In the beginner's mind there are many possibilities, in the expert's mind there are few.
Shunryu Suzuki
Beginner's Mind refers to having an attitude of openness, eagerness, and lack of preconceptions when studying a subject, even when studying at an advanced level, just as a beginner in that subject would. (Wikipedia) It is an openness to learning new things. I hope to maintain beginner’s mind as I continue to study and learn about financial issues, not just today but for the rest of my life.
In a New Yorker article entitled “Greater Fools,” the author, James Surowiecki, examines the dreadful condition of basic financial literacy in this country. The Financial Literacy Center has studied this problem for years. Their conclusions are not pretty. “Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.”
The consequences of ignorance and foolishness surround us. High interest rate credit cards, repossessed cars, foreclosed homes, massive unemployment, personal and corporate bankruptcy, the recent subprime crisis, and the slow motion train wreck of the American pension system are all the real consequences of financial ignorance and folly.
Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center observes that at a time when financial decisions are more complex than ever, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.”
Surowiecki observes, “Financial literacy studies have discovered an interesting unexpected result. The less people know, the more overconfident in their abilities they tend to be. In a German study, eighty per cent of those surveyed described themselves as confident in their answers on a questionnaire, yet only forty-two per cent got even half the questions right. This is known as the Dunning-Kruger effect: people who don’t know much tend not to recognize their ignorance, and so fail to seek better information…By contrast, well-informed people are more likely to ask others for help.”
James Chapter 1:5
If any of you lack wisdom, let him ask of God, that giveth to all men liberally, and upbraideth not; and it shall be given him.
This is the key to the Silver Eagle Experiment. Every day the participant asks God for wisdom, studies financial issues that are of concern to them, and every day the participant writes something new they have learned in a notebook. Very simple, very effective. As I continue to talk about financial issues with a wide range of people, I observe that the more sophisticated and successful tend to be more open to new ideas, more likely to study, and seek out expert advice. The people who find themselves in desperate straits seem to be more likely to look to lottery tickets or Government programs for salvation.
I continue to study the financial press every day. I read books, even books that are not in agreement with my personal financial prejudices. I try to maintain beginner’s mind, telling myself, “If you were all that smart you would be rich.”
Go and do likewise
Good article:
http://www.newyorker.com/talk/financial/2010/07/05/100705ta_talk_surowiecki
Friday, August 13, 2010
Sunday, August 8, 2010
Even a Blind Pig
Even a blind pig finds an acorn every now and then.
Without starting any arguments about free will, predestination, or the permissive will of God, let me observe that both skill and luck play a role in most arenas of life, including investment. There are activities, like chess, that are essentially pure skill. There are activities, like buying lottery tickets, which are pure luck. Most things in life fall somewhere between those extremes. In a excellent article entitled “Untangling Skill and Luck How to Think About Outcomes—Past, Present, and Future” by Michael Mauboussin the author uses statistical analysis to determine the importance of luck in a variety of sports, including the sport of investing.
The author observes, “One point is worth making right upfront: the outcomes of any activity that combine skill and luck will exhibit reversion to the mean. More technically, an extreme outcome (good or bad) will be followed by an outcome that has an expected value closer to the mean. Reversion to the mean is a tricky concept, and the relative contributions of skill and luck shed light on its significance for various activities.”
“There’s a simple and elegant test of whether there is skill in an activity: ask whether you can lose on purpose. If you can’t lose on purpose, or if it’s really hard, luck likely dominates that activity. If it’s easy to lose on purpose, skill is more important.”
What this all means is really very simple. Over time, if an individual’s performance heads towards an expected statistical mean, the activity is dominated by luck. Consider, if playing a particular slot machine is dominated by luck, it would be expected that any individual player would, over time, lose money at the payout rate of that particular casino, say 92%. In the games of poker or bridge even the best players can not overcome a run of truly bad cards, but over time a relative handful of the best players are routinely found sitting at the final table. In football, the outcome of a game can turn on something as unpredictable as the bounce taken by the ball after a punt was blown off course by a wind gust. However, over the course of an entire season, the best teams seem to have the best luck.
There is an interesting quirk in how humans tend to analysis outcome that has nothing to do with mathematics, “But academic studies have found that most people don't fully appreciate the role of chance in their investment results, “We have an asymmetric view of good and bad luck," said Shlomo Benartzi, a business professor at the University of California, Los Angeles. "It's well established that people attribute bad luck to randomness, but then attribute good luck to their own skill.” (The One Missing Investing Ingredient: Luck by Sam Mamudi)
So, if the outcome of individual investing over time tends towards some statistical mean, such as the performance of the Standard & Poor’s 500, what then should we then do?
It turns out the basic answer is pretty simple, consistent investment over time plus compound interest and diversification. If an individual consistently invests 10% to 15% of their income in a balanced and diversified mix of financial sectors and various investment vehicles including stocks, bonds, cash, and foreign currency over the course of 30 years, there is a pretty high chance that individual will be much wealthier than a similar individual who bought lottery tickets, or tried to out smart the market by timing the hot sector de jour. If interested, check out Asset Allocation (Part I and II) found in March and April of this year’s blog achieve. That means a LOW COST! balanced fund such as Vanguard Wellington, plus a bit of precious metals, and some inflation protected securities would likely be a good recommendation for the passive investor.
How about those of us who wish to actively manage our investments, at least to some degree? Again let me quote from the outstanding article by Michael Mauboussin, “In 1984, Warren Buffett gave a speech at Columbia Business School called “The Superinvestors of Graham-and-Doddsville.” 79 He referred to the coin toss metaphor and granted that some investors would succeed by luck. But he went on to point out that a number of successful investors came from the same “small intellectual village that could be called Graham-and-Doddsville.” Common to all of the investors was that they searched “for discrepancies between the value of the business and the price of small pieces of that business.”
Although luck certainly plays a role in investment, men like Buffett and Graham are often found sitting at the championship table as the tournament draws to an end. Let me give a simple example of how this works. The Bank of Nova Scotia (BNS) has turned out to be of my better investments. When I found the stock it was selling for a little over $25 a share then I bought a little more at over $27 a share. I reasoned that BNS:
1)Had been thoroughly pounded by the world banking crisis even though Canada was in better shape than most of the world since its economy is largely based on natural resources.
2)Although there was a housing bubble in places like Vancouver (just beginning to pop by the way) real estate was in better shape in Canada than the US.
3)Canadian banks seem to be better regulated than American Banks.
4)At the time I believed the Canadian Dollar was undervalued and I did not have enough invested in foreign currency.
Today BNS sells for $49 a share and pays a very righteous 3.81% dividend. However, since I bought it at a much lower price, that stock is effectively paying me something like a 7% dividend. Now, if I can just be that smart when it comes time to sell that stock?
In a disciplined approach to technical analysis, a subject for another day, an author recommended keeping a journal detailing the rationale for each investment decision, so that over time the individual could discover what worked and what did not work. I did this during a very brief experiment with technical analysis. I decided I was not cut out for that investment strategy. I think that the discipline of recording and analyzing our financial decision making process might also be good advice for the rest of us if we really want to learn something from Buffet and Graham.
Without starting any arguments about free will, predestination, or the permissive will of God, let me observe that both skill and luck play a role in most arenas of life, including investment. There are activities, like chess, that are essentially pure skill. There are activities, like buying lottery tickets, which are pure luck. Most things in life fall somewhere between those extremes. In a excellent article entitled “Untangling Skill and Luck How to Think About Outcomes—Past, Present, and Future” by Michael Mauboussin the author uses statistical analysis to determine the importance of luck in a variety of sports, including the sport of investing.
The author observes, “One point is worth making right upfront: the outcomes of any activity that combine skill and luck will exhibit reversion to the mean. More technically, an extreme outcome (good or bad) will be followed by an outcome that has an expected value closer to the mean. Reversion to the mean is a tricky concept, and the relative contributions of skill and luck shed light on its significance for various activities.”
“There’s a simple and elegant test of whether there is skill in an activity: ask whether you can lose on purpose. If you can’t lose on purpose, or if it’s really hard, luck likely dominates that activity. If it’s easy to lose on purpose, skill is more important.”
What this all means is really very simple. Over time, if an individual’s performance heads towards an expected statistical mean, the activity is dominated by luck. Consider, if playing a particular slot machine is dominated by luck, it would be expected that any individual player would, over time, lose money at the payout rate of that particular casino, say 92%. In the games of poker or bridge even the best players can not overcome a run of truly bad cards, but over time a relative handful of the best players are routinely found sitting at the final table. In football, the outcome of a game can turn on something as unpredictable as the bounce taken by the ball after a punt was blown off course by a wind gust. However, over the course of an entire season, the best teams seem to have the best luck.
There is an interesting quirk in how humans tend to analysis outcome that has nothing to do with mathematics, “But academic studies have found that most people don't fully appreciate the role of chance in their investment results, “We have an asymmetric view of good and bad luck," said Shlomo Benartzi, a business professor at the University of California, Los Angeles. "It's well established that people attribute bad luck to randomness, but then attribute good luck to their own skill.” (The One Missing Investing Ingredient: Luck by Sam Mamudi)
So, if the outcome of individual investing over time tends towards some statistical mean, such as the performance of the Standard & Poor’s 500, what then should we then do?
It turns out the basic answer is pretty simple, consistent investment over time plus compound interest and diversification. If an individual consistently invests 10% to 15% of their income in a balanced and diversified mix of financial sectors and various investment vehicles including stocks, bonds, cash, and foreign currency over the course of 30 years, there is a pretty high chance that individual will be much wealthier than a similar individual who bought lottery tickets, or tried to out smart the market by timing the hot sector de jour. If interested, check out Asset Allocation (Part I and II) found in March and April of this year’s blog achieve. That means a LOW COST! balanced fund such as Vanguard Wellington, plus a bit of precious metals, and some inflation protected securities would likely be a good recommendation for the passive investor.
How about those of us who wish to actively manage our investments, at least to some degree? Again let me quote from the outstanding article by Michael Mauboussin, “In 1984, Warren Buffett gave a speech at Columbia Business School called “The Superinvestors of Graham-and-Doddsville.” 79 He referred to the coin toss metaphor and granted that some investors would succeed by luck. But he went on to point out that a number of successful investors came from the same “small intellectual village that could be called Graham-and-Doddsville.” Common to all of the investors was that they searched “for discrepancies between the value of the business and the price of small pieces of that business.”
Although luck certainly plays a role in investment, men like Buffett and Graham are often found sitting at the championship table as the tournament draws to an end. Let me give a simple example of how this works. The Bank of Nova Scotia (BNS) has turned out to be of my better investments. When I found the stock it was selling for a little over $25 a share then I bought a little more at over $27 a share. I reasoned that BNS:
1)Had been thoroughly pounded by the world banking crisis even though Canada was in better shape than most of the world since its economy is largely based on natural resources.
2)Although there was a housing bubble in places like Vancouver (just beginning to pop by the way) real estate was in better shape in Canada than the US.
3)Canadian banks seem to be better regulated than American Banks.
4)At the time I believed the Canadian Dollar was undervalued and I did not have enough invested in foreign currency.
Today BNS sells for $49 a share and pays a very righteous 3.81% dividend. However, since I bought it at a much lower price, that stock is effectively paying me something like a 7% dividend. Now, if I can just be that smart when it comes time to sell that stock?
In a disciplined approach to technical analysis, a subject for another day, an author recommended keeping a journal detailing the rationale for each investment decision, so that over time the individual could discover what worked and what did not work. I did this during a very brief experiment with technical analysis. I decided I was not cut out for that investment strategy. I think that the discipline of recording and analyzing our financial decision making process might also be good advice for the rest of us if we really want to learn something from Buffet and Graham.
Sunday, August 1, 2010
In a Bet There is a Fool and a Thief
Albert Einstein studied the problem of how to beat the game of Roulette. After spending a good bit of time examining the game, he concluded that it could not be done, and he was quoted as saying, "The only way to beat Roulette is to steal the money when the dealer's not looking."
Saturday, July 31, 2010
Love Marriage and Money (Part IV)
I will end this series on Love Marriage and Money with the basic financial rules for young couples. I haven’t posted it since April 2009. While some of you have seen it before, I expect there are new readers who have not yet seen the entire list. I am changing two words. This is the first change I have made since I generated the list about 5 years ago. In Rule 1 example c, I have changed OK to risky and added the word even. Too many people have borrowed money for college, only to find there are no jobs after graduation. Worse yet, too many folks didn’t even get a diploma, but now they have student debt.
Basics Financial Rules
For Young Couples
1)Stay out of debt unless absolutely necessary (four exceptions)
a)Just about no one can pay cash for a house
b)Medical bills come whether you have money or not
c)Borrowing for school (even with and only with a goal) is risky. Scholarships and work study grants are better.
d)Starting a new business or expanding an existing business. Keep that cash flow positive.
2)Pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last.
3)Don’t use a Credit Card unless you can pay it off every month.
4)When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.
5)Many people recommend a budget. We have never had a budget except the one in my head. That worked pretty well for us but I think a formal budget would be even better.
6)No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.
7)Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.
8)When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate.
9)Start thinking about retirement when you are young. Take advantage of anything offered by your employer. This was not a problem or an issue 50 years ago, but my retirement picture is not all that good. Your retirement picture is positively scary. This is a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.
10)Give something to God without expectation of return. It is good for your heart.
Basics Financial Rules
For Young Couples
1)Stay out of debt unless absolutely necessary (four exceptions)
a)Just about no one can pay cash for a house
b)Medical bills come whether you have money or not
c)Borrowing for school (even with and only with a goal) is risky. Scholarships and work study grants are better.
d)Starting a new business or expanding an existing business. Keep that cash flow positive.
2)Pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last.
3)Don’t use a Credit Card unless you can pay it off every month.
4)When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.
5)Many people recommend a budget. We have never had a budget except the one in my head. That worked pretty well for us but I think a formal budget would be even better.
6)No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.
7)Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.
8)When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate.
9)Start thinking about retirement when you are young. Take advantage of anything offered by your employer. This was not a problem or an issue 50 years ago, but my retirement picture is not all that good. Your retirement picture is positively scary. This is a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.
10)Give something to God without expectation of return. It is good for your heart.
Saturday, July 24, 2010
Love Marriage and Money (Part III)
As a properly functioning marriage evolves, so will its division of labor. There are certain tasks that must be accomplished. Someone will see to it that they get done. Often these tasks fall into the traditional roles of husband and wife. Men tend to accept responsibility for cutting down trees and keeping the cars on the road. Women often do the grocery shopping and the laundry. There are a certain number of financial tasks that must be done if a marriage is going to survive. Once the couple has decided what needs to be done (a statement of work if you will), the budget that will accomplish these goals, and agreement has been reached on some sort of schedule, there is no particular reason why individual tasks should be done by husband or wife. They just need to get done.
In my parents’ house, my mother took care of all the day to day expenditures. She did most of the shopping, for everything. She made sure the checkbook was balanced, that the bills were paid, that my father and I were properly dressed, that the house was presentable, and that food was on the table at appropriate times. My father went to work and brought home the check. On most issues my mother took it from there. Before I appeared on the scene my mother was an accountant. Therefore it was logical that she continued in that role in her marriage. Even now she handles all the taxes. When my father worked as an independent consultant and rented out farm property in another state, taking care of the taxes required a major effort.
If my mother functioned as the CFO of their household, my father was clearly the CEO. My mother could not deal with investment decisions. They just made her too nervous. She could not stand knowing that she had shares of stock that went up and down in value. My father made all the investment decisions. He bought and sold stock, in his youth he built and sold a couple of houses, rehabbed a rental property, and rented out a farm that was given to him by his parents. He also directed the search for and retained the final word on all major purchases such as cars and houses. Of course my mother had input into these decisions, but clearly they were my father’s decisions.
One article I read some time ago broke up financially functioning marriages into several different categories. What I have described above, the author termed a division of labor. More commonly, marriages have a driver and a rider. Either husband of wife takes on almost all of the responsibility for overseeing the family’s financial plan. If one partner is particularly talented or knowledgeable, he or she might take over most of the planning as well as the execution of the family’s finances. This is OK if and only if both partners know what is going on and are comfortable with the arrangement. If you are the driver, make sure your rider knows where you are taking the family. Every month or so tell your partner what you are doing. It might not require more than the statement, “We paid all the bills this month and put $500 in savings,” or “We are in trouble. I wasn’t able to pay off the credit card this month. We have to cut expenses or figure out some way to bring in some more money.” When making a major decision, such as buying a car, or investing in a stock, make sure they understand what you are doing and are onboard with that decision.
According to the author of the article (I can’t find it) a division of labor seems to work better than the driver/rider arrangement. Families that describe themselves as having a functional division of labor tend to be wealthier than other groups. I guess that makes sense. It gives everyone more time to do what they do best. However you choose to work out the details of the financial component of your marriage, make sure you are both in agreement with what is happening and that you examine the results, frequently, to determine if it is working. For example, if you are saving for a down payment to put on a new home within five years, make sure you are staying on track to reach that goal. How you do it is your business. After all it is your marriage.
In my parents’ house, my mother took care of all the day to day expenditures. She did most of the shopping, for everything. She made sure the checkbook was balanced, that the bills were paid, that my father and I were properly dressed, that the house was presentable, and that food was on the table at appropriate times. My father went to work and brought home the check. On most issues my mother took it from there. Before I appeared on the scene my mother was an accountant. Therefore it was logical that she continued in that role in her marriage. Even now she handles all the taxes. When my father worked as an independent consultant and rented out farm property in another state, taking care of the taxes required a major effort.
If my mother functioned as the CFO of their household, my father was clearly the CEO. My mother could not deal with investment decisions. They just made her too nervous. She could not stand knowing that she had shares of stock that went up and down in value. My father made all the investment decisions. He bought and sold stock, in his youth he built and sold a couple of houses, rehabbed a rental property, and rented out a farm that was given to him by his parents. He also directed the search for and retained the final word on all major purchases such as cars and houses. Of course my mother had input into these decisions, but clearly they were my father’s decisions.
One article I read some time ago broke up financially functioning marriages into several different categories. What I have described above, the author termed a division of labor. More commonly, marriages have a driver and a rider. Either husband of wife takes on almost all of the responsibility for overseeing the family’s financial plan. If one partner is particularly talented or knowledgeable, he or she might take over most of the planning as well as the execution of the family’s finances. This is OK if and only if both partners know what is going on and are comfortable with the arrangement. If you are the driver, make sure your rider knows where you are taking the family. Every month or so tell your partner what you are doing. It might not require more than the statement, “We paid all the bills this month and put $500 in savings,” or “We are in trouble. I wasn’t able to pay off the credit card this month. We have to cut expenses or figure out some way to bring in some more money.” When making a major decision, such as buying a car, or investing in a stock, make sure they understand what you are doing and are onboard with that decision.
According to the author of the article (I can’t find it) a division of labor seems to work better than the driver/rider arrangement. Families that describe themselves as having a functional division of labor tend to be wealthier than other groups. I guess that makes sense. It gives everyone more time to do what they do best. However you choose to work out the details of the financial component of your marriage, make sure you are both in agreement with what is happening and that you examine the results, frequently, to determine if it is working. For example, if you are saving for a down payment to put on a new home within five years, make sure you are staying on track to reach that goal. How you do it is your business. After all it is your marriage.
Love Marriage and Money (Part II)
Well, you went ahead and you did it anyway. You are married. Now what? I am going to suggest something that is so far out of kilter with the zeitgeist, I expect some young readers will dismiss it out of hand. When you said, “I do,” two became one. There is no longer my money and your money. There is only our money. There are no longer your debts and my debts. There are only our debts. Merge your financial house as quickly and completely as possible. For the sake of this discussion, I expect two paychecks would be the norm for a typical young couple. The rules, however, would be no different if there was only one pay check.
When the paychecks arrive, they go into a joint account. At this point a negotiated budget would be very helpful in eliminating potential arguments. Here an Excel spreadsheet listing budgeted amounts for rent, groceries, utilities, cell phones, gasoline, car payments, and student loans would be helpful. It is not necessary to have a computer or know how to use Excel to budget your income. A piece of paper and a pencil works just fine. When all the expenses for the month are covered, the balance is available for saving for long term goals, such as a down payment on a house or discretionary expenses, such as restaurants and concert tickets. Approach this process with the idea in mind that money can only be spent once and avoid debt like the plague.
If you or your spouse spends more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them. If you are not in debt, if you have a rainy day fund, and you are systematically saving for large long term goals, you can, as a couple, decide to create a blue checkbook and a pink checkbook for individual discretionary purchases. Again, if you wish to complicate your life with two additional bank accounts, make that decision together, as a couple.
It is likely husband and wife will bring radically different ideas of financial responsibility to a marriage. My aunt once told me that members of our family squeeze a nickel so hard that the buffalo bellows. That is an understatement. My wife, within reason, was given everything she ever wanted. Needless to say, this led to some heated exchanges during the early years of our marriage. Somehow, I intuitively understood that one joint account and agreement on most purchases would be the best path for our young marriage. A couple of times during those early years the ride got pretty bumpy, but we made it. In practice, this method worked out as follows.
I say, “Gee, I really need a combat handgun. It only costs $600.”
My wife would respond, “Yes dear. I really think you need a new combat handgun and I need a new pair of shoes and a little marble topped table to display the small shiny items I bought last year at the crafts fair.”
Then I would think, “Do I really need to spend $1,200 on a handgun?” I still don’t have a combat handgun, but she does have a little marble topped table in her perfect room.
Generally, using this method works pretty well. Together we saved for things we both really wanted like college diplomas and nice stereo equipment. We both love music. It is a big part of our lives. Really, I can only think of one instance when our consensus consistently broke down. My extended family decided that spending money on Christmas presents beyond the nuclear family was an idiotic waste of money and ended the practice. In my wife’s family Christmas is a big deal. People who barely know each other are expected to exchange gifts. Every Christmas for years this led to at least one major blow up. Finally, we learned how far we could push each other without violating the cease fire agreement. Both of us were unhappy with the outcome, but we at least learned how to avoid the big argument, at least most of the time.
We continued to use the one checkbook, one bank account, one credit card method for more than the first 25 years of our marriage. Then my wife received an inheritance from her great aunt. She wanted that money in a separate pink check book. After some negotiations concerning what expenditures would no longer come out of the joint checking account, such as certain presents, I agreed. Now we have two accounts, our joint account and one containing the remains of two inheritances that my wife uses for discretionary purchases. I do not have a similar checkbook. That is OK.
I am offering a principle to avoid a great number of arguments and a great deal of pain. How you work out the details in your marriage is your business. Financial issues are sometimes listed as the number one cause of divorce. Hiding debt and expenses from one another is a sure fire recipe for disaster. If you want more statistics and horror stories here are two good recent articles.
http://finance.yahoo.com/family-home/article/110075/keeping-finances-separate-can-be-costly
http://finance.yahoo.com/family-home/article/102540/Hiding_Debts_From_Your_Spouse_Can_Be_Recipe_for_Divorce
When the paychecks arrive, they go into a joint account. At this point a negotiated budget would be very helpful in eliminating potential arguments. Here an Excel spreadsheet listing budgeted amounts for rent, groceries, utilities, cell phones, gasoline, car payments, and student loans would be helpful. It is not necessary to have a computer or know how to use Excel to budget your income. A piece of paper and a pencil works just fine. When all the expenses for the month are covered, the balance is available for saving for long term goals, such as a down payment on a house or discretionary expenses, such as restaurants and concert tickets. Approach this process with the idea in mind that money can only be spent once and avoid debt like the plague.
If you or your spouse spends more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them. If you are not in debt, if you have a rainy day fund, and you are systematically saving for large long term goals, you can, as a couple, decide to create a blue checkbook and a pink checkbook for individual discretionary purchases. Again, if you wish to complicate your life with two additional bank accounts, make that decision together, as a couple.
It is likely husband and wife will bring radically different ideas of financial responsibility to a marriage. My aunt once told me that members of our family squeeze a nickel so hard that the buffalo bellows. That is an understatement. My wife, within reason, was given everything she ever wanted. Needless to say, this led to some heated exchanges during the early years of our marriage. Somehow, I intuitively understood that one joint account and agreement on most purchases would be the best path for our young marriage. A couple of times during those early years the ride got pretty bumpy, but we made it. In practice, this method worked out as follows.
I say, “Gee, I really need a combat handgun. It only costs $600.”
My wife would respond, “Yes dear. I really think you need a new combat handgun and I need a new pair of shoes and a little marble topped table to display the small shiny items I bought last year at the crafts fair.”
Then I would think, “Do I really need to spend $1,200 on a handgun?” I still don’t have a combat handgun, but she does have a little marble topped table in her perfect room.
Generally, using this method works pretty well. Together we saved for things we both really wanted like college diplomas and nice stereo equipment. We both love music. It is a big part of our lives. Really, I can only think of one instance when our consensus consistently broke down. My extended family decided that spending money on Christmas presents beyond the nuclear family was an idiotic waste of money and ended the practice. In my wife’s family Christmas is a big deal. People who barely know each other are expected to exchange gifts. Every Christmas for years this led to at least one major blow up. Finally, we learned how far we could push each other without violating the cease fire agreement. Both of us were unhappy with the outcome, but we at least learned how to avoid the big argument, at least most of the time.
We continued to use the one checkbook, one bank account, one credit card method for more than the first 25 years of our marriage. Then my wife received an inheritance from her great aunt. She wanted that money in a separate pink check book. After some negotiations concerning what expenditures would no longer come out of the joint checking account, such as certain presents, I agreed. Now we have two accounts, our joint account and one containing the remains of two inheritances that my wife uses for discretionary purchases. I do not have a similar checkbook. That is OK.
I am offering a principle to avoid a great number of arguments and a great deal of pain. How you work out the details in your marriage is your business. Financial issues are sometimes listed as the number one cause of divorce. Hiding debt and expenses from one another is a sure fire recipe for disaster. If you want more statistics and horror stories here are two good recent articles.
http://finance.yahoo.com/family-home/article/110075/keeping-finances-separate-can-be-costly
http://finance.yahoo.com/family-home/article/102540/Hiding_Debts_From_Your_Spouse_Can_Be_Recipe_for_Divorce
Friday, July 23, 2010
Love Marriage and Money (Part I)
This isn’t very romantic stuff, but it is important stuff. Who you marry is likely to be the single most important, irreversible decision you will ever make. Not surprisingly then, this decision will also be the most important financial decision you will ever make in your life. Don’t kid yourself, you and your intended are forming a financial partnership, for better or worse, for richer or poorer, till death do you part. In most instances getting married (and staying married) is a wise financial decision.
If you don’t believe me, listen to Solomon.
Ecclesiastes Chapter 4
[9] Two are better than one; because they have a good reward for their labour.
[10] For if they fall, the one will lift up his fellow: but woe to him that is alone when he falleth; for he hath not another to help him up.
[11] Again, if two lie together, then they have heat: but how can one be warm alone?
[12] And if one prevail against him, two shall withstand him; and a threefold cord is not quickly broken.
I have seen these sorts of figures in many sources. I particularly recommend The Millionaire Next Door, but these particular numbers come from a MSN column written by Liz Weston. “The median net worth of married-couple households in the latest Census Bureau wealth study, conducted in 2002, was $101,975. For single men, median wealth was $23,700. For single women, $20,217.” When all other factors are held constant (income and education), just the fact that a couple is married led to an increase in net wealth of 4% per year when compared to single folks. Likewise, it has been repeatedly shown that divorce destroys wealth at a frightening rate. Again from Liz Weston, “Wealth declines typically started four years before a divorce was final, and the breakup ultimately reduced the typical person's net worth by 77% of that of the average single person.”
Before you tie the knot, count the cost. I know that is not what your hormones are telling you, but take some time to discuss these issues before your wedding day. Learn to communicate about money before you get married. It has been recommended that both bride and groom order a credit report complete with their score, then sit down at the table and examine each other’s financial history. In this conversation, bride and groom should also list all their debts including car payments, credit card debt, and student loans. I hate to be the bearer of bad news, but in most states you are not only marrying each other, but you are marrying each other’s debt.
In the story of a divorce told in an article by Lisa Scherzer, the wife discovers that prior to their divorce her husband had been racking up significant amounts of debt. Her attorney, Sheera Gefen-Greenberg noted, “Even though he's primarily liable for those debts, the wife, in a divorce, may still have to foot the bill at the end of the day.” The author goes on to observe, “In New York, any debt accrued during the marriage is legally considered marital debt subject to distribution between the parties in a divorce.”
I believe this is more important today than it was when I got married over 35 years ago. I like to tell people my wife married me for my money. I owned a 67 Chevrolet. It might have been worth $450. I also had $900 in the bank. I did not have any debts, no credit history, and I did not even know that such a thing as a credit score existed. Today, the average age for a first marriage is pushing 28. That is long enough to develop a credit history. Six years for a college graduate or ten years for a high school graduate is sufficient time to develop some bad habits and rack up some significant debt.
In marriage, as in the beginning of any business venture, the partners need to determine their assets, liabilities, and goals. Discuss where you want to be in 10, 20, or even 40 years. Do you want to start a family? That will cost you about $250,000 per child if you wish to raise them as traditional middle class Americans. Do you want to retire sometime before you die? Better start soon. Laura Rowley even suggests discussing hypothetical questions, like what would you like to do with an unexpected $10,000 inheritance?
When you say, “I do,” you are making a decision that has serious financial implications. If you study Consumer Reports total cost of ownership and frequency of maintenance data, if you read test reports from Road and Track magazine, if you research fair price numbers before buying a new car, why would you do any less before making the most important decision of your life?
If you don’t believe me, listen to Solomon.
Ecclesiastes Chapter 4
[9] Two are better than one; because they have a good reward for their labour.
[10] For if they fall, the one will lift up his fellow: but woe to him that is alone when he falleth; for he hath not another to help him up.
[11] Again, if two lie together, then they have heat: but how can one be warm alone?
[12] And if one prevail against him, two shall withstand him; and a threefold cord is not quickly broken.
I have seen these sorts of figures in many sources. I particularly recommend The Millionaire Next Door, but these particular numbers come from a MSN column written by Liz Weston. “The median net worth of married-couple households in the latest Census Bureau wealth study, conducted in 2002, was $101,975. For single men, median wealth was $23,700. For single women, $20,217.” When all other factors are held constant (income and education), just the fact that a couple is married led to an increase in net wealth of 4% per year when compared to single folks. Likewise, it has been repeatedly shown that divorce destroys wealth at a frightening rate. Again from Liz Weston, “Wealth declines typically started four years before a divorce was final, and the breakup ultimately reduced the typical person's net worth by 77% of that of the average single person.”
Before you tie the knot, count the cost. I know that is not what your hormones are telling you, but take some time to discuss these issues before your wedding day. Learn to communicate about money before you get married. It has been recommended that both bride and groom order a credit report complete with their score, then sit down at the table and examine each other’s financial history. In this conversation, bride and groom should also list all their debts including car payments, credit card debt, and student loans. I hate to be the bearer of bad news, but in most states you are not only marrying each other, but you are marrying each other’s debt.
In the story of a divorce told in an article by Lisa Scherzer, the wife discovers that prior to their divorce her husband had been racking up significant amounts of debt. Her attorney, Sheera Gefen-Greenberg noted, “Even though he's primarily liable for those debts, the wife, in a divorce, may still have to foot the bill at the end of the day.” The author goes on to observe, “In New York, any debt accrued during the marriage is legally considered marital debt subject to distribution between the parties in a divorce.”
I believe this is more important today than it was when I got married over 35 years ago. I like to tell people my wife married me for my money. I owned a 67 Chevrolet. It might have been worth $450. I also had $900 in the bank. I did not have any debts, no credit history, and I did not even know that such a thing as a credit score existed. Today, the average age for a first marriage is pushing 28. That is long enough to develop a credit history. Six years for a college graduate or ten years for a high school graduate is sufficient time to develop some bad habits and rack up some significant debt.
In marriage, as in the beginning of any business venture, the partners need to determine their assets, liabilities, and goals. Discuss where you want to be in 10, 20, or even 40 years. Do you want to start a family? That will cost you about $250,000 per child if you wish to raise them as traditional middle class Americans. Do you want to retire sometime before you die? Better start soon. Laura Rowley even suggests discussing hypothetical questions, like what would you like to do with an unexpected $10,000 inheritance?
When you say, “I do,” you are making a decision that has serious financial implications. If you study Consumer Reports total cost of ownership and frequency of maintenance data, if you read test reports from Road and Track magazine, if you research fair price numbers before buying a new car, why would you do any less before making the most important decision of your life?
Subscribe to:
Posts (Atom)