Thursday, April 30, 2015

When Does 22 Equal 62?

So when is a 22 year old man simultaneously a 62 year old man?

Answer: When he is a rookie in the NFL. Three years to retirement.

In a recent article in USA Today entitled “Future NFL Rookies Should Heed Hard Lessons About Dollars and Sense,” Jarrett Bell explores the dangers and pitfalls facing the young men about to be selected in the NFL draft. Phillip Buchanon, formerly a first round draft pick, who enjoyed a ten year career as a cornerback in the NFL has written a book titled New Money: Staying Rich about his experiences with money as a professional athlete.

His first lesson: “Don’t spend money that you don’t have.” Buchanon, like many other young athletes found himself a million dollars in debt before he signed his first contract. Unscrupulous rascals offer a form of the payday loan to college students on the cusp of a NFL career—at 20% interest rates.

Then there are the relatives, the friends from the “hood,” and the hangers-on that want to become part of a posse. Buchanon’s mother demanded $1,000,000 from her son as payback for his upbringing!

Patrick Kerney, a former NFL defensive end who has taught players the basics of handling money for many years recommends, “Boring, dull, and ugly,” low cost index funds.

There are simply too many horror stories of NFL players being victimized by sophisticated “investment advisors.” I remember that Tony Dorsett ended up in serious financial trouble as a result of thinking he could outsmart the men who inspired the J.R. Ewing character on television when playing games with oil futures. That was legal! Too many times these young men are the victims of outright criminal fraud. The article notes that the financial habits of NFL players are improving. However Kerney laments, “Now the big thing is they are buying annuities, where the insurance companies take and do with their money what they should be doing. That’s not as bad as throwing money at a venture capital situation, but there is a huge opportunity that is lost.” Annuities are some of the most overpriced financial vehicles out there. I haven’t yet seen any currently offered retail annuity I could recommend.

Mike Tyson managed to loose over $300 Million to unscrupulous promoters, investment advisors, friends, attorneys, and ex-wives. A man who once picked up a $173,706 gold chain lined with 80 carats in diamonds is now bankrupt. Tyson has reportedly bought 110 cars during his lifetime. I have read that he has lost, just lost, twenty Rolls Royce automobiles. He simply doesn’t know what happened to them.

While most of us will never have the opportunity to squander $300 Million, let’s hope we can learn that managing our money is a simple yet difficult discipline. As long as our income exceeds our expenses it’s OK.

I don’t know who said it but it is true, “If your outgo exceeds your income, you upkeep will be your downfall.”

Monday, April 27, 2015

Protecting Your Parents’ Money

In those days Hezekiah became sick and was at the point of death. And Isaiah the prophet the son of Amoz came to him and said to him, “Thus says the LORD, ‘Set your house in order, for you shall die; you shall not recover.”
2nd Kings 20:1

This morning I needed to get a letter of instruction notarized at my bank. The notary public was a little rattled. She had just spent an hour with a child dealing with the sudden death of a parent. Although he had the now worthless Power of Attorney and the key to the safety deposit box, his name was not on the safety deposit box access list. Unraveling this conundrum involved the bank’s attorneys and teleconferences with “back office” experts.

This shouldn’t have happened.

I have recently finished Protecting Your Parents’ Money by Jeff D. Opdyke. Because my parents did not read this book or have what the author terms, “the talk” with their son ten years ago when it could have helped, I found dealing with this material emotionally difficult.

If you or one of your parents are pushing 70, if you have suffered a stroke, if you have early signs of Alzheimer’s, Parkinson’s, or any indication of the possible onset of a neurodegenerative disease that might lead to dementia; if you have a heart condition or any hint that you might die soon or in a sudden untimely manner, you need to have “the talk.” Parents you need to sit down with your children and prepare for the day you will no longer be able to care for yourself or for the day of your death.

Your children need to have access to all your documents. These documents need to be up to date and to accurately reflect your current wishes. These include but are not limited to wills, trusts, living wills, durable power of attorney, power of attorney for health care, advance directives, insurance policies, and HIPAA authorizations.

Your children need to understand how much money you possess, where it is located, and how and why you are managing it in a particular manner. This would include bank accounts, credit cards, stock and bond portfolios, businesses, and property.

This book covers situations involving well healed families as well as dealing with situations where mom and dad are no longer able to make ends meet. This can be a little distracting as Opdyke jumps from the dangers of purchasing a $250,000 annuity to provide a lifetime income stream to budgeting for your parents in instances where it is unlikely that their money will outlive them.

The author discusses housing. This topic includes selling the old home place to free up cash, especially if mom can no longer cut the grass of fix the leaky old roof. The reverse mortgage is discussed at length, along with senior communities, and the possibility of mom moving in with her sister, Aunt Margaret. All these options have their own particular pitfalls and advantages.

Finally, the book introduces the reader to the wacky world of healthcare. Medicare, Medicaid, health insurance, medigap polices, as well as private pay options are all covered in a basic introductory manner, giving the reader just enough information to (hopefully) ask the right questions. One thing the author didn’t mention in this chapter just drives me crazy. The elderly receive both statements and medical bills that both look like they need to paid. Sometimes they end up double paying for a procedure that was covered by insurance or Medicare. It is difficult and time consuming to recover that money. Often the bill has not been submitted to insurance or submitted improperly. If insurance denies payment that is not the end of the story. My mother in law’s last ambulance ride was denied. The coding did not indicate that it was an emergency. At the time three separate conditions could have ended her life at any moment. Less than a week later she was dead. My wife spent hours on the phone straightening out that mess.

Throughout the book the author explores the dangers that face seniors in our society including children who rob them blind, “friends” or home health aides who help themselves to your parents’ possessions and credit cards, or financial planners who sell inappropriate investment products, making themselves rich at the expense of confused frightened old ladies. In the face of these real dangers, combined with the paranoia that is often associated with dementia, and a parent’s understandable desire to remain an independent adult the author suggests various conversation starters that will allow children to explore these very sensitive issues without frightening or angering mom or dad.

This book is worth reading if you or your parent might be on the edge of approaching that final chapter of their life. Check it out or better yet buy a copy. It will help you ask the right questions and hopefully find the right answers.

Saturday, April 25, 2015


A month ago I listened to a video by Rabbi Manis Friedman. Since then I have been mulling over a point the Rabbi made while answering a question. The host of this meeting was a real estate agent. He questioned making cold calls, an activity that pushed him outside his comfort zone. The Rabbi observed if your job didn’t push you out of your comfort zone, you probably wouldn’t amount to much of anything. However, he noted that you shouldn’t push against your capacity. That was a recipe for failure. The Rabbi remarked that telling the difference between comfort and capacity was a difficult task that required wise counsel from those who know you best.

Yesterday, I listened to a Joel Osteen sermon on freedom from unhealthy competition. He taught that you, as an individual, are only required by God to be the best you possible.

You are not running a race against anyone but yourself.

Galatians 6:4
Pay careful attention to your own work, for then you will get satisfaction of a job well done, and you won’t need to compare yourself to anyone else.

This morning I read a short blog article by Seth Godin titled Terrior. I was unfamiliar with the word so I looked it up in Wikipedia. Terrior is a French word used to describe the particular circumstances that result in the unique excellence of a particular product.

“Terroir is the set of special characteristics that the geography, geology and climate of a certain place, interacting with plant genetics, express in agricultural products such as wine, coffee, tobacco, chocolate, chili peppers, hops, agave (for making Tequila and Mezcal), tomatoes, heritage wheat, maple syrup, tea and sometimes Marijuana. The concept has also crossed to other Protected Appellations of Origin (PDOs a form of geographical indication), products such as cheeses.”

Seth encouraged his readers to so integrate the concept of Terrior into their life and work that anyone could immediately identify even the smallest and most insignificant product they create as something that belongs uniquely to that reader.

So there you have it. Comfort Vs Capacity. If your farm has the soil and climate to grow the grapes that make a fine dry white wine, grow the kind of grapes that will produce the best possible wine your farm can produce. If those conditions are not good for red wines, don’t try to produce grapes that are inappropriate for your farm’s capacity.

The farmer is responsible for “running the race” to be the best possible producer of the particular kind of wine his land can produce. He has a hard job tending the vines, deciding when to harvest his crop, on the type of yeast he will use in the fermentation process, and how to age his product to make certain it is the best it can possibly be. The kind of oak the farmer uses to age the wine will have an effect on the outcome of the process. Just like you, the barrels of your life will have an effect on how you age into the unique product that is you. Your friends, your church, your employer will all contribute to the outcome of your life.

I think the Rabbi is correct. Determining the difference between comfort and capacity is a difficult job. We all come front loaded with cultural and family baggage that makes it very difficult to discover who we actually are and why God put us on this planet. Living a life while simultaneously discovering how to live a life is a complex iterative design process that ideally should spiral upwards into a direction of self actualization. All too often we become envious of another person’s talent, beauty, or opportunities rather than focusing on the effort and wisdom required to produce a good outcome in our own life.

It all matters.
The soil; the climate; we have been given.
The decisions we make. The seeds we choose to plant. When to plant; how we choose to tend our garden; when to gather in the Harvest.
The level of effort we add daily to the gifts we have received from God.
The containers that age and enhance the product that will hopefully, someday, become everything God created us to be.

Friday, April 24, 2015

Breakfast at the Karma Cafe

This morning I was waiting in the drive through line at McDonald’s to get my breakfast sandwich, cost $3.78. When I went to pay, the girl at the window told me the woman in the van in front of me paid for my sandwich. I tried to pay for the order from the car behind me. It cost $9.78. I only had $7.00 in my billfold. So the guy behind me got a $7.00 discount on his order.

I wonder where that little chain of blessings will end.

At the time I was listening to the last half of an old Joel Osteen sermon on my car radio, #469 Freedom from Competition, if you are interested. What Joel was teaching is called Mudita or Sympathetic Joy by the Buddhists. They consider it one of the four sublime or heavenly abodes. When you are experiencing pleasure as you witness the success and happiness of another, you are in heaven. The opposite of Mudita is envy or schadenfreude, taking pleasure in the misfortunes of others. When we experience envy, one of the seven deadly sins, or take pleasure in the sufferings of others it must be a foretaste of Hell.

The sages consider Mudita the most difficult of the four immeasurables to practice. Maybe the sages are wrong. Through a simple random act of generosity, the woman in front of me in line was experiencing sympathetic joy and giving others to opportunity to join her in a heavenly place.

Jesus paid the price so that I, a man condemned to death, might live and experience joy in heavenly places.

What are the implications of this model for His followers?

Wednesday, April 22, 2015

It's All About the Numbers

I have a problem with my weight. This is a result of decisions I have made and the way I have lived my life. I have spent way too many hours parked in front of a computer screen and too little time engaged in cardiovascular activities. I am doing better. I walk almost every day. Individual decisions made daily are changing the way I live my life. I have lost somewhere between 35 and 40 pounds, but I have plateaued. I am nowhere near my goal. I am not doing so well on the left hand side of the weight equation.

Food In = Fat Stored + Calories Spent (Exercise)

My diet still contains too many carbohydrates, too much animal fat, not to mention the beer that I drink before I go to sleep. I haven’t made very many changes in this part of the equation. If I want to reach my goal, I am going to need to make better Food In decisions over an extended period of time.

The scale doesn’t care about how hard I try, my genetic predispositions, or any personal problems I might encounter along the way. I get on the scale. It tells me how much I weigh. If I want that number to drop, I have to do one of two things. Eat less or exercise more.

Financial problems are no different. Whether they are your personal problems or the problems of a multinational corporation earning billions in profits every year, the money equation doesn’t care about your personal interests, good intentions, bad luck, lack of opportunity, or any unfairness you may encounter in your life. It just reports the cumulative results of your decisions over time.

Money In = Money Stored + Money Spent

People who have not worked in laboratories, believe that Science give precise repeatable results. That isn’t quite true. How an experiment is constructed as well as the limits of the instrumentation affect the accuracy of the results. When dealing with complex systems in the real world, it is difficult to account for every conceivable variable. The results of a particular experiment can fluctuate. However, as you run and refine the experiment over time, a pretty clear picture of reality will begin to appear. In a paper the result of a certain experiment might be reported as, 100 pounds drag force, plus or minus 5 pounds with 95% confidence. In other words, you can expect drag forces between 95 pounds and 105 pounds 95% of the time.

Your life is a unique experiment. The decisions you make; the exact conditions of your environment; the improbable events we term good luck or bad luck all have their effects on your results. However, just as a knowledgeable personal trainer looking at my diet, age, and exercise program can make some reasonable guesses as to the outcome of my battle with the bulge, it is possible to make some general predictions about a group of people who live their lives making similar decisions.

Consider: A fifty five year old midlevel (average) engineer can expect to earn somewhere around $125,000 a year; maybe a little more in private industry; maybe a little less in the Government. Stanley and Danko would predict this particular average engineer would have a total net worth of $687,000. Those are just average numbers. There is a range of results. I expect someone somewhere could provide us with an in depth statistical analysis of engineering salaries.

Consider: A fifty year old general manager of a McDonald’s restaurant. Glassdoor reports that she would be earning somewhere between $30,630 and $63,000 per year. Average earnings for a McDonald’s manager are $45,945. Let’s assume, given her age she is somewhere near the top of the range, $60,000. Danko and Stanley would predict her net worth as being close to $300,000.

If your life is not producing the results that you desire, it is up to you change your decision making process. Make better decisions. Then over time, I can state with a high degree of confidence that you will change your life.

Find a field of interest where there will be a demand for your services. You don’t need to be a nuclear qualified welder or a engineer with a MS and a PE license to find a job. I know several plumbers. Two of them lived in houses that cost considerably more than the house this mechanical engineer inhabited during those years. If you consistently work uncompensated overtime in a salaried position, it is likely that your supervisor will notice. There is no guarantee, but if he is just (from personal experience I can tell you not all of them are) you will be rewarded for your faithfulness. For most entry level positions, just showing up on time on a regular basis will put you somewhere near the front of the pack. Add a good attitude, a solid work ethic, and personal honesty to the equation. It is unlikely that you will remain at an entry level for very long.

Once you have a goal, seek expert advice, a role model, or better yet a mentor to take those first steps. I started learning about investments from more experienced coworkers, and a conservative value investment newsletter. I have never stopped trying to find writers and experts who know more than I know. Somewhere, somebody is doing what you want to do and succeeding. Seek them out. Read their book. Ask them questions.

It is not my job to tell you how to live your life or how to attack the money equation. You can choose to work harder or smarter. You can choose to learn about how to manage Money Stored. There are men and women who have no job other than managing their money. You can even learn how to live a better life on less money.

It is the purpose of this blog to help you explore pathways to financial freedom, whatever that might mean to you. Spend some time seeking peace through prayer or meditation. Then analyze your problem in a calm dispassionate manner, understanding that you are not your problem. Decide on a goal that is meaningful and believable--to you. Then without excuse, explanation, or retelling your personal story propose something that you can do to move closer to that goal.

Then take action.

James 1:5
If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you.

Monday, April 20, 2015

We Get Paid What We Are Worth (At least most of the time)

The man who says I can and the man who says I can’t are both usually right.
(attributed to Henry Ford)

This year Kobe Bryant will earn a base salary of $23.5 Million. Last year his base salary plus various incentives and bonuses topped out at $30.5 Million. In addition he picked up $31 Million from endorsement contracts. That’s a total of $62 Million in one year for playing basketball. I could be wrong but I doubt that Kobe averages 30 hours a week practicing and playing basketball. How much is that an hour?

Why does Kobe Bryant earn $62 Million a year? Because the marketplace believes he is worth it. When he signed that contract he was the best basketball player in the world. The owner of the Los Angles Lakers, his general manager, his head coach, and all those companies intent on cashing in on his name believed that Kobe’s presence on the court would generate that kind of income for the Lakers organization or increased sales of somebody's basketball shoes. Age and injuries are slowing Kobe down. It is unlikely he will get that kind of money from his next contract—if there is a next contract.

By comparison Howard Schultz the CEO of Starbucks earns a paltry $21.8 Million a year. He was the son of a poor truck driver, who went to work for Starbucks when it was a small unknown company. When the management of Starbucks wouldn’t listen to Schultz’s vision for the future of their tiny company, he left to start his own coffee bar. He didn’t have anywhere near the $400,000 he needed to open his business, but a rich doctor impressed with his work ethic and ability to take a calculated risk bankrolled his first shop. Two years later Howard Schultz bought out Starbucks for a measly $3.8 Million. His drive and energy has built Starbucks into a world respected brand with over 21,000 stores in more than 65 different countries. Men like Howard Schultz don’t work 40 hour weeks. I expect 60 hours or more a week would be typical.

If I was a shareholder I would vote to give him a raise. I think Howard Schultz is underpaid.

Currently baristas earn between $7.63 and $10.63 per hour. Although a particular barista might be a fine person, he is basically a human robot performing a number of simple repetitive tasks. The marketplace, the law of supply and demand, determines his economic value to the marketplace. Walmart and Starbucks have both recently announced blanket increases in salaries for entry level employee. Walmart was honest. They said they could no longer retain the kind of employees they want given their current wage scale. I couldn’t find a reason for the Starbucks announcement, but I bet their thinking is similar.

In addition Howard Schultz is now offering his employees free college tuition in any major they choose, not just those that might benefit the Starbucks organization. Think about it. He has a sweetheart deal with the online branch of Arizona State University, a well respected school. Given the cost of the Georgia Tech online Master’s in computer science that might cost Starbucks something like $3,500 per employee per year. Businesses using low skill labor typically have high employee turnover. Schultz will get to keep intelligent, highly motivated employees for a minimum of four years at an additional cost of maybe, a $1.75 an hour.

Oh, by the way, Starbucks employees give their employer a four star rating on the Glassdoor website. That is a pretty decent endorsement of a low wage employer.

Freedom guarantees inequality.

Meta-narratives are important. Once I was talking with a first generation Asian co-op at our lab about his high school experience. He casually, thoughtlessly, dropped a bombshell. In passing, he observed, “Of course I do well in math. I’m Asian. We all do well in math.” Besides working as a co-op at a Government laboratory to juice his college applications, he also ran a car detailing business on the side. He was very proud of his business.

If your meta-narrative includes statements like I can’t, or it doesn’t matter if I try because…, or the little guy doesn’t have a chance, or I deserve special treatment because I have special needs, I can predict the outcome of your financial life with a reasonable level of accuracy.

I don’t want to ever be found guilty of telling people what they can’t do. I don’t want to tell them they need special treatment because they can’t make it on their own. I want you to find a way to turn your skill set and opportunities into financial freedom, whatever that means to you. No matter your current condition you can do better; you can do more with life.

There are no guarantees. Life isn’t always fair. I know people who have seriously screwed up financial lives because of misfortunes beyond their control. However, I can make the statement that certain types of behaviors will produce certain kinds of results within a given range with a reasonable degree of confidence.

Take some time. Look at your own personal meta-narrative. As Doctor Phil says, “How’s that working out for you?” If you believe that life is basically unfair; that there is no hope for the little guy; that there is no use in trying; it pretty likely you will never fulfill your destiny. Instead, look for opportunities; commit to out working the completion; and never, ever give up.

The Chinese call America the golden mountain. When they come to this country they say they have come here to climb the golden mountain. You have that same opportunity. Make the decision. Make it today. Go out there and climb that golden mountain.

Sunday, April 19, 2015

When I was 35, It Was a Very Good Year

When young (less than thirty something) the main concern is controlling debt. First student debt, then “household formation” debt generated by filling that starter home with stuff and the carport with minivans and SUVs. Start saving for retirement at 22 (just like the books all teach). Don’t really worry all that much about your first investments. Keep it simple. Buy low cost stock index funds. Keep 10% or 15% in bonds. You’ll be OK. Even at this young age, estate planning is a consideration. If there are minor children in the picture you will need a lot of term life insurance. Numbers like $250,000 per child or 10 times annual salary have been suggested.

Don’t forget you need a will, if only to determine custody of your children in the case of death.

During your middle years (say 35 to 55) the stakes get higher and your time to retirement begins to loom closer. Hopefully, at least 15% or more of your income is going into tax favored investments (401-K or Roth IRA). Hopefully, something over that 15% is going into your taxable investment account. It is time to begin to schedule numerical milestones for your long term goals. Sometime during your forties, you might want to consider disability insurance. If you work in a dangerous occupation, like logging, you might want to consider disability insurance at an earlier age. Studies indicate that we reach our decision making peak around age 55, a time when the product of mental acuity and experience maxes out. If you are going to take a few calculated risks, this is the time. You have the money. You still have your earning power to recover from mistakes. If you have been doing the right things you will have the judgment and experience.

As you pass into your sixties, it is time to decide when to pull the plug and retire. When people ask me, “Should I retire?”

I answer, “Are you still having fun?” If the answer is yes, keep working. If no, then ask, “Are you able to retire?”

Usually, the answer is, “No.” Excessive debt and kids still in college are the usual reasons. Then we develop the start of a simple outline that will get my friend or coworker from point A to point B.

As you pass from 55 to 65 the stakes get really big. These are your peak earning years. It is time to start considering tax planning as an integral part of every significant financial decision. How you choose to structure your income sources, when you begin taking Social Security will have significant tax implications. During these years, assume that you will grow old. Both your body and mind are likely to decline to a point that you can no longer make decisions or care for yourself. Therefore, it is time to investigate trusts to manage and protect your money if you are no longer up to the task. It is time to bring your adult children into your decision making process. It isn’t yet time to let them make your decisions for you, but it is time that they understand what you have, where it is located, and why you are doing what you are doing. The day might come when they will need that information at their fingertips.

At 60 look into long term care insurance. A current rule of thumb suggests that if your net worth is under $500,000 you can’t afford it. If your net worth is over $1,000,000 you don’t need it. Self insure. If your net worth is somewhere between those two numbers, long term care insurance might be a good idea.

Let’s assume you retire at 65, the year Medicare kicks in. The first few years of retirement are the most dangerous years from an investment point of view. Be careful. Be more careful than most of the literature recommends. A stock market crash in those early years of retirement could have disastrous consequence that could haunt you for the rest of your life as well as destroy your plans for your children and grandchildren. You no longer have a job. Even if you can get your old job back, an unlikely scenario, you don’t have the years necessary to recover. If you have planned well, you can begin to take greater (not great) risks as it becomes apparent that it is not likely that you will need some of that money during what remains of your lifetime.

A very good option is gifting children and grandchildren while you are still alive. You can give up to $14,000 per person per year to anybody without any tax consequences for you or for them. Think of the good you could do while you were still alive? Every year, you could fully fund a Roth IRA for a child and her spouse. Where could you put your money that would be better protected from the taxman than in a child’s Roth IRA? You could fund 529 college savings plans for your grandchildren.

A good man leaves an inheritance to his children’s children.

Have a very good year. Enjoy every season of life in its turn. My prayer is that you use your money wisely and well; that you are blessed with good health, long life, and beautiful happy children who will make you proud.

Then with old blue eyes, you can sing:

But now the days are short,
I'm in the autumn of my years
And I think of my life as vintage wine
From fine old kegs
From the brim to the dregs
It poured sweet and clear
It was a very good year

Wednesday, April 15, 2015

The Living Wage Controversy

"In public policy, a living wage is the minimum income necessary for a worker to meet their needs that are considered to be basic." (Wikipedia)

"A living wage is defined as the wage that can meet the basic needs to maintain a safe, decent standard of living within the community." (Wikipedia)

From time to time, I find myself entangled in discussions concerning the concept of a “living wage.” It sounds nice, but what does it actually mean? If someone actually believes they are entitled to whatever constitutes a living wage in their mind, no matter their skill set, knowledge, experience, or level of effort, I am afraid they are going to be sorely disappointed, angry employees or more likely, unemployed.

First of all who gets to decide on this living wage? The economists at the Massachusetts Institute of Technology (MIT) have created a living wage calculator. Do they have the right numbers or might someone disagree with their opinion? Obviously, the needs of a single mom living in San Francisco would differ radically from a college dropout living in his parents’ basement in Travelers Rest, SC.

According to the scholars at MIT, a single mom in San Francisco with one child would require $26.03 per hour. As a point of comparison, minimum wage in San Francisco is $11.05 per hour.

Compare this with the calculated living wage for the boy in the basement, $8.70 per hour. Contrast this to the current $7.25 per hour minimum wage in Travelers Rest, SC.

What if they both lived in Travelers Rest, SC? According to MIT, the single mom would require a hourly wage of $16.77. Let’s see? Two perfectly equal workers standing next to each other, performing exactly the same task; one earns 93% more than the other because she has a child? How do you think that would play out in the real world?

What if the employer can’t pay a living wage for a particular job? If the employer can’t earn a profit from an employee’s labor, that employee will not have a job for very long. At least in private industry, there is an iron law at work here. Government programs spending other people’s money can do anything they want, until, as Maggie Thatcher observed, they run out of other people’s money.

The math is pretty basic. Take any wage you want, for the sake of this example, let’s say $17.00 per hour.

$17.00 per hour X 40 hours per week X 52 weeks per year = $35,360 gross annual salary.

However, that is not what this employee costs the employer. Overhead, depending on the nature of the business and location typically adds somewhere between 50% and 100% to that number. Let’s split the difference and add 75%.

$35,360 X 1.75 = $61,880

This particular employee must generate at least $61,880 in value, usually measured by the bottom line, to her employer’s business or her job will simply not exist. These numbers are pretty realistic. I remember an example presented by the owner of a small electronics firm in New Jersey. His median employee happened to be a secretary who earned something a little over $37,000 a year. Her cost to the company was about $73,000 per year.

Ultimately, the cost of business (including taxes) are not paid by the corporation, they are paid by the consumer. If an employer can’t pass the cost of a living wage on to his customers, at some point that company will go out of business. Actually, it is worse than that. If the employer can’t get a competitive rate of return on his investment from hiring an employee, he will find other uses for that money. Increasingly, other uses would include robots, programmable machine tools, and applications of artificial intelligence in the “cloud.” In the back offices of America, middle level professionals are being replaced by a combination of low skill data entry clerks and sophisticated accounting systems.

Please understand that I believe the creation of high wage jobs for the average high school graduate with no particular skills is the number one problem facing our country. Over the last 40 years the American worker has been hit with the confluence of three titanic forces, globalization, automation, and regulation. During the 1950s the United States had the only industrial infrastructure that wasn’t bombed into rubble during World War II. By the mid 60s German and Japanese products were flowing into our country. Today, the Gross Domestic Product of China has surpassed that of the United States. If low cost Chinese labor is being replaced with robots, what is the future of the American worker? Finally, the cost of compliance for a multitude of Government regulations has driven entire industries out of business in this country.

Companies that have the ability to pay high wages to average employees who have no particular economic value or skill set must generate enormous amounts of wealth creating their goods and services, more than enough to earn an acceptable Return on Investment. The question then becomes, “How can we best encourage companies to bring those jobs back to our country or create stable jobs that pay a living wage in this new era?”

Don’t wait for this situation to improve. Take action to improve your own life and the lives of those around you. Think like an employer. Ask yourself, what am I worth? If you want to earn $40,000 a year, understand that you are costing your employer somewhere between $60,000 a year and $80,000. Would you pay yourself $75,000 a year for what ever it is that you do? If you want that job you will need to provide at least that much value to your boss or he will go out of business.

The best way to increase your value to your organization is to increase your own personal worth. How can you make yourself a more valuable human being? What skills can you add to your toolbox that will make you a more desirable employee? What are the problems and questions that keep your boss awake at night? How can you answer those questions? How can you solve those problems?

Because one skill is no longer enough, dedicate yourself to becoming a lifetime learner. The world is constantly changing. There is no guarantee that what you are doing today will be of value to anyone tomorrow. Look for opportunities to study new subjects or keep your current specialties current. I think this is particularly true in the scientific and medical communities, but even more humble trades like the automobile mechanic have become technical professions requiring advanced computer diagnostic tools as well as specific certifications for particular types or brands of vehicles.

Do not believe that another degree or certification in another computer language will guarantee your future any more than that first degree that didn’t get you a job. Once you have that new skill, find a way to practice that new skill, even if you need to start your own business.

It all comes down to the paradox of success. In order to advance your own agenda, you must forget about yourself and your agenda. Instead, you must focus on the agenda of your employer or your customers who are ultimately, your employer. Then you will earn much more than a living wage, because you’ll be worth it.

Tuesday, April 14, 2015

The New Three Legged Stool and Your Social Security

I have just finished reading The New Three-Legged Stool subtitled A Tax Efficient Approach to Retirement Planning by Rick Rodgers. Since it was published in 2009, I wouldn’t assume that all the information in this book is up to date. Tax regulations change frequently. With that caveat, it is a good introduction to the complex world of tax planning for retirement and for estate planning. My immediate take away? Before implementing any of his strategies, I plan on speaking to an attorney and a CPA.

The old three legged stool consisted of a company or government pension, Social Security, and personal savings. It was assumed that roughly ½ of those personal savings would be realized when you traded your big house in an expensive location for a small house in a cheap location. Two of those three legs are gone. The defined benefit pension plan is almost extinct. The real estate crash of 2006-2009 wiped out a considerable percentage of the middle class net worth in this country. Folks who white-knuckled it through the stock market crash of 2008-2009 have seen their portfolios get well. Those who sold out at the bottom to preserve, “What was left,” have never recovered from that disaster.

Today, the author contends that the new three legged stool consists of tax deferred savings, such as the 401-K, tax free savings, that would be the Roth IRA, and taxable investment accounts. How you choose to juggle and use these assets in retirement can have serious tax implications. You are pretty safe spending money in your taxable investment accounts (if it has already been taxed). Consider using the principal from a maturing CD to fund the Mediterranean cruise rather than cashing out an IRA. When and how you take money out of that 401-K can get tricky. Be careful. Roth IRAs are the greatest thing since sliced raisin bread for the young, but they were too little too late to do me much good. The problem with the Roth is that it grows tax free forever, no matter what happens. Who wants to spend that money? Ever?

The author also includes tax strategies for maximizing your Social Security. The bad news is that if you have been diligent, responsible, and lucky you will be punished by the Government for your efforts. For most of the program’s existence Social Security benefits were not taxed. We were told Social Security is not a tax. This is your money that the Government is putting aside for your retirement. It will be returned to you with interest when you are old and feeble. Hah. Today up to 85% of your Social Security check will be taxed as regular income. I am not sure the gyrations required to beat down that 85% number are really worth the savings. Still it is something I should investigate in greater detail before pulling the trigger on Social Security. Right now I am planning on delaying that until age 66, my full retirement age.

I am worried about Social Security. While there is no immediate danger, after years of surplus generated by the Baby Boomers, the annual cost of Social Security will exceed income starting in 2017. If we don’t make any changes, Social Security will unable to pay full benefits starting in 2041. Social Security needed to find another $4.7 Trillion (2007 dollars) in general revenues, immediately cut benefits (starting in 2007) by 13%, or increase the Social Security take by 1.95% (starting in 2007). None of this has happened.

Today it is 2015.

Something is going to have to give; most likely some combination of the following.

1) Federal Insurance Contribution Act (FICA) taxes will need to go up from the current 12.4%. This will make America less competitive. Chinese labor doesn’t pay FICA taxes. Also FICA is a nasty regressive tax. The working poor, who don’t pay any income tax, still pay FICA starting with their first penny.

2) Payments to grandma will need to go down. I think the politician who suggests that grandma eat more dog food will not be reelected to any office. Social Security payments need to go up, not down. Too many people are completely dependent on this inadequate resource.

3) 100% of all Social Security will become taxable as regular income or simply stolen from workers after a lifetime of contributions by means testing.

4) The current $118,500 limit on Social Security taxes will be raised.

I don’t think the Baby Boom is going to get what has been promised, but I don’t think Social Security is going to be gutted anytime soon. There are just too many of us—AND WE VOTE. However, if you are younger than 50, you might want to limit your retirement planning to the new three legged stool. Make a special effort to grab any matching money offered by your employer for your 401-K and please fund your Roth IRA. I believe that Social Security will survive, even for the Millennials, but there are going to be some changes made to what has been described as the Ponzi scheme that works. If you are reading this blog, the chances are you will not like them.

Sunday, April 12, 2015

What Should You Study?

Recently I listened to a speech by Jay Abraham, a well known business consultant who charges corporations $50,000 a day to increase their sales and most importantly, their bottom line. He also serves as a personal coach to celebrity personal coaches such as Tony Robbins and Jack Canfield. The essence of his message is the paradox of success. In order to advance your own agenda, you must forget about yourself and your agenda. Instead, you must focus on the agenda of your employer or your customers who are ultimately, your employer.

When I lived in Montgomery County, MD my pastors and church leaders constantly complained and moaned about the large number of the unchurched people in our area.

“How bad was it?” the audience asks. Enquiring minds want to know.

It was pretty bad. Probably somewhere over 90% of my neighbors stayed at home or did something with their families other than attend Sunday morning church services. I have seen numbers that indicate only around half of that demographically important jurisdiction even identifies themselves as a member of any religious tradition. Montgomery County is home to many highly educated Government employees and contractors, as well powerful, wealthy, culturally and politically influential men. Today, over 1/3 of the residents of this county were born in another country. In many ways Montgomery County could be viewed as a harbinger of our nation’s cultural future. If true, it doesn’t appear that traditional American Christianity has any place in that future.

Shortly after I arrived in that area almost 30 years ago, I formulated this problem into a question for church leadership, “What can you offer the people of Montgomery County that is so valuable TO THEM that they would be willing to sacrifice half a day of their precious free time to get it?”

People in the Washington area typically work 50 hours or more a week. Two income families are the norm. Their one way commute times run around the forty minute mark. Throw in a trip or two to the grocery store and the kids’ soccer practice we are adding close to another working day spent on the road every week. Sunday morning with a cup of coffee, the family, and the Washington Post are precious moments of peace in a weekly whirlwind of activity. If our family decides to attend church, getting the kids fed and dressed, loading everybody into the car, driving halfway across town, sitting through an hour and a half service, chatting briefly with church friends before driving home and changing clothes can easily add half a day of stress to already stressed lives.

Churches, like their members, tend to be absorbed in their own agenda. Like you and me they believe that what they want is the most important question facing the planet. Humans are like that. We Christians cloak our desires in God talk, “It isn’t about me. No, it is all about the sovereignty of God,” which conveniently calls for the faithful to pray, pay, and obey the church leadership that stands watch over their souls.

If churches in cosmopolitan areas like Washington, D.C wish to increase their body count and the size of the weekly offering, I would suggest another approach. Instead of telling sinners what they need to do in order to get right with a God whom they do not believe exists, find ways to add value to their lives and solve their problems.

There was a time, not all that long ago, when church membership was a necessary component in a socially respectable life. That day is over.

A man I greatly respect while meditating on the future of the church in America and the role of the pastor observed, “His people are as much his study as Bible and theology.”

Amen to that. What should a shepherd study other than his sheep?

A businessman looking to grow his business or an individual looking for a job is no different. Complaining about the wages and benefits offered by a potential future employer or ungrateful customers who don’t understand your business is unlikely to get you to where you want to go. Instead make it a point to stand in your employer’s or your customers’ shoes. View the world through their eyes. What do they want? How can you add value to their lives? How can you solve their problems? When you are able to answer those questions, then you will achieve your ambitions.

I believe that when the day comes that you find a way to become a greater blessing to your employer, your customers, your investors, and hopefully, some day, your employees, you will no longer need to concern yourself with your own agenda.

Your cup will overflow.

Shedding a Little Light on the Path to Darkness

Once upon a time a wise king ruled a tiny mountain country, really no bigger than a postage stamp. He was surrounded by more influential, sometimes dangerously aggressive powers. Beyond the borders of those states, lived dozens of different tribes and nations that were constantly at war with one another. Just like you and I, this king did not live in a safe world. Even though the wise king didn’t possess great armies or wealth, four times every year the servants of many of the world’s great rulers brought him gifts of money. Year by year the servants of these mighty empires gave the king a report prepared by their lord detailing what had transpired in their kingdom in the previous year.

As a young man the king started small. He entered into his first agreement with a nearby nation he knew well and trusted. His father sent him to a fine school in that country. There he met and became friends with young men and women from that foreign nation. As his web of treaties and agreements grew, he avoided kings and nations he knew could not be trusted to keep their word. When the king reached the end of his experience and knowledge, he sent his agents all over the known world to spy out opportunities to increase the wealth and influence of his tiny nation.

I read an article encouraging the reader to fear the growing power of multinational corporations more than the growing power of the Federal Government. My first thought was, “Well last time I checked had a couple of experimental drones, but so far as I know, none of them are equipped with Hellfire missiles and the last time I checked their CEO, Jeff Bezos didn’t have a history of having his enemies assassinated.”

I didn’t immediately respond to the article, but I asked myself, “Why don’t I fear corporations?” I certainly respect them. I understand that they do not have my best interests in their hearts, but I don’t fear them. The answer is found in my little parable that illustrates the path of the value investor. Start small with business you know and trust. One of our first investments was in Johnson & Johnson, a classic widows and orphans stock. My wife was familiar with their products and their admirable reputation for integrity from her job at the hospital. Look at lists of dividend aristocrats, companies that have increased their dividends at least 25 years in a row for early investment possibilities. Continue, step by small step, into more distant opportunities as your portfolio, knowledge, and confidence continues to grow.

Today, a number of corporations, some of them quite large and dangerous, send me money at least four times a year. They also report their activities to me every year. Still, I frequently remind myself that I live in a dangerous world.

Yoda would remind us there is another more general lesson to be learned from that article. Politicians, corporations, and religious leaders want to excite your passions. They don’t want you to think things through for yourself. Any time someone is encouraging you to fear, hate, or become angry with other human beings made, just like you, in the image of God be suspicious. Be very suspicious. They want your money and your freedom. It is up to you to become wise and avoid their traps.

I have decided what should cause me concern is the marriage of political power, money, and military power. When those three forces combine, as in the example of the First Triumvirate consisting of Crassus, Pompey the Great, and Julius Caesar, that alliance will have the potential to basically end the freedom of our republic, just as it did in Roman times.

Thursday, April 9, 2015

A Ray of Sunshine

Student debt is a problem that didn’t exist fifteen years ago. Today something on the order of $1.3 Trillion in student loans is choking the life out of the Millennial generation. These young people are graduating (or not) with significant amounts of debt that can not be discharged--even in bankruptcy.

The presence of near limitless amounts of Government backed loans has allowed institutions of higher education to increase the cost of a degree at 5 times the rate of inflation. Today, the cost of an education no longer has any connection with the value of an education. I received my first degree from Furman University, a small high quality school that mainly offers degrees in liberal arts, social sciences, and the fine arts. Today the cost of a Furman diploma is pushing the $250,000 mark. Most of the degrees granted by that institution simply aren’t worth that kind of money. A degree in English Literature is relatively worthless in today’s economy. If you just insist on getting an English degree, one can be obtained down the road from the University of South Carolina for about $60,000 for an instate commuting student. An additional advantage might be if you are good enough to be accepted at Furman you are probably good enough to get at least a partial scholarship from the University of South Carolina.

Is a Furman degree likely to generate four times more income than a comparable degree from USC? Unfortunately, I learned that outside the southeast nobody has ever heard of Furman. You say, “Furman.”

They ask, “Fordham?”

There is a ray of sunshine piercing the darkness. Recently Georgia Tech made the unprecedented offer of an online Master’s Degree in Computer Science for $7,000! Georgia Tech is one of the finest engineering schools in the country. Their graduates are particularly prized by private industry as the education they received is viewed as more immediately useful than the education offered at elite universities such as the Massachusetts Institute of Technology.

At first I was suspicious that online courses would not offer the quality of a classroom learning environment. However, a young woman I know quite well completed her undergraduate degree through online courses offered by Regent University. The education she received from Regent was as good or better than anything I have seen on campus. I thought some of her senior classes were closer to graduate level work than what I did as a liberal arts undergraduate.

Starbucks has just announced a program that takes it one step further. Basically, they are offering their employees the opportunity to obtain a four year degree in any major at zero cost from Arizona State University’s online program. This is unprecedented! Even good employers only offer tuition reimbursement for courses or degrees that will directly increase your value to the company. I can just imagine what one of my grouchy old school engineering managers might have to say if I requested tuition reimbursement for a course in Buddhist Psychology.

How can they do this? Think about it. Would Starbucks get a better deal buying coffee by the ton from a single supplier or would they get the better deal if each of their stores bought coffee by the pound from local grocers? By combining the power of Kevin Kelly’s law that predicts over time the cost of digital content will asymptotically approach zero with the best bid from a single supplier, they have dropped the cost they will pay for education to the point they can offer their employees this amazing benefit.

I don’t know the numbers, but let’s say Starbucks can get one of their employees a degree in English Literature for $15,000. That is a reasonable guess since Georgia Tech is offering what is usually a two year degree for $7,000. All of a sudden the relationship between cost and value becomes much closer to reality. The cost to the student is nothing but their time.

I am truly excited. If this kind of program takes off, we are looking at a revolution in the cost and availability of higher education, not only in this country but all over the planet. They don’t call it the World Wide Web for nothing. The availability of a low cost, high value alternative to the traditional classroom education will force providers like my beloved alma mater, Furman University, to return the cost of an education from cloud cuckoo land to a price that a middle class family can actually afford, just like when I attended that school over forty years ago.

Here are the links if you want to learn the details.

Georgia Tech offers $7,000 Master’s in Computer Science

Starbucks Shells out $250 Million on Free College for Every Employee

Wednesday, April 8, 2015

Learning as a Lifestyle

I am not a self starter. Unlike some people, I need direction before I become confident enough to start doing anything on my own. As a child, I was never encouraged to take any risks at all. As a result, I never learned how to take a calculated risk, an important predictor of success in life. These two weaknesses are most likely interrelated.

However, I think these weaknesses caused me to develop what I believe to be one of my personal strengths, the ability and desire to learn from everybody. When I started working at Renfrew Bleachery I had the good sense to learn as much as possible from my fellow employees. Even though I had a liberal arts degree and not all of them had high school diplomas, I instinctively understood they knew more about their jobs than I did about mine.

Once I remember talking to a grizzled old timer who ran the bleach range. The company brought in a consultant because they were having problems with the machine. A bleach range is perhaps 120 feet long, 15 feet wide, and 12 feet high. It is a monstrously complex assortment of rollers, chemical vats, mysterious sealed boxes, and heating elements. The old timer told me the consultant walked around looking in control boxes and under the machinery for a good two hours before asking him where a particular control unit was located. Our employee immediately took him to the correct location on the machine. The consultant was shocked. He asked, “How did you know where to find it?”

The old man replied with obvious satisfaction, “After 21 years, I learned a thing or two about this machine.”

Later in my career I was hired as a department supervisor at a saw chain factory. When introduced to a man five or more years younger than I was at the time who was to become one of my employees, I asked him how to operate the machinery found in his area. When he told me, I took notes just like when I was attending classes in college. He was absolutely shocked. He couldn’t believe someone from management would be paying that kind of attention to his words. Too bad for management; maybe if they had spent more time listening to good employees the factory would still be there today.

Although I have my prejudices and preferences when it comes to investing and money management, I make it a point of studying material from a number of viewpoints, including those of authors with whom I generally disagree.

This is critically important in understanding any political issue. There are simply no news sources that are anything close to objective. All the networks and publishers put their own political spin on the stories they choose to cover. Sometimes what they choose to cover or not cover reveals much about their point of view. However, if you study the same question or story from four or five different viewpoints it is possible to gain enough information to come to some kind of reasonable conclusion.

I believe that if we possess information that might benefit another, we are obligated to offer them the opportunity to learn what we know. When I wanted to learn how to run the machine used to heat treat steel saw chain components, I asked the man I respected as our best machine operator. He said he wouldn’t tell me because what he knew guaranteed his job security. I could have caused him problems. After all he was an employee and I was, by that time, a shift superintendent. I let it slide. I learned from other employees and supervisors. It turned out he was not the only person who knew how to operate that machine. In the end, his knowledge didn’t give him the job security he desired.

When I was in engineering school, I did a lot of volunteer tutoring and some paid tutoring. Even though helping others raised the curve, threatening my quest for a high GPA, I discovered that if I understood a subject well enough to teach others how to solve a particular type of problem, my A was guaranteed. A willingness to help others had its side benefits. One of my “students” gave me a key to the engineering building. He got the key in a trade with a graduate student who was in desperate need of a tank of gas for his car. This key allowed my access to the computer network after hours and during weekends. It was easy to find an unused terminal in a locked and empty building; no sitting on the floor waiting for the next available terminal for me. I passed that key on to a deserving underclassman when I graduated.

I have tried to consistently follow this path in life even when it appeared that generosity did not produce the desired career results. Consciously taking the high road in a particular situation where I was basically stabbed in the back late in my career allowed me a greater opportunity and motivation to learn about the art of investing. Even though I ended up in a slot where I didn’t have the ability to achieve at a high level of excellence, I was able to retire earlier than if I had received that promotion and not learned what I have learned about money.

Because I was retired when the family emergency hit, I had the time I needed to work on those complex and emotionally difficult problems. If I had not been retired, I would have been forced to apply for extended leave without pay.

Things have a way of working out.

Even when things don’t work out according to our understanding, I believe that if we have acted in accordance with our faith, our understanding of what is good and just, God will know. I am thinking of the 21 Libyan martyrs murdered for they faith by ISIS in Syria. They weren’t clergy or missionaries. They were just men trying to feed their families by working at jobs no Syrian wanted. Now they are in the very presence of God, their names are written in the Lamb’s Book of Life along with the other saints, martyrs, and heroes of our faith. Their reward in eternity will be great.