Money In, Life Out?

I find writing about the left hand side of the financial equation, Money In, far more difficult than writing about the right hand side of the money equation Money Stored + Money Out.

Money In = Money Stored + Money Out

For most of us, Money In means a paycheck. Whether we are working on an assembly line, performing heart surgery, selling cars, or writing the great American novel, we are trading time for the promise of money. Money can only be spent once, but it can be replaced. Time is an irreversible process. Once lost it is gone forever.

Whether we like it or not, the clock is running. Then a combination of personal decisions, our habits, and the demands of practical necessity take over. While I am still single, it is possible that I can marry anybody out there who would have me. Once married, I can only have that person as my wife. Divorce? I have never seen a “good” divorce. At best they are painful, destructive, and expensive. Once you have made the decision to have children, are you going to abandon them in a ditch so you can have new children?

Once we have made one of these life path altering decisions, habits take over. We tend to run on autopilot until the next life crisis forces another decision.

In my father’s day, career choice was pretty much a one time decision point. There was an unwritten, unspoken covenant between employee and employer; the best thirty years (or more) of your life in exchange for the security of a regular paycheck, health insurance, and a comfortable retirement. That covenant is gone. Today in most work environments, employees must consider themselves independent contractors, essentially day labor with no guarantee of future employment. Even in professions with low unemployment rates, such as defense sector engineering, employees are becoming gypsies who move from company to company as contracts for new weapon systems begin and end. Someone in his early twenties can expect to have as many as eight different careers over the course of forty years of employment.

There are at least four different approaches to making work a meaningful part of your life.

1) Live The Life You Love. A family trust fund, a wealthy spouse, or few material desires would be helpful. There is no guarantee the marketplace is interested in what you love.

2) The Great Compromise. What is the least objectionable way to earn enough money to support your desired lifestyle?

3) Just The Facts. A hardboiled, realistic appraisal of your situation without factoring in your personal desires. When I was in high school, I discovered one of our neighbors had a degree in musical composition from Julliard, perhaps the finest conservatory and school for the performing arts in our country. He earned a living managing his family’s wholesale drapery business. It had to be done.

4) How to Be a Greater Blessing. What do your neighbors lack? Rather than consider your own material needs and personal desires, consider the needs and desires of others. What skills and resources do you possess? How can your assets fill your neighbors’ needs?

I have come to the conclusion that there are some decisions that are too important to make in a vacuum. Marriage and career are two such choices. You need outside expert advice. Are you really the best judge of your own abilities or would it be helpful to seek the advice of friends, parents, or an experienced mentor prior to making a life altering decision? If you are married and think that you can leave your spouse out of a career decision, think again.

In writing this blog over the last six years, I have come to understand that your selection of friends will greatly influence the course of your life. Are they a bunch of quitters, who whine and complaint about the unfairness of life or do they take responsibility for the outcome of their life, taking up arms against a sea of troubles, and by opposing, end them. (with a tip of the hat to the bard)

If you are a regular reader of this blog you know the famous quotes, “You are the average of the five people you spend the most time with.” “If you are the smartest guy in the room, you are in the wrong room.” The Bible points out the importance of friendship in stories like the Good Samaritan or the four friends who carried their sick buddy to Jesus for healing.

If you have outgrown your friends; believe me, this does happen, don’t cut them off unless they are truly poisonous. I have found that when summer has run its course old friendships that are no longer appropriate, simply fall away like tree leaves in autumn. In every change, death accompanies new life. In the spring new leaves appear because it the tree’s own nature.

In the end it is your life. The decision on how to live your life is your decision. Whatever your decision, make it carefully, make it wisely. Time keeps marching on.

“The Moving Finger writes; and, having writ,
Moves on: nor all thy Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all thy Tears wash out a Word of it.”
Omar Khayyam

Where Seldom is Heard a Discouraging Word

While I was out walking the Swamp Rabbit Trail this morning, a woman ran past me at a pretty good clip. We were both close to our respective turn around points. Her point was at a road crossing about 30 yards beyond the half mile marker that was my turn around point. I made a little joke about the seemingly small difference between the two locations. As she was walking backwards during this segment of her routine, we had the opportunity to chat a bit. I learned that she was running seven miles that morning. She learned that I was walking 4.25 miles. I also learned that she is a marathon runner. She has even competed in ultra-marathons. I expressed my amazement and admiration that anyone could run 26 miles and 385 yards without stopping. She praised my determination for walking in the rain, observing there were not many of us out on the trail. Having finished with her backward walking cool down, she turned on the afterburners and disappeared into the mist.

Reflecting on this exchange, I realized it was pretty common. Whenever I have the opportunity to talk to another walker or runner out on the trail, we are always supportive, encouraging and positive. Usually, I am the one receiving the encouragement from a more accomplished athlete, but sometimes I am cheering on someone recovering from surgery or just starting an exercise program.

Before I retired, while learning and practicing the art of investing, I would interact with coworkers who were walking the same path. We were always supportive, encouraging, and positive, even when the market was falling. We shared resources, newsletters, books, and resources on the Web.

I think that is generally true when people are working toward similar goals. We know that swimming against the current is hard work. Most of us would agree with Robert Collier who observed that those, “of us who are swimming against the tides of trouble the world knows nothing about, need only a bit of praise or encouragement,” in order to achieve our goal.

I don’t know about you, but as the song says, I want to make my home in a place where seldom is heard a discouraging word, and the skies are not cloudy all day.

Even when it is raining.

Common Sense

Michael Jordan has a net worth of $1 Billion. That is one with a B billion or think of it as a 1,000 million dollars or just $1,000,000,000. Michael likes to gamble. I have read huffy reports filled with self righteous indignation that Michael has been known to lose $50,000 a weekend in Atlantic City. Let’s compare that to a hypothetical retiree with a net worth of $500,000 who loses, $25 playing the slot machines.

It’s the same thing.

Does anyone care about the second scenario?

There is also a report from a questionable source that Michael Jordan once lost $5,000,000 in a single night at the crap tables in Las Vegas. If this is true that would be equal to our retiree loosing $2,500 in one night. In both case I expect their wives would have extremely angry unpleasant things to tell them about their behavior. In both cases, I would suggest they had a problem. I would advice them to seek counseling and perhaps the support of a twelve step group.

It’s our old friend the money equation.

Money In = Money Stored + Money Out

Pretty simple isn’t it? This equation integrated over a lifetime is all the mathematics there are to the story of your money. How you use it is your business. After all, it is your money and your life. One of the foundational purposes of this blog is mindfulness, the ability to understand and control the movement of your money through your life.

Over most of our lifetime, Money In will come primarily from our paycheck. I personally wanted to start enjoying a comfortable retirement as soon as possible. In order to achieve that goal, I had to make some compromises and sacrifices in other areas. My parents thought they must have failed me on some level. They could not understand why I could possibly want to retire during my peak earning years. They did their best to talk me out of my plan. My father loved his job. He really didn’t hit full stride until he was in his early sixties. Then he wasn’t about to let anybody or anything slow him down. He kept on running until a few days shy of his 76th birthday. Finally, he decided it was time to retire. He spent the last ten years of his career traveling the world, giving speeches, and along the way, winning several prestigious awards. That was not my experience.

If you are a 29 year old man with a wife and two babies in diapers who has trouble making the monthly bills what you want out of a career is less important than providing for your family. If you need to take a second job to make ends meet, take a second job until you can find something better.

Money Out is where our fun starts. It is your money. If you love to eat at the finest restaurants in town, that is your business. If you consciously budget $400 a month for sampling the best food and wine your city has to offer, that is OK by me. If you can afford it and it gives you pleasure, it is your money and it is your life. On the other hand if mindlessly wasting $400 a month on lunch out at restaurants rather than brown bagging it prevents you from doing what you really want, going on a really cool vacation, then I would say, “You have a problem.”

Money Stored is not an end in itself. It is only a tool to help you live a full and rewarding life. That would include giving to others and building a better world for the next generation.

We need to approach these questions with a little common sense. Here is where a monthly budget might help if you don’t understand the flow of money through your life. One of the problems with money is that you can only spend it once. If you pay $600 for a pair of handmade Italian shoes, you can’t use that money to buy a new camera. Shoes or camera is none of my business. How you choose to spend your money or not spend your money is your business. I want you to use your money wisely and well, in a conscious appropriate manner that brings you pleasure and makes your world a better place.

Refund Anticipation Loans and Other Taxing Thoughts

When I started investigating the subject of refund anticipation check offers, I thought it would be relatively straight forward and easy to understand. Hah! Like everything else involved with our tax system tax refunds present a complex maze of opportunities for the unwary to lose money.

I write that individuals who face even a moderately complex tax return should seek professional guidance. Although requirements vary from state to state a Certified Public Accountant (CPA) has five or more years of education and has passed some very stringent exams in order to receive a state license. Over 40 state boards now require that accountants pass an additional exam covering ethics. Unfortunately, even individuals with small incomes can have complex tax returns. I know one such person who works as an independent contractor for at least a half a dozen firms. In addition to dealing with multiple form 1090s, this person is paying for college with funds from a variety of different sources. Even this relatively simple situation generates questions that require professional answers. I counseled this person to seek out a CPA recommended by someone she trusts.

If you have a regular paycheck, a mortgage, and a few investments and you are computer savvy, Turbotax and some of their competitors have a pretty good reputation, but what if you don’t have a computer or understand how to use the software?

How about H&R Block, Liberty, or some other storefront franchised tax preparation service?

My investigations have indicated that using these companies is a crapshoot. Some of their employees are competent. Some of them are not. There are plenty of horror stories out there on the Internet. Too many have discovered that their returns contained costly mistakes. They overpaid and were forced to resubmit amended tax returns. All of this generates more tax preparation fees, not to mention sleepless nights. The average tax preparation fee for 2014 is reported as $273, up 11% from two years ago. The same article from My Way News reports fees in excess of $400 are commonplace. That is approaching the lower end of what CPAs charge.

Some of these fees contain costly charges for refund advance checks or prepaid debit cards. Sometimes the customer willing pays these fees to get their refund money sooner. Sometimes they are not properly informed as to their options. I didn’t know it but these fees are big money. Currently 10% of H&R Block’s revenue is generated by charges for refund anticipation checks. For Liberty Tax Service that would be 20%!

In the past this service was honestly termed a Refund Anticipation Loan. For example the New York Times reported that Beneficial charged a $30 filing fee and a $59 loan fee on a refund of $1,000. That is an effective APR of 250%, just about as bad as a title loan.

Needless to say the most frequent victims of these scams are the working poor.

As the number of complaints increased, IRS rules changed and states started cracking down on some of these practices. Now they are termed Refund Anticipation Checks or some similar name. There are still fees associated with advances that essentially make these instruments a short term, high interest rate loan even if they are no longer called a loan.

Court cases have shut down some of the most egregious tax preparation firms. Wikipedia reports that H&R Block settled a lawsuit brought by the New York City Department of Consumer Affairs for predatory lending practices, but as the laws and regulations change so do the particulars of what remains—A Scam.

The IRS, AARP, and a variety of local community organizations provide free tax preparation services for low income workers and retirees. They can’t handle partnerships or other complex problems, but they are competent to handle most returns. Electronic filing can have your money direct deposited to your checking account in just a couple of weeks. If you can’t wait two weeks for a tax refund, you are cutting it too close.

Especially during tax season, “Let’s be careful out there!”

Title Loans

Yesterday I received an advertisement from a local title loan company in the mail. While not as despicable as their close cousin the unsecured payday loan, title loan companies prey on the poorest and most ignorant members of our society.

The very poor with bad credit, perhaps as the result of bankruptcy or divorce, have little or no access to legitimate financial institutions for small “bridge” loans of less than $1,000. Banks and Credit Unions seldom make loans for less than $1,000. As due diligence these institutions will always run a credit check on the borrower. If their credit score is below the bank’s threshold, no loan will be issued.

The title loan business started appearing in the 1990s. These loans can be described as filling a gap between the pawn shop that would make a loan under more reasonable terms since it would hold both the title and the car and the inexcusably usurious rates offered by unsecured payday loan.

The pitch is a loan up to $20,000 with no credit check, “flexible payments,” and you get to keep your car, at least for a while. Typically the size of the loan will be limited to 30% to 50% of the expected value of the car at auction, since repossessing the automobile in the case of a default will add time cost and legal costs to the unpaid portion of the loan. These companies claim that the typical loan runs in the $300 to $500 range. Depending on state law, interest rates can run into the triple digits. Some states have limited the rate to 36%. Coincidently, a 36% annual interest including all fees is the maximum amount that can be charged a member of our armed forces. Congress had to take action, as too many servicemen were losing their security clearances as a result of bad credit or excessive debts.

The victims should understand why they asked to provide proof of registration, a government issued picture ID, proof of residence, and an extra key to the vehicle when applying for a loan. The company wants to know where to send the repo man when the time comes to seize your car.

What isn’t clear from the advertisement is that these companies are looking for poor, uneducated, unbanked or under banked customers whom they can trap in a cycle of debt that all too often ends with the loss of the car. An Illinois study indicates that about 20% of all title loans are used to pay off other title loans. The back end of many title loans contains a “balloon payment” that is significantly higher than the previous payments. This means that a considerable portion of the loan remains unpaid at the end of the term of the loan. If someone is cash strapped badly enough to need one of these things, chances are they will not have the money necessary to make that last payment, giving the lending institution the opportunity to make some more money off the misery of the poor.

If you are considering such a loan or know of someone who is considering a title loan, stop and take some time to consider your options. Ginna Green, spokesperson for the Center for Responsible Lending, notes title loans didn’t exist thirty years ago. She recommends exploring possible personal sources, like asking your employer for an advance, or asking a friends or a family member for a personal loan. She also observes that churches and community groups maintain benevolent funds to help members in times of trouble. Finally, she notes that some credit unions will make small unsecured loans on reasonable terms. I expect that would be more likely if your paycheck was direct deposited to your credit union account.

Here are the cold hard facts from Bankrate.Com

About 1.7 million car title loans originate every year.
The average car title customer pays $2,142 in interest on a $951 loan and renews the loan eight times.
About 7,730 car title lenders operate in 21 states, charging borrowers $3.6 billion in interest on $1.6 billion in loans each year.
A typical borrower receives cash equal to 26 percent of a car's value and pays an annual percentage rate of 300 percent.

A Question for the Rabbi

Recently I wrote a post based on the teachings that a Hasidic rabbi presented to a luncheon roundtable meeting of Jewish businessmen and businesswomen. This post explores the work of preparation required to receive a blessing. The creditors of an impoverished widow are threatening to enslave the woman’s sons to pay off her debt. Elisha the prophet miraculously multiplies the woman’s only possession, a miniscule supply of oil. After the miracle, the widow is left with more than enough money to pay her debt and live in comfort for the rest of her life.

If you are interested, here is the link to the original post and the Rabbi’s presentation.

What the Rabbi Told Me

One of my readers asked a very perceptive question. The story states the widow had been the wife of one of the sons of the prophets, God’s people at the time, so how is it that these men of God let her get into this desperate situation in the first place? This is a good question for the sons of the prophets and a good question for the Church in this day and time.

Promising to continue my research, I gave her my best quick answer. Basically, these were hard times for the children of Abraham, Isaac, and Jacob. During the ministries of Elijah and Elisha Israel was deeply divided. In fact their political disagreements resulted in a split of the nation into two kingdoms Israel and Judah. Israel had rulers like Ahab and Jezebel; the most wicked in Biblical history. Judah did better with rulers like Jehoshaphat, but they weren’t exactly models of Godliness.

It was a time of religious pluralism. God and Baal were both worshiped. God was worshiped in the temple and in the forbidden high places. Prohibited sexual practices were common place. Often the men of God were persecuted and murdered. As a result God cursed his people, both the innocent and guilty, with famine and war. These were not good times for the economy. Likely the sons of the prophets didn’t have enough money to support their widows and not enough faith to believe that God would come to their aid if they tried to do the right thing.

As I continued to dig into the times and ministry of Elisha, I came upon the story of the Moabite revolt. Moab decided to stop their payment of tribute to Joram son of Ahab, the new king of Israel. He entered into a military alliance with Jehoshaphat the king of Judah, and the governor of Edom. The three leaders marched off into the desert with their army. After seven days they ran out of water. Since the situation was really bad, they decided to seek counsel from a prophet of God. Elisha just happens to have accompanied the army on this particular expedition. The prophet ridicules Joram, asking why he doesn’t call on the God (Baal) of his parents. However the prophet tells the army that for the sake of one reasonably righteous man, Jehoshaphat, God will perform a great miracle. The kings and the governor are instructed to dig ditches in the desert. Then without any rain or rivers, God will supply their needs.

Once again I see the same pattern that occurred in the widow’s miracle. The men of the army were given a seemingly absurd task, digging ditches in the desert, but they were obedient. God filled those ditches with an abundance of water. But wait, there is more. The Moabites seeing the sunlight reflecting off the water, believed it to be the blood of their enemies. They walked down the hill intent on obtaining some easy plunder, but instead the soldiers of the alliance cut them to pieces.

It is hard to find a good job in a bad economy. The law of supply and demand is working against our efforts. Finding enough water for the soldiers, horses, and camels of three armies in the middle of a desert during a drought is even more difficult. However, there are always higher spiritual laws at work. We are challenged to walk in faith with the understanding that we can not be blessed if we do not obey God (work). Finally we are called to trust God, knowing that while he is not a cosmic cause and effect machine that exists for our benefit, he will be faithful to reward those who diligently seek after him.

Faith. Obedience. Trust. I have heard the same message twice in less than two weeks, once from a Hassidic rabbi and once from an Egyptian Orthodox priest.

If you want to hear the story for yourself, it can be found in 2nd Kings Chapter 3 or the sermon is linked below.

Life of Elisha the Prophet (Part III)

Reading the Tea Leaves

When making investment decisions, I frequently remind myself that I can’t predict the future. However, to some degree we all make decisions, every day, based on our understanding of future events. When I look at my fuel gauge, it gives me a pretty good idea as to whether I had better fill up while I am still in Georgia or it informs me that perhaps I can wait until I am on the other side of Jacksonville. When choosing a career path, we are engaging in some form of divination. We are not only thinking about a paycheck today, but opportunities that may present themselves over the course of the next 20 or 30 years.

Everything that you desire, everything you hold dear will change and ultimately pass away. This difficult truth applies to your career aspirations as opportunities in various enterprises rise and fall with changes in the marketplace.

I am quite convinced that if I was born twenty years sooner, I would have had a career in journalism. I wanted to find a job as a writer, but by the time I graduated with a second major in English the daily newspaper was already in a state of serious decline. Even great daily papers like the New York Herald Tribune were folding. First radio, then television, and now the Internet have slowly eroded the soil that supported daily newspapers all over the country. One by one they are falling into the ocean to be forgotten.

Fifty years ago even small city papers were staffed by trained professional journalists. Their articles were reviewed by a senior editor who understood both the art of writing and the newspaper business before the typesetters laid out the pages for publication. Typesetters were the first to lose their jobs. Then the writers and the photographers either lost their jobs as the newspapers folded or they were replaced by stringers who were paid by the story or by the photograph. From looking at grammatical errors and misspellings in the pages of newspapers like USA Today I suspect that they are no longer edited by professionals.

There is no use lamenting a world that no longer exists. The Internet has turned everybody into a journalist. It costs nothing to start a blog. Then just like me, you can write a biweekly column on any subject imaginable, including some I wish I couldn’t image. Unfortunately, as am I sure you have noticed, I don’t enjoy the services of a professional editor.

While I was still working in the American textile industry, somebody told me to look at the employees, particularly the younger employees, in order to predict the future of that business. If the job openings were not attracting smart ambitious young people it was likely a dying industry. I applied this analysis to my factory. The results were not pretty. As I looked for a new job in another city, I tried to remember to look at my future coworkers. I remember interviewing at one factory in particular that I didn’t expect to have much of a future based on my opinion of their management. I was correct.

After nine years experience, I thought American industry didn’t have a very good future so I returned to engineering school hoping to find a job in a Government research and development laboratory. Both the factories where I toiled for those years went out of business, as did the factory where I earned my work study credits as a mechanical engineering undergraduate. The laboratory where I toiled for over 27 years is doing just fine, but I believe their sun is already past noon. The size of their mission is beginning to shrink, just at the time when administrative burden is growing at a rapid pace. They are just beginning to find it harder to attract and keep the best and brightest. I expect the facilities will be there for a long time, but will they be manned by Government employees or by contractors?

Take a look at your coworkers, especially the new hires. Are they the best and the brightest or something less? If energetic younger employees are seeking greener pastures in other businesses; if the most competent old timers are opting for early retirement in order to start a second career, it might be time for you to update your resume and review your rolodex for potential contacts with future employers.

Take a look at disruptive technologies that might threaten your way of life. The typesetters knew about Xerox machines and word processors years before these technologies destroyed their jobs. Their unions tried to pretend that they could put those genies back in the bottle. Let me assure you that once out of the bottle the genie isn’t going back into captivity.

Ask yourself, “Where are the best and the brightest looking for work?” Talent, like money, flows where there are the best opportunities. No one can predict the future, but maybe you can make some shrewd guesses about the future of your present world and perhaps find a better alternative.

Nobody is going to do that job for you. As the song says, “You are going to walk that lonesome mile by yourself.”

American Pickers, Pawn Stars, and Your Beanie Baby Collection

I receive periodic emails from a number of personal finance and self help web sites. Some of these linkups don’t last very long. Some have been around for a while. Recently, I received an article from Dave Ramsey ridiculing collectibles as an investment. It was pretty funny. The thought that anything sold on the Home Shopping Network is going to make you rich someday is laughable. The only people likely to make any money are the vendors who buy it from your grandmother’s estate sale and sell it at a flea market somewhere.

They aren’t getting rich either.

My answer is don’t be that last person holding that collectible. One of my friends has made good money buying and selling baseball memorabilia. Even though he knows what he is doing sometimes he is that last man holding, like an autographed Barry Bonds bat he bought before the steroid scandal broke. I think he paid something like $500 for that one. Now it is pretty much worthless.

My favorite collectible story concerns a coworker who collected Beanie Babies. She only paid the $5.00 or $6.00 retail price when they were first issued, so she didn’t lose very much money. She also thoroughly enjoys her Beanie Babies, the only sensible reason for collecting anything. Once she had a very rare beanie Baby. One of these things actually sold for $1,200! Of course I strongly recommended that she sell hers right away. She didn’t. Today it might be worth $1.20 on a good day.

If you have ever watched collectible “reality” (hah) shows like Pawn Stars or American Pickers, you already know the secret to making money as a collectible dealer. You absolutely need to know the spread between bid and ask. Bid is the price a buyer is willing to pay for an item. Ask is the minimum price the vendor is willing to receive for the item. The size of the spread is a measure of liquidity. On items like shares of Exxon that can be bought and sold in a fraction of a second the spread is measured in one hundredths of a penny, a diminishingly small percentage of the item’s value. On items that can be sold at auction or at estate sales, the auction house typically takes a third of the sale price for creating a market. On that Black Velvet Elvis hanging in your bother-in-law’s trailer, if anyone buys it they are unlikely to pay even half of what they think they might be able to sell it for someday at the Jockey Lot in Pickens.

People who actually make money buying and selling collectibles know what they are doing. They are not emotionally involved in their transactions. It’s only business. I expect when an American Picker buys a collection of rusty Burma Shave signs, he already has a particular buyer in mind.

Like all homes, ours is decorated with arts and crafts of various sorts. My wife collects plush animals. It started innocently enough as a few of these creatures took up residence on our bedroom chair, but watch out. They multiply. We have some paintings and framed prints that hang on our wall. They have brought us great pleasure over the years, but only one of them is ever likely to make anybody any money. I doubt I will ever sell it because it is my favorite. In 1970 I bought a painting from a street artist in Gatlinburg for $20.00. A couple of years ago I decided to see if I could learn anything about the artist on the Internet. It turned out she is now known as the Grandma Moses of the Smoky Mountains. After talking with a gallery owner who sells her paintings, I learned my painting is worth in the neighborhood of $1,000. The gallery owner counseled me to hang on to it. The artist is in her eighties. He expects the value of her paintings will jump once she is dead.

Like I said, “This isn’t personal. It’s just business.”

If some shiny little thing gives you pleasure, buy it for the memories and the joy of owning something beautiful, but don’t expect to ever make any money from your “investment.”

Ultimately, every “collectible” we own has another value, that of the story it tells us every time we view it. My wife personally knows many of the artists and craftspeople whose work decorates our home. She can tell the story of where she bought the item; who made it; our relationship with the artist and what the item means in the tapestry of our life.

As the French say, “l’art pour l’art.”

Be a Blessing. Speak a Blessing

But the tongue can no man tame; it is an unruly evil, full of deadly poison.
Therewith bless we God, even the Father; and therewith curse we men, which are made after the similitude of God.
Out of the same mouth proceedeth blessing and cursing. My brethren, these things ought not so to be.
James 3:8-10

As I grow older I am beginning to understand that there is more to bringing blessings to this unhappy world than a search for wisdom that can be shared with others and acts of charity. I am learning that it is better to speak words of blessing than it is to speak words that curse my fellow men, who just like me, are made in the image of God.

As in so many areas that are eternally important, I am too soon old and too late smart.

We live in a world that is growing dangerously angry and intolerant. Christians hurl ugly insults at one another over questions of doctrine, calling one another a heretic or worse. The American political consensus is at a historic low, the lowest I have seen since the Vietnam/Civil Rights era of the late sixties and early seventies. In other parts of the world, people of different faiths are slaughtering one another in the name of God. It starts with the words we speak. Then come clubs and the steel toed boot; then come knives and guns; then come cluster bombs and fuel air munitions; then the specter of nuclear annihilation.

There is another dimension to this problem, critical negative people who fail to give their blessings to their own children, those who will follow in their footsteps. To understand the importance of the blessing, consider the story of Jacob and Esau from Genesis 27. As he was dying, Isaac told his eldest son Esau, bring me some food so that I might eat and bless you before I die. Hearing this Rebecca, Isaac’s wife, gave Jacob, the son she loved, a heads up. She encouraged him to disguise himself to fool his blind father so that he might receive the blessing. Jacob was fearful, asking, “What if my father curses me?”

Rebecca said, “If there is a curse let it fall on me.” She prepared a meal for Jacob to bring to her husband Isaac. The fraud was successful. Jacob received the blessing.

Genesis 27:

28 “From the dew of heaven
and the richness of the earth,
may God always give you abundant harvests of grain
and bountiful new wine.
29 May many nations become your servants,
and may they bow down to you.
May you be the master over your brothers,
and may your mother’s sons bow down to you.
All who curse you will be cursed,
and all who bless you will be blessed.”

Those who are younger than you need your blessings. It is important that they feel loved, accepted, and appreciated. It is important that you don’t die having failed to be a blessing and to have spoken words of blessing over others.

For some time I have tried to encourage civility in political discussions. Really there are very few evil people in the world. There are a larger number of people who consistently engage in behavior that is ultimately self sabotaging. However, the vast majority of humanity is just like you and me, ordinary sinners trying to find their way home. Instead of assuming that you know the evil that dwells in your opponent’s heart, assume the best; that like you he is trying to make the world a better place. He may be woefully ignorant, or horribly deluded, but instead of critical negative words, extend compassion and loving kindness as you attempt to make your point.

Can you imagine a world where I could write a thank you letter to a political enemy who did something that I considered of value?

That is just a beginning.

Can you imagine a world where I could be polite to a foreign phone bank operator telling me what she can’t do to correct her company’s mistake with my father’s insurance coverage after I have been on hold for fifteen minutes?

What does any of this have to do with the management of money and the creation of wealth? Ultimately, wealth is created by all the financial transactions occurring throughout the world. If you want to improve your financial condition in a manner that is pleasing to God and in keeping with his spiritual laws, give your customer or your employer more than is required by the letter of your contractual relationship. Ultimately, you are not working for man. You are working for God.

Consider controlling your tongue a subset of the Golden Rule. Speak unto and about others as you would want them to speak unto and about you. Let it begin with loving kindness. We have the power to extend that gift to our loved ones, our acquaintances, and yes, even to our enemies or business competitors.

Where others suffer, extend compassion, not pity. If you ever pity another in your life, there is something wrong in the relationship. The goal is compassion. Pity is something that we extend to that poor person over there. Compassion is born of a sharing of hearts, an understanding that we are both in this together. Since pity is normally felt at a distance, if you are feeling pity for a person you are trying to help, they are probably not hearing what you have to say.

Finally, rejoice with those who are being rewarded for their goodness or the value of their contribution to society with success, in any part of their life. In all your interactions try to improve your words.

Don’t only try to be a blessing, make the effort to speak words of blessing.

Balance. Balance.

Humans are complex creatures. A multitude of different authors have created lists that they believe encapsulate the various dimensions of our lives, needs, and desires. The most famous is Maslow’s hierarchy of needs. Starting with the necessities of life such as food, water, and air; the list then progresses to safety, then love and belonging, then to self esteem, and finally self actualization. Some might term self actualization peace with God or others might use the term enlightenment. Just for today, consider the complexity of your own needs, goals, and dreams. Then ask yourself, “How am I doing in this area?”

The Catholic philosopher and mystic, Pierre Teilhard de Chardin observed, “We are spiritual beings having a human experience.” Whether you choose to believe it—or just entertain the idea as a potentially useful metaphor, consider the three dimensions of our being; body, soul, and spirit.

Look at your body. Mine isn’t as pretty as it was 45 years ago, but it is still serving me well. Am I giving my body what it needs? I am doing pretty well with exercise and sleep. I am not doing so well with diet. Before starting this post, I gobbled down two ham, egg, and cheese biscuits. I know I could do better, but I like breakfast biscuits, particularly when they are on sale. If I am ever going to achieve my weight loss goal, I will have to improve my diet. It is an area of my life that needs work if I am ever going to achieve a healthy balanced lifestyle.

Soul has been defined as mind, will, and emotion. Are you developing your mind, making yourself a more valuable commodity in the marketplace, a better educated more attentive, conscious, aware human being? Spend a minute or two meditating on the following passage.

Proverbs 4:

5 Get wisdom, get understanding;
do not forget my words or turn away from them.
6 Do not forsake wisdom, and she will protect you;
love her, and she will watch over you.
7 The beginning of wisdom is this: Get wisdom.
Though it cost all you have, get understanding.
8 Cherish her, and she will exalt you;
embrace her, and she will honor you.
9 She will give you a garland to grace your head
and present you with a glorious crown.”

We don’t know what it is, but we know that there is something more. What does it all mean? Most of us, even some pretty hard-boiled agnostics, are at least curious about the possibility of experiencing the transcendent. Are you a spiritual being? If your answer is, “Yes.” are you following a spiritual path? Are you practicing the disciplines and fulfilling the obligations of your tradition? Are you actually doing those things that you believe will bring you closer to God or enlightenment or whatever you think might be out there that might help you achieve self actualization? Are you studying the scriptures? Are you praying or meditating or practicing some kind of ritual on a regular basis? Are you worshiping with and learning from others on the same path? If you say you are a spiritual person but you are not doing spiritual things, you are kidding yourself.

We all have a way to go on this one. I haven’t met any ascended masters—yet, but I am privileged to know a few believers who have climbed to heights that I have not yet experienced. Several years ago, one of these people, burdened with guilt, felt the need to confess his sins to me. It was one of those moments when I found myself on Holy ground. His deeply honest, heartfelt confession was more like the confession of an eight year old child than a grown man with a family and serious professional responsibilities. I felt a little like Isaiah when he cried out, “Woe is me! For I am lost; for I am a man of unclean lips, and I live among a people of unclean lips, and my eyes have seen the King, the LORD Almighty.”

Take a half hour, sit down and construct your quality of life list. Include your physical health, the components of your social life, your psychological wellbeing, and since this is a personal finance blog; ask how your inner homo economicus is faring.

Jim Rohn observes, “Goals are like magnets.” It is a good analogy. Just like goals, big powerful magnets will exert a greater power on an object than weak little magnets. An object that is aligned with the poles of a magnet will experience a greater force at the same distance when compared with an object that is out of alignment with the poles of the magnet. Goals that are congruent with our inner values will exert a greater power than goals that conflict with our real self. I doubt if Jim Rohn knows that in most cases the strength of a magnet field declines as the cube of the distance from the magnet. This means the strength of a field two feet from an object will only be 1/8 as strong as the field at one foot. A goal that is too distant will not exert much force on our every day life.

If you see any area on your list that could use some work, come up with a measurable goal that will help you achieve a balanced healthy lifestyle. Start with the area that hurts the worst.

What About Tomorrow?

From time to time I talk with people who have really serious problems. It doesn’t matter if it was primarily their mistakes, tectonic shifts in the economy, or a misfortune totally beyond their control such as illness or an accident. They are in trouble and they don’t see a way out. There is always a path out of financial difficulties. There is no guarantee that you will reach your goal, but you can start out on that journey. You can do that today.

Tell yourself, “If I am alive at 65 there is a good chance that I will still be alive in five or ten years. In may take me five or ten years to build enough of a nest egg to retire, but would I rather be 70 in my current condition or have a chance at a better life?”

I graduated with a degree in U.S. History and English Literature. After nine years working in American factories in a variety of low and mid level positions, I lost my job in the recession of 1982. For those of you old enough to remember, that was a bad one. I didn’t like working in factories. They are noisy, smelly, and sometimes dangerous places. Some of the women carry blue steel in their purses. Employees get in fist fights. There was even an instance of a woman hiring a root doctor to place a curse on her rival for the attentions of the same man (really). Let’s not even mention some the really nasty stuff, like hexavalent chromic acid or cadmium cyanide.

Like other men of my age (31), I came up with the idea of returning to school, earning a degree in mechanical engineering, so I could leave the factory floor and endless cycles of training new employees followed by the inevitable, layoffs. There was no guarantee that I could make it through Calculus. My track record on math wasn’t very good. There was no guarantee that I wouldn’t run out of money before I could graduate. We didn’t have much in savings.

Three years later I graduated. Twelve years after my first graduation, I was starting over.

At some point it was obvious that without a Master’s degree I wasn’t going beyond a certain level in a research and development laboratory. I knew it would take me about five years in night school to get the degree. At the time I was 40 years old. It was at this moment I first asked THE QUESTION, “OK, in five years I will be 45 years old. Would I rather be 45 with or without a Master’s degree?”

At age 46, I received my Master’s degree. The school I attend only held commencement once a year, so I had to wait five months to get my diploma.

It has been my observation that really serious financial problems take three to ten years of focused effort to solve, depending on their severity and your intensity, but in three to ten years, the actuarial tables tell me that it is likely that you will still be above ground.

Would rather be alive in three to ten years living with or without a solution to your problems?

Keith Cameron Smith discovered one of the significant differences between the rich and the poor is their sense of time. We all plan, but our timescales are different. Smith makes the following observations concerning different groups.

“The very poor think day to day.”

“Poor people think week to week.”

“The middle class thinks month to month.”

“The rich think year to year.”

“The very rich think decade to decade.”

I expect most readers of this blog fall somewhere in the middle class. Smith believes the middle class focus is on comfort. What can they buy today to make their life comfortable? If they think they can make the monthly payments, “It’s all good.” Take a page from the playbook of the wealthy, expand your time horizon. If you are thinking in terms of monthly credit card payments, imagine a future with zero balances on all your cards. Then plan to live on a budget that will allow you to achieve your goal.

Ask yourself, “What kind of future do I want?”

Then start out on your journey. Google Maps tells me that it is 52.7 miles from Pelion, SC to Winnsboro, SC. In current traffic that drive would take you about an hour. However, if you never leave Pelion, you will never reach Winnsboro.

Getting a Life

Finding financial freedom is not an end. It is a beginning. If you are an American, it is in your genes. Although these words mean different things to people of different political persuasions, I don’t think I have ever met an American who would disagree with the committee of five who edited Thomas Jefferson’s original draft of the Declaration of Independence.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

If you are reading this, you are alive and at least have a measure of freedom (access to the Internet). That means you are at least able to pursue happiness, although there is no written guarantee that you will ever catch it.

Wealth is not the goal. It is a means that allows you to pursue what makes you happy at a higher rate of speed. That’s all it is. Wealth is not life. It is just a tool that allows you to have a life.

What makes you happy? Really happy?

Life, liberty, and the pursuit of happiness are all good places to start, but not good places to end.

I am old enough to know that I won’t live forever. In fact, as I watch my parents’ generation die, I know that I don’t want to live forever, at least not in this physical body. Wait, it gets worse, I am beginning to bury men of my own age. In fact I have buried two friends and coworkers who were younger than I was at the time of their death. It is beginning to dawn on me that I don’t have all that much time left. Neither do you. If you are alive, you are headed for the grave.

If you follow the basic, proven, principles of financial responsibility, there is a high probability that you will find financial freedom. People, this stuff works. It really, really, works.

Then what?

It is time for you to become a blessing. You shouldn’t wait until you find financial freedom, but being a blessing is a lot easier once you and your family have enough.

There are no excuses. You can either choose to be part of the solution or part of the problem. That means you personally. If you choose to be a victim, you are not part of the solution. Waiting for some politician or religious leader to give you life, liberty, and an opportunity to pursue happiness is a trap that will rob you of your life. I am not telling you not to vote your conscience or participate in our political process, I am telling you to stand up, become a man or woman of God and make a difference. At the end of time, it is what you do, what you personally do, that matters.

You don’t have to be a Rockefeller to be a blessing. Go ahead, put a quarter in a parking meter that is about to run out. A small gift to someone you will never meet. If you eat at a full service restaurant, tip at least the customary 15%, more if the spirit moves you.

How would you like to live on a server’s salary?

How much are you giving to charity? God instructed the Jews to give 10% of their increase to his temple. In Christianity you are free to give or not to give as much or as little as you wish. Are you and God OK with your giving? If you, personally out of your own pocket, are not giving a reasonable amount to the charitable activities that you believe are important, I don’t want to hear anything you have to say about how much I should give the Government to support charitable activities that you won’t support with your own hard earned cash.

God says—emphatically and repeatedly—that debt is a curse; that the ability to lend is a blessing. So, lend something to someone while you are still in debt. See what happens? A long time ago when I was young and relatively ignorant, I helped some friends in the ministry with their car loans. I didn’t understand that it was up to me to choose to step out from under a curse and experience what it means to be part of the blessing. In retrospect, I understand these and other similar acts were foundational in my quest for financial freedom.

Your responsibilities don’t end with the grave. You have a duty to be a blessing to next generation. While you are still alive, help young people find their way. Don’t rob them of their opportunity to become responsible adults, making them victims dependent on you or the largess of the Federal Government, but do look for ways to help them, encourage them, and show them the way. If you open your eyes you will discover that God will give you opportunities to help young adults in a time of trouble with a well placed gift or a no interest loan. If this is done with discretion and sensitivity, they will be more likely to listen to your instructions on how to get a life; how to pursue and ultimately capture that elusive creature, happiness.

If God blesses you with a measure of his wealth, plan on how to best use it after you pass. Blend this paragraph with the previous paragraph in your mind. If you help young parents open a 529 for their children’s college tuition, you are helping, not only in the present moment, but in a future that you may or may not live to see. If you help plan for a child’s retirement with a tool that we have been given, like a Charitable Remainder Trust, you will have the opportunity to be a blessing not only to the next generation, but also to the works of God, all tax free. Become wise. Learn about these things.

Ultimately, you will find happiness in what you—personally—have done to improve your life, your family’s life, the life of your community, and the life of the world. For a Christian that means entering into the Kingdom of God.

Where is the Kingdom of God?

That would be anywhere God is King.

Even a Broken Clock....

Even a broken clock is right twice a day. That would be a better record than that of the “22 chief market strategists” of the largest banks and brokerage houses on Wall Street. In fact, in a recent article entitled How Bad are Wall Street Forecasts? Really Bad, Morgan Housel reports that a blind brainless idiot who predicts the market will go up 9% every year will have a better track record than the smartest men on Wall Street backed by skilled analysts, quality research, super computers, and PhD economists.

Every January these men make a prediction as to where the market will stand at the end of December. The article reports that the strategists were off by an average of 14.7 percentage points per year. The blind brainless idiot was off by an average of 14.1 percentage points per year. Both results are so bad that they are completely useless.

So why do these men make their annual predictions? Why do we listen to them?

We assume that we can profit from the efforts of some team of omniscient experts. Somebody must be able to predict the combined results of every financial transaction, natural disaster, and all the political upheavals that might have an effect on the Dow Jones Industrial Average. Right?

Wrong!

First of all, you are assuming that the men making these predictions are telling the truth. When dealing with investment advisors that is a dangerous assumption. These firms are buying, holding, and selling securities for their own purposes. They have been known to recommend that their clients buy shares in a company that they are dumping like barrels of toxic waste. Likewise, they may be buying exactly what they are telling their clients to sell.

There is another reason they may be lying, fear of a self fulfilling prophecy. While men who are selling their own books or investment newsletter routinely predict the end of the world while offering their secret advice on how to survive the apocalypse, I have never heard the chief market strategist of a large reputable firm prophesize the end of the world. If he did such a foolish thing, all of his investors would cash out their chips leaving his firm without a reason for its continued existence.

Investment is a discipline but it isn’t a science. There is no unifying theory that explains every natural event that might affect the market, let alone the reactions of 7 billion irrational humans to these unforeseen events or events of their own creation like major scientific breakthroughs or world wars.

Even making probabilistic statements about the future is dangerous. During the collapse of 2008 the major investment houses learned the limitations of statistics. Their experts were predicting what actually happened as “a thousand year event.” In retrospect this claim seems truly preposterous. Anything that remotely resembles a modern market has only existed for a few hundred years, yet you are predicting a thousand year event on maybe two hundred years worth of applicable data? Good luck.

There is another problem with probability. Even if you know that a particular outcome is truly a once in a thousand year event, you can’t tell me in advance in what year that event will occur. When we lived in Maryland, we experienced two thirty year floods in one year. Improbable? Yes, but it happened.

Nobody can predict the future with accuracy. Not even you. A little humility and a lot of diversification are good for any investor.

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

What the Rabbi Told Me

Second Kings Chapter 4:

1 A certain woman of the wives of the sons of the prophets cried out to Elisha, saying, “Your servant my husband is dead, and you know that your servant feared the LORD. And the creditor is coming to take my two sons to be his slaves.”
2 So Elisha said to her, “What shall I do for you? Tell me, what do you have in the house?” And she said, “Your maidservant has nothing in the house but a jar of oil.”
3 Then he said, “Go, borrow vessels from everywhere, from all your neighbors—empty vessels; do not gather just a few.
4 And when you have come in, you shall shut the door behind you and your sons; then pour it into all those vessels, and set aside the full ones.”
5 So she went from him and shut the door behind her and her sons, who brought the vessels to her; and she poured it out.
6 Now it came to pass, when the vessels were full, that she said to her son, “Bring me another vessel. ”And he said to her, “There is not another vessel.” So the oil ceased.
7 Then she came and told the man of God. And he said, “Go, sell the oil and pay your debt; and you and your sons live on the rest.”

Sometimes I come across something that is so good that I just have to share it. In retirement I have developed a little ritual. Every morning, along with my coffee, I watch something educational or inspirational on Youtube. A couple of days ago I discovered Rabbi Manis Friedman speaking on the subject of financial abundance at a luncheon meeting for Jewish businessmen and businesswomen. This is less than half of what he had to say, filtered and reorganized through my mind and experiences for a blog post.

The story of Elisha and the widow is not one frequently heard in the churches I have attended, although that is probably a mistake. A widow, deeply in debt is about to loose her two sons to her creditors. Elisha asked this impoverished desperate woman an interesting question, “Tell me what you have in your house?” Why on earth would he ask her a question like that? If she owned anything worth mentioning she wouldn’t be attempting to guilt manipulate the prophet in her moment of hopeless misery.

The Rabbi teaches there are three parts to finding financial abundance, whatever that phrase might mean to you. The first part is effort. God can’t bless you until you create a vessel to contain the blessing. That is your part of the partnership. The Rabbi warns his audience, “Don’t count on miracles.” Hard work, education, integrity are all part of your vessel. If you want a bigger blessing, create a bigger vessel for God to fill or in the case of the widow borrow as many vessels as you can find.

The widow exhibited the second part to finding financial abundance when she obeyed the prophet. A farmer exhibits the same kind of faith when he plants a seed. Without the rain the seed will not grow. The farmer is capable of planting a seed, but he must have faith that God will bring the rain in due season. The farmer isn’t in control of the rain. The farmer understands that ultimately he isn’t in control of anything. He can’t push a button and get a goodie from God. The blessings of God do not fall out of a cause and effect vending machine. Instead, they come out of a relationship. Think about your relationship with your husband or wife. Can you pull a lever and automatically get what you want out of your spouse?

This is where faith blends into the third component, trust. God is going to do what God is going to do. I have even less control over my creator than I have over my wife. Yet, I trust my wife has my best interests in her heart and that ultimately in her own time and way will respond to my efforts. If I can trust my wife, why shouldn’t I trust the God who created this world and everything in it? I made the decisions that have shaped my life, not God. Creating the vessel was my free will role in my partnership with God. The Rabbi believes that God will always richly respond to your efforts; not necessarily in the way you expect, but he is confident that none of your efforts are ever wasted. You may not need to chase down your blessing. Perhaps it is off on a side trail. Perhaps it is behind you. In that case perhaps you just need to stand still and let the blessing catch you. God isn’t limited by your plans. He might have something better.

Finally, the widow asks her son for another vessel to hold her blessing. Why? The oil is still flowing. When her son responds, “There is not another vessel.” The blessing ends. The Rabbi teaches that we should never say that we have no more room in our life for God’s blessings. The day we state we have gone as far in life as possible, it is a certainty we won’t go any further.

Interestingly, the Rabbi believes God wants all of his created beings to live a life of abundance; not as an end it itself, but as a beginning of a cycle of blessing and generosity. He believes that God wants you to be successful even more than you want to be successful. After all, the Rabbi reasons, it is his world not your world. You and I are only here on this world for a very short time. He notes, “But God is stuck with it.” Why wouldn’t he want his creation to be a success? The Rabbi sincerely believes that God really loves this world and the children who inhabit it. As a Christian, I wish the Rabbi will come to understand just how much God loves his world.

“For God so loved the world, that he gave his only begotten Son, that whosoever believeth in him should not perish but have everlasting life,” but then that would be my sermon to the Rabbi. This blog post is his sermon to us.

The original video from Youtube:

Financial Abundance

Reflections on Our Annual Visit From the Taxman

Your Money Milestones by Moshe Milevsky contains an interesting chapter on your relationship with the taxman. He starts with an cruel experiment conducted by the state of Minnesota Department of Revenue. In advance, they warned 2,000 taxpayers that they were part of a group that had been selected at random for an extremely through audit. The Department of Revenue divided the group into high, middle, low income groups as well as groups that had more or less opportunity to under-report their income.

How would you react if you received such a letter?

Not surprisingly, the middle and low income groups reported more income and claimed fewer exemptions than in previous years. However, to the surprise of the revenue agents, the wealthiest group claimed less income and more deductions. They concluded that the wealthy subjects were preparing for a fight. They did not view their tax rate as a given but rather as a negotiation between their lawyers and accountants and the state of Minnesota. As in any such negotiation, the buyer starts out with a lowball offer. The vendor then counters with a ridiculously high proposal. After several hours or days of squabbling, both parties will finally arrive at mutually acceptable terms. The merchant will then sell the same item to the next customer for an entirely different price. In such a world there is no such thing as “true value” only an ever varying discovery of the law of supply and demand in real time.

The wealthy victims are correct in their assumption.

As readers of this blog know, I gave up doing my own taxes back in 1987. I was attempting to report the purchase of our first home to the IRS. I asked several different agents the same questions. I was getting different answers that didn’t seem to track with the IRS publications I had in my hand. I was scared. The CPA showed me a five foot long shelf of 3 ring binders that contained the current tax code. He explained that he received about 50 new pages in the mail every week. He then had to pull out the old, out of date pages and replace them with the new pages. I expect that service is now on line. He also informed me that the tax code doesn’t say what the tax code says it says. The tax code says what court decisions say the tax code says. That changes with every new decision. When the CPA discovered that I had rented the home back to the seller for a couple of months since the construction of his new home was running behind schedule, he smiled like a hungry shark looking at a fat game fish. I had converted rental property to real property, giving me a $3,000 deduction!

I firmly believe unless your life is reasonably simple, you need as CPA in your corner. There are over 85,000 pages in the tax code. How they are going to be interpreted is constantly changing. Unless you are a professional, there is no way you can deal with the IRS by yourself.

The author is puzzled by the number of people who initially overpay their taxes so they are certain to receive a refund. Of course over-withholding gives the Government an interest free loan on your money. Why would you do that? The math says that is a bad idea. However, back in the day when we didn’t have anything like a six month emergency fund, an unexpected tax bill that hit at the wrong time could have been extremely painful. It simply was not worth the risk. Today, I want to be reasonably certain my withholdings and estimated taxes come within plus or minus $1,000 of my final tax bill. Back then a $600 shortfall could have been a disaster. Back then my car wasn’t worth $600.

Savings bonds were another technique I used to “smooth” our inflow and outflow back when we didn’t have much in the way of inflow or outflow. As a supervisor, I had to run the savings bond program and the blood drives on my shift. If you want to ask your troops to participate in such programs, you had better be the first in line to volunteer. I would allow the savings bonds to stack up until I had an unexpected need. After six months you could cash them out receiving principal and some trifling amount of interest. It was just another way to augment what I then called, “working capital.” Today I would call it the emergency fund.

Finally Milevsky explores the taxman and your mutual funds. Generally mutual funds report pretax gains. It turns out that funds that have very high pretax returns may rate much lower than other funds with lower pretax returns after taxes are paid. Mutual funds generate unrealized gains that are not taxed; interest income, short term gains, and dividends that are taxed as regular income; and capital gains that are taxed at a lower rate. I remember, back in 2008 there were people who sold out their mutual funds at a loss who ended up with a net tax bill. If the mutual fund sold out underlying shares at a profit before or during the collapse, the unfortunate investor could end up paying taxes even though he was losing money. It all depends on what gets taxed and what offsetting deductions are currently allowed.

Let me add for free that making an investment for tax reasons is almost always a bad idea. However, not including the impact of taxes in your considerations before making an investment is almost always a bad idea.

Just another one of those apparent paradoxes that are a part of our financial life.

Who are You? Tell the Truth, at Least to Yourself

There are a number of debates on questions of personal financial that share a common root problem. Are financial questions simple math problems with an obvious solution or are they primarily questions of human behavior and psychology?

I try to simultaneously embrace both sides of the argument by asking the question, “Who are you?” If you know the answer to that question, then you will be better able to choose an appropriate path to financial freedom.

Consider: Which is a better debt reduction method, the debt snowball or the debt avalanche. They are both proven, effective methods of debt reduction, but authors strongly disagree on the best method. Both camps recommend racking and stacking your debts. They both recommend that the debtor pay the minimum on all but one of these debts. Then every bit of available spare money should be targeted on eliminating the first debt on the list. When that first debt is paid off then all the money going to that debt should be added to minimum payment being made to the second debt until it is eliminated. It is obvious that such a strategy will gain momentum over time until the student is debt free.

The problem lies in how to rack and stack the debts. The mathematically correct method is the debt avalanche. List the debts from highest interest rate to lowest interest rate. Pay of the highest interest rate first. This could save the debtor considerable amounts of money over time when compared to the debt snowball.

But is that the best path for you?

The debt snowball lists the debts from smallest to largest, ignoring the interest rates. In his considerable experience, Dave Ramsey has determined that quick initial victories motivate his students to persevere in their debt reduction efforts. Those who attempt to use the debt avalanche are more likely to give up. I can’t listen to the Dave Ramsey radio show very often. It is just too depressing. People call Dave who have made a complete hash of their financial life by their phenomenally bad decisions. Still, they just don’t get it. They believe that they are not doing anything wrong. Dave screams at them for a few minutes until he has their attention. Then he offers some appropriate counsel from his “seven baby steps” and a free book or a free pass to one of his courses.

If you are in serious credit card debt, if you don’t understand compound interest, if you have a track record of unwise financial decisions, you should probably use the debt snowball. If you are a young engineer who, understanding the power of compound interest took on a manageable amount of student debt to get a master’s degree and a better job, the debt avalanche could well be the preferable method.

Almost no responsible authors recommend the use of a Home Equity Line of Credit (HELOC) to lower the overall cost of interest on a diverse portfolio of consumer loans. If I can pay off a 15% credit card with 5% money from a HELOC, why shouldn’t I take advantage of the equity in my home to pay off expensive consumer debt?

Again answer the question, “Who are you?”

Credit card debt is typically unconscious or at best semi-conscious debt accumulated by a consistent pattern of irresponsible impulse purchases over an extended period of time. In some instances people have amassed substantial credit card debt attempting to “live on their credit cards” using them to fund the everyday purchases of life. Their income is less than their actual cost of living. This problem will never be solved by debt—of any kind.

Cleaning up consumer debt by placing a lean on your primary residence is almost never a good idea, even though it is the mathematically preferable option. If buying habits and the consistent misuse of consumer credit caused your problems, it is unlikely that you will completely and instantaneously overcome a lifetime of unwise behavior with a consolidation loan. Instead, the data indicates, that carrying a wallet full of credit cards with zero balances; you will resume the habits that led you to the use of a HELOC in the first place.

Although it is totally counterintuitive, it is unlikely that a sudden influx of more money will solve your problems with money. A University of California study indicates that winning the lottery will not increase your happiness. There will be a brief spike in happiness, but then the lottery winner tends to revert to his base psychological condition. A study by the state of Florida indicates that lottery winners are twice as likely to go bankrupt when compared to the general population. I guess people who spend significant amounts of money on lottery tickets are demonstrating that they don’t know much about managing their money.

The anecdotal evidence is even worse than the controlled studies. A Forbes article tells the story of Jack Whittaker who won a $315 Million Powerball Jackpot. Within five years, he was repeatedly robbed, twice arrested for drunk driving, lost his granddaughter under “suspicious circumstances,” and lost almost all of his money. He told reporters, “I wish I’d torn that ticket up.”

First answer the question, “Who are you?” Once you understand yourself, your limitations, the root causes of your behavior, then you can better find your way to financial freedom. This is a never ending, iterative, spiral process. Start where you are. Without guilt, shame, or judgment examine your financial condition. Where do you stand? How did you get there? What can you do to improve your situation? Then day by day take action. Examine the results of your efforts.

Repeat endlessly.

An Indecent Proposal?

I am in the process of reading a book entitled Your Money Milestones by Moshe Arye Milevsky, a professor of finance at York University located in Toronto. I am not sure I will recommend this book, but it is proving to be fun. The author likes to play “what if” games with his readers. One of these games is a different way to calculate your net worth. What if you calculate your future income and add that number to the asset side of your calculation? How might that change the way you view your net worth? In a way it is a reasonable proposal. After all you include the remaining balance on your mortgage on the liability side of your balance sheet. That is not the present. It is the future. Why not view your future earnings in the same way?

Professor Milevsky had a close relationship with a prize pupil. She graduated at the top of her class. She was accepted at one of the finest graduate schools in the United States. However, she discovered that she would need a quick $80,000 she didn’t have in order to attend this school. Milevsky offered the student an alternative to a student loan. He was willing and able to offer the student $50,000 in cash. In exchange the student would promise her professor 10% of her salary during her first ten years of employment following graduation. The professor guessed that her salary would start at approximately $100,000. Over the course of ten years he could reasonably expect to double his investment. This is roughly equal to a 7.2% loan. Initially I found this idea a little creepy. My mind came up with visions of a beautiful young princess chained to a fat alien slug.

But is this an indecent offer?

Actually it is a better offer than a comparable student loan because the lender is sharing risk with the borrower. Current student loans can not be discharged in bankruptcy. Sometimes they can not be discharged with the death of the student. Whether or not the student finds a good job or any job, that loan will be repaid according to the terms of the contract or it will ruin the child’s life for at least the next twenty years. In this case the lender will not be made whole if the student decides to join the Peace Corp or gets married and discovers she wants to be a stay at home mom.

While this idea of treating the cost of an education as an actual investment similar to shares in a corporation rather than as a corporate bond (loan) might work in close relationships. There is an obvious problem. There is no secondary market for such investments. If the professor needs some quick cash to buy his new mistress a Porsche or pay a retainer to an expensive divorce attorney he can’t call up his broker and sell his agreement with the student.

At this point I asked, “Why not?” I owner financed the purchase of my old house in Maryland. Companies try to buy that mortgage from me on a fairly regular basis. There could be a secondary market for this kind of security. If the student thought 10% for 10 years was too high, how about offering them 2% of their future income for their entire working life. Perhaps a percentage point could be translated into ten shares of Judy Jones, Inc. that could be bought or sold on the open market.

Why stop there? I believe one of the root problems of our current student loan crisis is the university. The school has no skin in the game. They get all their money up front. It doesn’t matter if the student graduates or ever finds a job in their field. The school gets all their money. What if the university shared in the risk? They could offer scholarships underwritten by major investment houses. These securities could be bundled in mutual funds and sold on the open market, lowering risk for the investors. Should I buy shares in the University of Alabama Theater Arts Program at a Price Earnings Ratio of 14 that pays a 4.3% dividend or should I buy shares in the Department of Electrical Engineering at the Massachusetts Institute of Technology at a Price Earnings Ratio of 60 that pays a 1.4% dividend?

Hmmm?

It would be interesting to see what kind of scholarship money would be offered under what terms in such a world. If Judy Jones has the potential to become the next Wolf of Wall Street, major business schools might fight over her future value offering her better and better deals until she signed an offer sheet. If Percy Maltree, majoring in English Literature, wants to write a thesis on Suicide and the Young Artist in graduate school, what kind of offers would he get? Would you offer Percy any money? Under what terms? What if Percy dropped out of graduate school for a semester, because he found working for his Philistine thesis advisor—stressful? Could you sell your shares of Percy Maltree, Inc. for ten cents on the dollar?

Oh by the way, the actual Judy Jones turned down Milevsky’s offer. She thought it sounded too much like slavery. What if her professor had made a more, obviously, generous offer?

Then what would happen?

Trust No One!

In the dark of the night, a nameless, obviously powerful man, known only as the well manicured man, gave Fox Mulder some advice, “Trust no one, Mr. Mulder.” When it comes to issues involving your freedom or your money, two deeply intertwined issues of life, trust no one. Don’t even trust what you read in the pages of this blog. Instead, study, evaluate what you have learned, propose an experiment to demonstrate the efficacy of a proposition, run the experiment, and evaluate the results.

It is your life. Decide what financial freedom means to you. If you have not achieved this goal, examine your life. Where do you stand? What is working? What isn’t? Then begin to study the teachings of authors and experts who claim to have the answers to your questions. Evaluate their creditability and their track record. Does what they are saying make sense? There are some highly skilled snake oil salesmen out there, but the gurus who offered become an instant real estate millionaire with no money down seminars in 2006 have been overtaken by events. There are some books like Your Money or Your Life by Joseph Dominguez that have been around for more than 40 years. Get the latest edition. The investment advice in the original is no longer valid in the Bizarro ZIRP (Zero Interest Rate Policy) World created by the governors of the G20 central banks.

Even successful, responsible pundits make mistakes. Paul Samuelson, the father of modern economics, once quipped, “To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.”

Books and lectures are good. A life, well lived, is better. Look around you. Who is doing better than you with what you have? It is not likely that I would be able to learn much of value concerning money management from a cardiologist earning $350,000 a year, especially if he is up to his eyeballs in debt. There are two measures of money income and net worth. It might be more useful for me to find a 60 year old couple with a combined household income of $60,000 who have managed to build a net worth in excess of $720,000. According to the well proven formula proposed by Danko and Stanley in the Millionaire Next Door, this couple would qualify as prodigious accumulators of wealth.

Once you have a grip on basics, like consistently live below your means, save 10% of your take home pay before creating your monthly budget, and pay off your credit cards every month or don’t use them until they are paid off; start an experiment in the laboratory of your own life. Then measure the results.

Unlike questions of faith there is no infallible authoritative Word of God when it comes to financial questions other than the Intelligent Investor by Benjamin Graham. That’s just a personal finance joke but take the time to read that book as well as the latest edition of A Random Walk Down Wall Street by Burton Malkiel. No one can predict the future with 100% accuracy. However there are financial principles that are timeless. You can find many of them in places like Deuteronomy, Proverbs, and Ecclesiastes.

The Golden Rule might be a good foundation for any business relationship or financial transaction.

Luke 10

25And one day an authority on the law stood up to put Jesus to the test. “Teacher,” he asked, “what must I do to receive eternal life?”

26 What is written in the Law?” Jesus replied. “How do you understand it?”

27 He answered, “Love the Lord your God with all your heart and with all your soul. Love him with all your strength and with all your mind. And, Love your neighbor as you love yourself.”

28 “You have answered correctly,” Jesus replied. “Do that, and you will live.”