a head start, they conclude that they have no possibility of reaching financial freedom, so why try.

Monopoly, the board game we played as children is a zero sum game. Money and property change hands with each move until all the players except one exit the game in bankruptcy. The winner is left with all the properties and all the money.

The economy is not a zero sum game. In medieval Europe the basis of wealth was control of land by warlords. If the leader could obtain enough plunder to feed his troops, he could enslave the peasants living within a certain geographic area, ensuring the stability of his reign and (if he was very lucky) his ensuing dynasty. Even this unfortunate state of affairs was not a static zero sum game. Although the residents of cities were taxed by the local nobility and their mercenary troops, they were creating new wealth beyond that contained on the then existing monopoly board based on land.

Merchants were moving goods that came from as far away as China. Goldsmiths and other artisans were plying their trades, turning raw materials into far more valuable commodities. Eventually, this newly created wealth that was not based on the control of land, exceeded the value of the assets found on the old game board. The new game, called the Renaissance, was played on the land board, the banking board, the manufacturing board, and the world trade board.

Then the industrial revolution added steam engines, railroads, coal mining, steamships, mechanized looms, and whole host of new game boards. Winners and losers came and went over the centuries as the value of the entire game continued to grow. Austrian economics calls this process, creative destruction. The end of buggy whips and carriage makers, heralds the rise of an automotive industry based on the assembly line. Radios in cars gradually replace newspapers read in trains. Television leads to the decline of both radio and print media. Then cable TV minimizes the power of the three major networks and PBS.

Just in the last 40 years, men like Bill Gates of Microsoft and Steve Jobs of Apple have created new Monopoly boards that didn’t exist when I first graduated from college. Billions of dollars in entirely new businesses have been created out of nothing.

Today the Internet is changing everything; Amazon is replacing brick and mortar stores; the cost of premium digital content (movies, television programming, and music) is asymptotically approaching zero as predicted by Kevin Kelly in his seminal book, New Rules for The New Economy.

As you produce goods and services that are deemed as valuable by your neighbors, you too are creating new wealth. It doesn’t require a genius IQ or a huge amount of money to start. If you take Aunt Martha’ china hutch out of storage, repair forty years worth of dings and bangs and refinish it, you can create wealth by selling the product of your imagination and labor on eBay. A piece of junk costing you money to store is now a prized possession in a home you will never visit.

All it takes is your ingenuity and hard work.

Saturday, January 24, 2015

100% Responsibility

Bum Phillips Quote:
Ther' is two kinds of football coaches.
Them that has been fired and them that's gonna be fired.

You are 100% responsible for your life even though you are not in control of your life. If you are going to improve any component of your life, you must take responsibility for your circumstances.

This is a good time of year to explore this concept by examining the life expectancy of a NFL head coach. There are only 32 head coaching jobs in the league. The average salary runs around $5.5 Million—much of that money is guaranteed. The men who achieve this status are the best of the best. They have worked their way up the coaching pyramid from college or even high school to position coach at the professional level. From there they are given responsibility as offensive or defensive coordinators. Finally, after years of 16 hour a day dedication and significant measurable success a few of them become head coaches.

Every year somewhere around five or six of these men will be fired. Their competence is beyond question. Their dedication is beyond question. Yet if their quarterback does not produce or they miss the playoffs two years in a row, they are heading for the trashcan. Head coaches are held 100% responsible for the performance of 53 football players, 15 assistant coaches, and miscellaneous supporting staff.

Often the head coach does not have the final say in draft selections or free agent signings. That is the job of the general manager. If the general manager does a poor job of selecting premium draft picks over several years, he will be fired. But until that happens, the head coach is 100% responsible for their performance on the field. This has been compared to a chef that is given a menu to prepare but is not allowed to select the ingredients for his dishes. It is not fair, but that is the way it is.

It gets worse, a fine young quarterback on his way to the pro-bowl can suffer a career ending injury in a fraction of a second, finishing not only his career but the career of his coach. A star wide receiver arrested in a drug or prostitution sting operation can be suspended until due process runs its course. That could take the better part of year or longer if he is convicted.

Then there is the football itself, an oblate spheroid that bounces in unpredictable directions at the worst imaginable times. There are officials that make horrendous bad calls that give away the game to an opponent.

Still thousands of men work their entire lives for a chance to take one of these jobs. They pour their heart and soul into their work. During the season, many of them sleep in their offices to save commuting time. They study hundreds of hours of films, looking for a weakness in their opponents. They work with every team member, practicing plays over and over until they can be executed with precision no matter what the opponent throws in their way. Usually, they at least attempt to develop a special relationship with the quarterback, the only player on the field who can loose a game all by himself. In well run franchises the general manager cultivates a similar relationship with his head coach.

The game never goes as planned. The ball bounces this way and that way for both teams. Strategy and tactics must be altered in real time as unexpected events unfold on the field. In a single game anything can happen. The best team in the league can loose to an inferior group of players. However, over the course of a sixteen game season the cream has a way of rising to the top. The twelve coaches who reach the playoffs generally have job security for another year except in extraordinary circumstances, such as a heart attack, nervous breakdown, or the machinations of a delusional nitwit owner. Win one or two playoff games a year for several years the job is yours for pretty much as long as you want it. Win a Super Bowl ring? Go the Hall of Fame and retire to a cushy job at ESPN.

Those who are fired generally find new jobs. Most go back to the position (offensive or defensive coordinator) that catapulted them into the head coaching ranks. It is not that unusual for a man fired as a head coach for one team to become the head coach at another team. Bill Belichick earned two Super Bowl rings as defensive coordinator of the New York Giants. He was fired from his first head coaching job with the Cleveland Browns. Then after a brief stint as head coach of the New York Jets, he jumped ship to join the New England patriots. He has earned three more super bowl rings with that team. He is looking to add one more to that total in about eight days.

These men understand the rules; written and unwritten, of the game that is their life. They are smart, hardworking, experts who understand not only the game of football but how to manipulate and control their players and assistant coaches. However on the other side of the field there is another smart hardworking expert commanding 53 of the finest professional athletes and 15 assistant coaches intent on ending your career.

If you really want to accomplish anything of lasting value with your life, is your path any different?

Friday, January 16, 2015


Over the last six years, I have reached the point where I have learned enough to begin to know what I don’t know about teaching Christian personal finance as a ministry. Today, I would like to share some of those reflections. Perhaps you can find something in these words that might shine some light into your relationship with money. Understanding yourself as well as understanding the realities of your personal situation are the two keys to charting your course towards financial freedom.

I have learned that I don’t need to spend a lot of time telling individuals they are “sinners.” First of all, most financial mistakes do not rise to an occasion for sin. They are simply wise or unwise behaviors. Most people who find themselves in financial difficulties know exactly how the arrived in that unfortunate situation. When student loans, car payments, an underwater mortgage, and $13,000 on the Mastercard have landed someone in bankruptcy court, do I need to add to their suffering?

I have learned that I can’t scream loudly enough about the evils of debt. We live in a culture that considers debt a blessing. We believe a lie. God clearly and repeatedly states that debt is a curse. The ability to lend money is a blessing. There is no such thing as “good debt,” not even mortgage debt. Taking out a mortgage may be the best option in a given situation, but understand that you are, of your own free will, placing yourself under a curse. It may work. Or Not! Car loans and credit card debt are simply not acceptable. They should be avoided by everyone under all conditions. Student loans have proven exceedingly dangerous. If you are a semester shy of a MD, a $20,000 student loan isn’t going to kill you. If you drop out of a media arts program in your sophomore year that same loan could prove a serious burden. Look into your own heart. If you are praying that your credit will be approved, especially for a car or other depreciating assets, something is wrong with your world view and values.

I have learned that one of the first steps on the road to financial freedom is accepting 100% responsibility for your situation. As Jim Rohn observed, “You can’t hire someone else to do your pushups for you. We live in an incredibly complex cause and effect universe that contains an element of randomness. You can not control everything that happens to you, but you can take responsibility for the outcome of those events in your life. There is a high correlation between wise financial behavior and good outcomes. There is also a high correlation between unwise financial behavior and bad outcomes. If you want good outcomes in any aspect of your life, no matter what your situation or how it happened, the ball is in your court.

I have learned that most people in financial difficulties understand the principle of 100% responsibility. They are willing to look at their mistakes, accept the consequences, and make the resolution to improve their situation. In our culture, it seems that most of the people who are unwilling to take responsibility for their own lives look to the Government for salvation. They want to believe that every problem in their life is the result of a conspiracy of evil rich people. They certainly couldn’t have done anything wrong. Now it is up to the savior state to deliver them from bondage. I haven’t found a way to get these people past that roadblock. Unlike many personal financial teachers, I see nothing wrong with applying for Government assistance if you are legitimately qualified. There is a reason our nation has socioeconomic safety nets. However, even if you manage to qualify for some pittance from the savior state is that how you define financial freedom?

I have learned that teaching people the basic principles of financial freedom is not all that difficult. It can be done in less than 30 minutes in most situations. Put Money In on the left hand side of a sheet of paper. Then, on the top of a second sheet of paper put 10% of Money In after the word, “Savings.” Then add your monthly expenses until the Money In number equals the Money Saved + Money Spent number. This process is called a formal budget. Learning to budget is simple, but it isn’t easy. You will need to correct your first attempts at living on a budget more than once before it becomes second nature, but if you persist it will work wonders. Once you have an adequate emergency fund (at least 3 months take home pay) start investing in something simple, like low cost index funds. If you don’t want to do your own research, Vanguard lifecycle funds are a good place to start. This paragraph is all you need to know to move you down the road to financial freedom for the first several years of your journey.

I have learned that motivation is by far my greatest challenge. It is painful to discover that you have messed up. Learning to budget, paying down debt, denying yourself the proverbial latte are not fun activities. At some level the subconscious mind doesn’t like the budgeting process. To make yourself accountable to a piece of paper that you created is not a fun activity. Throwing your hands up in despair or pretending the problem does not exist is much easier. My job is to continue to encourage, support, and cheer you on. It isn’t easy to build motivation into a technical discussion of investment options. How do I scream about the evils of debt in a positive manner that will change your belief system? Guiding injured, frightened, angry people in a positive direction with sensitivity and gentleness is not something that comes naturally to me. Yet I understand that is necessary if I want you to hear my voice.

After over 600 blog articles and nearly six years of trying, I would like to thank all of you for joining me on my journey. I hope you have found something in these efforts that is a blessing, something that will lead you closer to financial freedom.

Monday, January 12, 2015

Nobody Ever Said it Was Going to Be Easy

Important things are usually pretty simple. The money equation that dictates the outcome of our financial life can be stated as:

Money In = Money Stored + Money Spent

That equation integrated over the course of your lifetime is all there is to it. If you want to be free from debt (negative Money Stored) or build savings for retirement or a child’s education (positive Money Stored) there are only two things that will do it. You can increase Money In or decrease Money Spent. At least at the beginning you will need to do both at the same time.

Since I was a child I have had a problem with my weight. Those of you who are slim and fit can look at people like me and think, “What’s wrong with him? Doesn’t he know about the fat equation?”

Food In = Fat Stored + Exercise

They could tell me, “There are only two ways to lower Fat Stored, eat less or exercise more. You probably need to do both.”

And they would be right. I could say, “But I am a few days shy of my sixty fourth birthday, I have arthritis in both my knees, and I suffer from a heart arrhythmia.”

What I can’t do, my excuses, don’t matter. Nobody is interested and excuses will not improve my condition. At one point I asked myself what I could do. I could walk. The first day is the hardest. What you need to do is get dressed, put on your walking shoes, and open the front door. Then let your feet decide what to do next.

Over the course of three years I have dropped about 40 pounds by increasing Exercise. Although I have improved my diet, it is still pretty lousy. Fat meat, carbohydrates, and beer are not recommended for a weight loss diet. You don’t think I know that? Living on Romaine Lettuce and vegetable smoothies just doesn’t appeal to me.

If you drop 40 pounds by increasing Exercise, that will not be the only benefit. My blood pressure has improved. Last week my cardiologist told me that for the first time in twelve years, I no longer need to be on prescription blood thinners, an aspirin a day is good enough. I view that as an enormous victory.

I am still something on the order of 40 or 50 pounds overweight. It is my intention to preserve in my exercise program, maybe improve my diet some more, and hopefully, someday, get off the prescription medication I take to lower my heart rate. Will I succeed? I don’t know, but just for today, I am going to try to do better.

If you have a problem with the money equation, there is something you can do to improve your situation. Don’t let anyone tell you that you are a victim of the economy, sneaky bankers, or the machinations of the Government. No matter what is going on in the economy, somebody is making it, without cheating their brothers and sisters or scamming the system.

If you live in the United States, there is a pretty good chance you can find a way to spend less money. Do you really need to spend $100 a month on a cell phone? Do you really need to spend $150 a month on cable? How about the amount of money you are spending on restaurant and convenience food? Any room for improvement there?

Some personal finance teachers such as, Trent Hamm, author of the Simple Dollar has turned frugality into an art form. His financial choices are allowing him to enjoy a high quality lifestyle with his wife and children. One of the old classics, Your Money or Your Life, by Joseph Dominguez, challenges the reader to calculate the cost of items in terms of hours rather than dollars. Let’s say that after deducting taxes, rent, utilities, and a reasonable amount of money for food from your salary, you are left with $4.00 an hour in discretionary income. Do you really want to work for 25 hours every month for your cell phone provider? Think about it.

You can make yourself a more valuable person. Don’t let anybody tell you that you can’t do it. I am not talking about more valuable in the eyes of God. We are all equally valuable in the eyes of God. He died so that we can live. I am talking about value in the eyes of the market. Unless you are a thief, an embezzler, a scammer, or a skimmer your paycheck reflects the value of the service you provide to your neighbors. If you want to increase Money In, become a more valuable servant. Don’t worry about Kobe Bryant’s $48 Million contract extension. You are not Kobe. His job is being the best Kobe Bryant he can be. Your job is being the best you, you can be.

If you don’t believe you are earning enough money in your current job, find ways to be of greater value to your boss or find a different job where your personality, values, and skills will be appreciated. If you don’t have the skills necessary for life in the new millennium, go back to school or just go to the library and learn how to fix toilets or program a computer.

I never said it was going to be easy. It isn’t easy. Anything worthwhile requires effort, but ask yourself, “Do I want to spend the rest of my life working to fulfill somebody else’s dreams or do I want to work to fulfill my dreams?” You are not in this alone. God will give you wisdom and strength if you ask. Look for people who will be an encouragement. People who will push you rather tell you, “Poor baby.” Find people who have been there, people who have faced the same difficulties and obstacles that you are facing; people who are overcomers. If you are the smartest person in the room, you are in the wrong room.

Just for today, do something that will improve your situation. If you fail and some days you will fail; decide in your heart, “I will try again tomorrow.”

Friday, January 9, 2015

Two Questions

How much income will you need in retirement?

Not an easy question. We don’t know the future of the economy. We don’t know how long we will live. We don’t know how much medical care we will require before we die. We don’t even know if we will be able to answer that question before events will answer it for us.

Still, it is a question that we must ask and answer.

The simple answer is 80% of your preretirement income. That would make you about average. Once you retire, you will no longer need to spend money on the daily commute, clothing for the office, lunch out with the guys, and since your taxable income will likely drop, you can expect a lower tax bill. Some states even give their retirees tax incentives.

The most frequent method of lowering your ongoing cost of retirement is by moving from a high cost/high tax area to a low cost/low tax area. The other obvious method of lowering your income requirement is tapping into your savings and investments.

It turns out that in spite of a lot of good words, people don’t really want to lower their lifestyle in retirement. In fact they are likely to want to reward themselves for a lifetime of hard work with a cruise or two or some other luxury.

So, be honest and tally up the numbers, including a few “nice to haves” that make like worth living. Be sure to include the cost of healthcare. If you don’t have health insurance (or Medicare) you don’t have a retirement plan. Old school financial teachers would add that you haven’t paid off your mortgage you don’t have a retirement plan. If you only have a couple of years left on a mortgage that you can easily afford, I wouldn’t let that be a show stopper, but no outstanding debt at retirement is a good rule of thumb.

What are your sources of income? For most of us that list would include some of the following:

Social Security
Dividend and Interest Income
Part Time Work

I would suggest that ideally, the total of these numbers should roughly equal your normal expected expenses. If you can cover the purchase of something like a new car with your regular retirement income without tapping your savings, I tip my hat to you.

To be honest, most of us will not be able to cover the cost of retirement with a pension, Social Security, and the equity from our primary residence. That three legged stool is broken forever. We are now responsible for building our own retirement nest egg using 401(k) accounts, Roth IRAs, and taxable investments.

Exhaustive academic and industry studies indicate that if you have a balanced portfolio of 50% equities (stocks) and 50% bonds (bonds, bond funds, certificates of deposit, cash, and savings accounts) there is a 98% chance you will not outlive your money if your annual draw does not exceed 4% of your total initial portfolio indexed to inflation. In our current bizzaro Zero Interest Rate Policy (ZIRP) world that relentlessly punishes savers and old people some pundits are lowering that number to 3%.

But for the sake of simplicity let’s use 4% in an example.

Charlie and Madge will have a combined retirement income of $3,000 a month. They are projecting monthly expenses that will run about $4,000 a month. That is $12,000 that will need to come out of savings in their first year of retirement.

$12,000 divided by 0.04 (4%) or multiplied by 25 (same thing) means that Charlie and Madge will need to have a minimum of $300,000 in retirement savings before they pull the trigger. Of course, if they continue to work, this will likely increase their retirement income and retirement savings.

The 4% draw question brings up a second important question that is rarely asked, “How much are you willing to loose in a single year?”

This is an important question because the answer will limit your investment strategy. In simple terms equities will return 7% - 7.5% a year over a sufficiently long period of time. However, there is a something on the order of a 1 in 12 risk that your equities could take up to a 50% loss in a single year. If you want that return over the course of your working and retirement lifetime (say 60 years?) you must be willing to accept that risk without getting out of the game.

Studies indicate that it is reasonable to expect a 3.0% – 3.5% return on less risky investments although that number is not as predictable as Siegel’s Constant for equities.

It is obvious that a 4% draw isn’t going to work with a 3.0% return.

Maybe Charlie and Madge might want to have a little more than $300K in the tank just so they can sleep better at night. A 4% draw will survive anything short of a 50 year storm, but one can expect a 50 year storm every 50 years. The problem is you don’t know the year in advance.

When I lived in Maryland, we were hit with two 30 year storms in a single year. That was pretty exciting. I watched the Monocracy River rise something like twenty feet to put the Highway 28 Bridge underwater, not once, but twice in a single year. A large portion of Point of Rocks, a nearby town on the Potomac River, went underwater, not once, but twice in a single year.

Now please, “Let’s be careful out there.”

Wednesday, January 7, 2015

The Money Game (Big Picture)

While we are discussing the nature of money, take a few moments to consider the nature of the money game. Currently our entire monetary system is a castle of debt built on a foundation of thin air. Look at a Federal Reserve Note. It says “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” Money is usually first created when instruments of debt are sold by the Federal Reserve Bank or the U.S. Treasury. It works like this (a very simplistic explanation):

The Treasury issues bonds to dealers who sell them by means of an auction.

The Federal Reserve Bank buys the bonds from the dealers using credits created out of nothing.

These credits are deposited in the sellers’ bank accounts.

The banks holding these accounts are now free to lend this new money to their customers.

Some of these customers will be other banks. The second tier of banks can then lend to other banks. This process is called fractional reserve banking. For each new dollar created by the Federal Reserve and the U.S. Treasury ten new dollars can be added to the general economy by banks lending to banks if the reserve requirement is held at10%. The Federal Open Market Committee of the Federal Reserve Bank selects a reserve requirement that they hope will increase or decrease the money supply in a manner that will prevent deflation or control inflation.

They hope that you, the American consumer, will borrow this money, get a job, and work the rest of your life to pay back the debt you owe to the bank that owes the money to another bank and taxes to the Government which created the debt in the first place.

Here is the problem. If all that debt is going to be repaid in a continuous ongoing cycle, the actual wealth created by our nation must continue to increase—forever. Remember the Rule of 72. If you borrow $1,000 at 6% for 12 years, you must generate $2,000 in after tax income to pay off that debt.

72 divided by the interest rate gives the number of years required to double an investment

Let’s look at a couple of simple examples.

In 1987 I bought a house valued at $98,000 with a 10% down payment. I had what I hoped would be a secure job. I knew I could pay the mortgage with current salary. I was pretty certain my salary would increase in a predictable manner over time. I guessed right. If a couple bought a similar house in 2006, they would still owe more on that house than it is currently worth. They can’t sell it unless they come up with the money. The other options are a short sale or foreclosure. If they still have their jobs after the crash of 2008-2009, their income has remained stagnant.

A student takes out $50,000 in student loans in order to obtain a liberal arts degree. Not having done his research the student discovers that approximately 40% of students graduating with this major are working in low paying retail jobs that do not require a college degree. The 60% that will find a job requiring a degree will earn a median starting pay of $35,000. This will allow them to pay off their student loans at a rate somewhere in the neighborhood of $3,500 a year. If They Are Lucky!

In the 1950s and 1960s a married man with a high school diploma could reasonably expect to provide his family with one car and a 1,200 square foot house in a reasonably good neighborhood.

Through the 1970s, 1980s, and 1990s my generation upped the ante. The women of America joined the labor force. Two incomes provided two cars, a 1,800 square foot house for a smaller family and more toys sooner for more Americans.

Personal debt increased but so did the salaries necessary to service that debt.

After 2000 American households maintained more and more of their middle class life style with debt. However, median household income has not increased at a rate that can keep pace with the increasing debt load carried by American families.

Over the last 14 years total debt (both pubic and private) has increased significantly but Americans are no longer increasing their wealth at the rate necessary to pay off these debts. The Fed is creating money but the velocity of this money has dropped precipitously over the last six or seven years. That means banks aren’t able to lend money at the rate the Government desires.

For a loan to occur the bank must have the money to lend (tax payer bailouts took care of that problem). Next the bank must identify customers who will be able to repay their loans. Finally, these credit worthy customers must want to borrow some money. This isn’t happening at the rate necessary to keep the economy headed upward. The average American household is choking on debt. They are trying to get rid of debt, not accumulate more debt. As is always the case the more credit worthy the customer, the less likely it will be that he will need to borrow any money. The people who actually want to borrow money, are the least likely to be able to repay the loans.

Does it make sense that both the debt and wealth of an individual or a country can continue to increase forever?

Remember that only three things can be done with debt.

It can be repaid.

If not, it is called default when a nation fails to repay their debts or bankruptcy when a private individual fails to repay their debts.

If you own the printing presses, you have a third option, monetizing the debt (devaluing the currency).

One more thing to consider: Debt that can not be repaid will not be repaid.

Tuesday, January 6, 2015

Is Money Spiritual?

Rabbi Daniel Lapin teaches that money is spiritual. Really that argument is not all that different from what is taught by economists. Money only has value because a large number of people believe it has value. Ultimately a Swiss Franc or a Zimbabwe Dollar are both pretty pieces of paper backed by nothing more than the faith of the people who choose to hold them in their hand. Most of my money is even more ethereal than that. It exists as series of little electronic blips on a piece of magnetic media sitting out there in the cloud.

You can choose to believe money is spiritual, spiritual energy, the idol of your faith, or something that is merely symbolic of a deeper truth, the truth of your life. No matter what you choose to believe about the nature of money, how you earn money, how you view it, and what you choose to do with it once it comes into your hands are all deeply spiritual questions.

Maybe the beginning of a new year is a good time to return to the foundation of the Silver Eagle Experiment, a challenge to allow God to change the way we view money. What if we began each day with a prayer, asking the Lord of the universe who owns all the silver and all the gold, how we can use his abundance wisely? What if we were to ask how we can be a blessing to others?

I have a parking lot ding on my newer car. It isn’t something that really needs to be repaired, but it is just enough to be annoying. I may get it repaired—or not. Yesterday, while getting my hair cut, I asked my barber for a referral. He recommended one of the three body shops in town. He told me he hears that mechanic does some pretty good work. That means there are people out there putting words of blessing on someone because he has been a blessing in their lives. It seems to me that something spiritual is at work here that will ultimately result in more money coming into that particular body shop even if I decide the ding is not worth the cost of a repair.

Are more overtly spiritual vocations really all that different? If a pastor has 200 adult members attending a meeting that will run ninety minutes and those members earn an average of $25.00 per hour, that congregation has already given their church $7,500 before the first dime hits the collection plate. If the time necessary to get a family from the breakfast table to the Church until the family is eating lunch is counted, that number might be more like $15,000.

In a place like Washington DC where 50 hours or more is an average work week and the commute time runs about ninety minutes a day, Sunday morning time is probably worth more to the citizens of that area than they receive from their employer.

What if a pastor included that calculus in his prayers of thanksgiving and supplication?

What if you asked God how you could be a greater blessing to your employer or to your neighbors? Could persistence and patience in prayer and diligence in work result in both spiritual and material blessings?

What if this blogger asked for guidance on how to better bless those who have blessed me with the time and energy required to read these posts?

Whether or not you choose to view money as spiritual or as something else, treat it as though it was spiritual, because (unless you are hermit living in a cave) you certainly cannot separate your spiritual walk from your relationship with money.

Happy New Year! May you be blessed in the year of our Lord, 2015.