I finally got one! An iPad. As I write this, I am sitting in a Starbucks in San Francisco. This town should be called iTown. The woman sitting next to me on my right is typing into her Macbook Pro while listening to music on her iPad. The woman on my immediate left is using a Windows-based PC. On her lap is an iPhone.

What inspired this blog post? A Washington Post article of a few weeks ago called The Republicans Prepare Their Agenda of Less. In the article, a member of the Tea Party spoke of the need to address the looming issues of Social Security and Medicare and have an “adult conversation” with the American People.

Several months ago, I wrote a series of articles about why Medicare sucks. I am still getting comments about those articles. I wrote about the budget in those articles and that Medicare, in all its many parts, and Social Security represent represent tens of trillions of unmet obligations in the Federal budget. I also said that any attempts to address long term deficits would have to take into account those two programs and restructure them significantly if they are to remain solvent and if the American people are to continue to be able to afford them.

There are three things to remember about what I wrote:
1) Social Security and Medicare are paid for through payroll taxes. Every working individual, from the very old to the very young both rich and poor, pays into these programs. This is something that appeals to my sense of social justice, that is that everyone should pay for programs that everyone benefits from.
2) for the past 30 years the government has used receipts in excess of pay outs to fund general government operations. The excess receipts have been traded for government bonds. the interest payments alone are crippling. When people, ie, officials, talk about a trust fund, they are talking about money held in trust, except there isn’t money held in trust. There is money held in bonds, bonds that we don’t have the ability to repay, not at current income levels.
3) all discussions about Social Security are discussions about current income or current receipts, as example by the year 2037 to 2041 we will only take in enough income to pay out 75% of obligations. On the bright side this means that the government will stop misappropriating the people’s retirement funds to fund general government operations on the down side we will all wake up to the reality that that is what has been going on and there will likely be a significant public outcry.

The history of Social Security is outline well at http://www.ssa.gov/history It is worth a read fascinating, really. These documents hold the key to why we are in such trouble. Truthfully, everyone is to blame for the Social Security and Medicare mess. When the money was flowing and it wasn’t being borrowed against, it was too big a pile of cash not to spend. By 1950 cost of living adjustments and disability payments and survivor benefits were added. Health care was originally envisioned to be part of Social Security. It was not part of the original law, but along came Medicare in 1965. Politicians voted for the expansion of Social Security and Medicare at the urging of their constituents and no one thought about the long term consequences. Well, those consequences are here.

It is important to understand what Social Security was meant to do. It was originally called Social Insurance and it was intended to provide economic security against abject poverty. It was intended to keep people out of Alms or Poor Houses. The Great Depression was the third great economic dislocation this country experienced in about a century. It brought with it 25% unemployment and extreme poverty for many, savings were decimated and pensions were rare. Alms houses were funded by state governments to care for people in poverty, but state implementation of these programs was spotty, there was a significant stigma associated with accepting assistance from Alms houses, there was means testing and people were reluctant to receive help from what amounted to state-run welfare programs. When Social Security was enacted, it was not a popular program. The benefits, set at roughly 30 dollars, the amount intended to keep someone from becoming destitute, did not change for the first decade or so of the program. People felt that they could and would get more benefits from the state-run welfare programs. Social Security provided direct payments to states to bolster those programs. In the beginning, Social Security was simply another tax people paid that they perceived little benefit from. In order to increase the popularity of the program, payments began to increase and the retirement age was lowered from 65 in 1935 to 62 in 1950. Thirty dollars in 1935 has the same purchasing power of 470 dollars today, yet a recipient retiring at age 62 who has enough credits to qualify for full benefits will receive 1750 dollars, an amount more than 3 times greater than what Social Security was ever intended to pay our per individual. The machinations that took place in the 1950’s were successful; for a program that was intended to keep its eldest citizens from becoming destitute has become one of our largest entitlements. It is a program that has not kept pace with the realities of demography. In 1935 the life expectancy was 59 years today it is roughly 78. In 1935 people were only expected to spend a handful of years collecting Social Security. Today a recipient, retiring at age 62, may collect Social Security for 20 years or more.  The truth about the payroll tax is that it  has become a stealth income tax because income in excess of payments has been rolled into the general budget. Given that almost half of our citizenry pays no income taxes, yet everyone pays payroll tax, this is a form of tax justice I can live with.

What is the adult conversation our government needs to have with us? First we have to understand that it won’t be a conversation. This is what our government will have to say:
1) The party’s over
2) There is no trust fund and the trillions of dollars in IOUs the government has promised to pay Social Security will have to be forgiven.  What is a trust fund?  You can find the definition here.  I am sure you will agree when you read this that what is going on with Social Security does not meet the definition of “trust fund.” When I first wrote this, I went back to the Social Security site and went to the program solvency link FAQ’s.  When I read the FAQ section I was genuinely shocked.  See the solvency issue is really about what to do with stretching the current income being paid into Social Security.  No one wants to have the program redeem its bonds in large quantity to meet obligations because no one knows what would happen if Federal Bonds were redeemed.  Our government is already printing money at historic numbers to prop up the economy, how would it fare if investors showed up to say redeem 1 trillion dollars in bonds to fund Social Security obligations?  Where would the money come from to pay those bonds?  Right now the money that comes in is sufficient to allow the US government to roll over its debt as it relates to Social Security.
3) The retirement age will have to be between 70 and 72
4) Benefits will have to be reduced

I wonder if Americans are ready?

Please comment.

Okay so like I’m middle aged.  I think middle aged people tend to conduct their affairs in pretty much the same way.  Middle aged people tend to reflect on their lives and decide ultimately that people, more than things, are important.  I know that is true for me and I think is the reason why the fastest growing demographic on Facebook are people in middle age.  We are trying to recover those connections that we lost on the road to getting somewhere.  Middle aged people have acquired all the things they want or have adjusted their wants not to want so much and start to clear the clutter from their lives.  A few years ago my home flooded.  I was racing about the house trying to save things that were doing their best to die a water-logged death.  I realized then that I had way too many things.  A friend remarked as she viewed my personal possessions strewn about the back yard to dry, that my yard looked like the Sanford and Son junk yard. I began to de-clutter then out of necessity, but clutter is the natural state of our lives and de-cluttering requires conscious living and constant vigilence. Middle aged people also tend to become more frugal.  Retirement is just around the corner and we have to think about that.  A friend of mine recently told me about a trip out with his wife.  She wanted to go out for a burger.  He checked the fridge to see if they had the ingredients to make a burger at home.  They did not. Realizing that they would have to eat out, my friend grabbed a slice of American Cheese and put it in his breast pocket. He wanted to save the cost of the cheese for the cheeseburger.  My same friend enjoys a glass of wine with dinner.  The problem is that drinks with a meal can increase the tab by 30% to 50% and the mark up on beverages is routinely 300%.  So his solution is to bring his own wine and have a glass in the parking lot before going into the restaurant. While I don’t port my own cheese and wine, there are things that I do to save money.  All of my friends enjoy life,  time with their families,and  sharing the occasional meal out and traveling, what we all have in common is the desire to plug the crazy money leaks that can keep us from doing those very things.  I use online banking to save both time and money.  If you use online banking the customer service division at your bank is at your disposal should a payment go missing. Years ago I would have to wait for a check to clear then obtain a copy of that check to prove that I made a payment  No so with online banking, they have an electronic trail and they will make contact with your “payees” should your payment go missing.  I recently had an experience in which my bank caught one of my service providers holding a payment until it generated a late fee before crediting my account.  I ditched that service provider and got a cheaper plan with a competitor. I canceled my cable/dish subscription.  Most households spend over a thousand bucks a year on those subscription services.  You would have to become a zombie in front of the TV in order to get enough “value” to justify that cost.  I watch TV on the Internet instead.  Fewer commercials, less time to watch each show and I only watch what I want to watch when I want to watch it.  I reuse ziploc bags and aluminum foil.  As a result I only buy those items once a year.  I buy Amway SA8 laundry detergent.  It is super concentrated, eco-friendly, hypoallergenic, dissolves completely in the wash, gets my clothes clean and I only have to buy it once a year. Even though rates of return for savings are ghastly at all banks, I use virtual banks for my savings.  They offer higher rates and are FDIC insured.  I use a frequent flier credit card for charges I would make anyway, utilities, groceries and gas, and redeem the points for flights.   Since 2005 I have saved $1000 per year in air fare.  I negotiate big ticket items.  My money is very patient, I don’t have to spend it right away and, as a result, before making a purchase I ask, “can you do any better?” If I am shopping online and find an item I like, I always Google that item to see if I can find it cheaper. I almost always can.  I keep a “most wanted” list to curb impulse buying.  I am storing my DVDs and CDs in iTunes so that I can donate the hard copies and continue to de-clutter my life.  We have a garden and eat at home.  We go out maybe 4 times a month.  I don’t slavishly shop at Wal-Mart assuming I am getting the best quality for the deal.   I shop at Wal-Mart, Safeway and the local food co-op.  I had an electrician install a digital, programmable thermostat.  It has saved 20% on my heating costs.  I hire professionals to do work that I have either no business doing or work that isn’t in my best interest to do.  I am a big “do it your selfer”. But being a DIYer can put you in a time and financial hole as deep and as wide as the Grand Canyon (okay that is hyperbole but you get the point).  The trick is to figure out the tasks I should do and the ones I should not do.  Let’s go back to the thermostat.  I had it for 6 months before it was finally installed.  The instructions and the wiring that went with it were very complicated and carried dire warnings that a wiring mistake could result in furnace damage.  I added the installation onto a planned project that required an electrician, the thermostat got installed and I am saving money which wouldn’t have been the case if I had clung to my DIY tendencies.

I would love to know about those cheap things you do!

Please comment.

Several years ago a colleague mentioned a book to me, Your Money or Your Life, by Robin and Dominguez.  This duo created a book and a course over 20 years ago that provides financial literacy and helps anyone discover the true place and purpose of money in their lives.   The root cause of the current financial crisis is not globalism.  It is not the shift from a manufacturing-based economy to a service one.  The root cause is quite simply lack of financial literacy and the belief that a home is an asset whose value will always increase.  Yes, we have other problems.  Stagnant wages in the middle class over the past decade is one of them, but at the end of it all the widespread lack of financial literacy is the main culprit.

Many years ago I used to volunteer for and contribute money to Habitat for Humanity I traveled to other places in New Mexico and to towns in Southern Colorado to help build.  A local contractor and his wife opened a Habitat chapter in my small town.  As part of their orientation, they partnered with a group out of Albuquerque. The year was 2003.  The Albuquerque group revealed a small problem among the Albuquerque Habitat recipients.  They were mortgaging their homes to predatory lenders in exchange for lump sums of cash.  See when Habitat builds a home, it issues a mortgage to the recipient of the home.    The recipient must work, cannot be on public assistance and must fulfill the sweat equity requirement for getting a Habitat Home.  The mortgage is over 25 years and is a principal-only.  But the year was 2003 and home values were rising.  Taking out a second was just too tempting for some.  Because I was a Habitat Donor, I approached the regional office in Denver and the main office in Americus, Georgia to find out whether or not courses in financial literacy were required before a recipient got a Habitat Home.  I did not like the answers I got.  What I learned through Habitat was a home could function like a loaded gun in the wrong hands.

What does this have to do with Robin and Dominguez’ work?  They allow anyone to develop a formula for what money actually costs.  What it costs to earn it.  And by extension what things cost.  Understanding this is the essential concept of financial literacy.  This lesson, something that they call the life force of money, has caused me to be frugal and yet enjoy spending money on the things and experiences I truly care about.  Robert H Frank, economist, wrote a recent editorial in the Times about the shrinking middle class.  His argument is really odd, though, he asserts that the middle class is having trouble getting by, because the rich consume so much and turn luxuries into perceived necessities.  Perceived necessities that the middle class will borrow to obtain.

Robin and Dominquez, though, provide a better way out for the middle class.  They ask their readers to determine how much they have earned over their working lives.  For W2 wage earners, that calculation is easy.  The Social Security Administration tracks your income and will provide you a year-by-year breakdown of your earnings.  The information is yours for the asking.  They then ask their readers to do another calculation:  calculate the hourly wage.  Finally they ask their readers to look at, really look at, what is takes to earn a given wage in an hour or over a day or a week.  $200 dollars becomes more than $200 dollars.  $200 dollars comes to represent the hours spent in meetings, on sales calls, on a long commute, on call, etc.  When you go to exchange that $200 dollars for something you end up asking yourself is that X that I am about to buy worth all the effort I went through to obtain the means to buy it?  With that mental equation you have instant frugality.  I find that because of that equation I don’t take on debt lightly, I pay off my credit cards monthly, I have less clutter in my home all because I want my work product to support the things I truly enjoy and I don’t want to be a slave.  Financially, I’ve been there, done that and still have the T-shirt as a momento.  My nightmare was a $87,000 home on $28,000 of income.  I was leveraged 3 dollars for every dollar I earned. Today many leveraged themselves into homes at a rate of 4, 5 or 6 times what they earn.

When it comes to home ownership, it is okay for me to spend a fraction of my time, energy and effort to put a roof over my head but it is not okay for me to spend all of my time doing so.  It might even be okay for me to spend up to 10 days per month of my time and energy putting a roof over my head, but more than that and something is wrong.  I become a slave to my house and that is not acceptable.  Is financial literacy a panacea?  It is a heckuva good start.  It is hard for me to believe that we would be in the mess we currently are in if Main Street understood the basics. Yes, just as the Israelites wanted to go back to Egypt after a miraculous liberation some of us will consciously choose slavery over freedom even after reading Your Money or Your Life, but we have to start somewhere.

Please comment.

I think that most folks who have read my blog understand that I am not a fan of the 401K.  The market crash of 2000 and each market crash after that have lead me to believe that the vehicle of tax-deferred savings with the majority of those savings going into the stock market is simply not going to help the average worker reach any sort of secure retirement.  A couple of years ago, I wrote and and published an article outlining what a scam I thought the stock market was and is.  I also put the article on my blog.  Recently I have posted to my Facebook page links to articles I have found around the web about Social Security.  These articles are not so much about the need to overhaul the program, they are about what financial planners are telling their clients in anticipation of changes to the program.  I have posted these articles for one reason only:  The people getting the financial advice are 6-figure income earners.

Throughout the Bush era, the median household income was $43, 000.  That income threshold is now slightly above $50,000.  Only 25% of US households earn above $66,000 dollars.  In other words when financial planners are talking about building a secure retirement future, they are not talking to the majority of working Americans.

CNN posted an article, Secrets of Extreme Savers, that I also posted to my Facebook page.  Many of these savers were six-figure income earners but not all were, some were single, some were not, some had children, some did not.  The one thing that they all had in common?  They all saved 30-40% of their after-tax income.  The one who saved the least, 25% actually started a side-business to make up the difference.

This turns the whole concept of living within your means on its ear.  Living within your means will land you in the poorhouse, the truth is that you have to live well below your means.  Unfortunately this concept is entirely at odds with an economy that has consistently outsourced its manufacturing to cheaper labor markets and has become increasingly dependent on a spending consumer.

The mantra of save 10%, get a 50% match then invest in the stock market for 15-16% long term returns and a secure retirement is simply a financial myth.  Every financial book written in the 1990’s had some version of this formula in it and retirement savers adopted the strategy en masse.  Simply “googling” the search terms, history of the 401K, leads one to the inescapable conclusion:  that the proliferation of 401K plans led to the very stock rally that culminated in 1999 and that retirement savers hope will occur again today.  It won’t.  In 1982 the DOW sat at roughly 800 by January 2000 it was at roughly 11,700. The last decade has been classified as a bear market.  The demographic trend, the baby boomer generation, that created the bull market run of more than a decade ago has passed.  Those boomers are no longer saving for retirement and driving the markets, they are collecting Social Security.

The truth is that we have to save more and investing for appreciation in the hopes that that strategy will lead to a secure retirement is probably a fools game.  The crazy thing, though, is that the 401K was never intended to get anyone rich.  It was intended to supplement Social Security.  From Teresa Ghilarducci professor at The New School for Social Research, “In a perfect world, an average worker could amass something like $400,000 in a 401K by retirement.  After nearly three decades of 401K contributions, though, the average account balance for people nearing retirement age is about $60,000.  Far less than what’s needed.  So it’s no surprise that when a recent Gallup poll asked what Americans want most from government, more chose guaranteed pensions than guaranteed jobs or health care.  Most people save less than 5% of their income for retirement, and many start withdrawing funds early because of layoffs, divorces , and other unexpected events.  The consequence of these 401K leaks is that workers retiring in 15 years will do worse than their parents and grandparents, according to the Center for retirement Research at Boston College.  Almost two-thirds of households will probably face declining living standards in retirement.”

In short, the 401K was intended to be a base hit, not a home run and saving 10% was the least a worker could do to prepare for the future, but not the only thing.

I used a retirement calculator to calculate the payout over 30 years for a given retirement fund balance.  Then I went to the Social Security website to find the benefit of a person born in 1948 and retiring at age 62.  An individual with a $400,000 nest egg in retirement + Social Security will yield an initial retirement income retiring at age 62 of $2000 per month.  Assuming 3.5 % investment return and 3.5% inflation that worker will be able to give himself additional modest increases in income throughout retirement.  This retirement calculator at hugh’s calculators is a handy tool.

As I plan my retirement now, I look at what I have today and what I can buy today that will give me cashflow in retirement.  Buying buckets of bonds and dividend-yielding stocks will give cashflow in retirement.  Buying stocks for appreciation won’t.  Buying rental property will, buying a house won’t.  Starting or investing in a business will, looking for a job unless, I intend to save a third of my income so that I can engage in one of the other strategies I just mentioned won’t.

Am I saying that a person who is unemployed with the wolves at the door shouldn’t look for a job?  I will answer that question by paraphrasing author, Robert Allen.  In 2002 I attended a Robert Allen seminar and he basically said this:  Some of you are here today because you are hurting financially.  Many of the opportunities we will discuss here are not going to be for you.  I urge you instead to do what you need to do to get stable.

I take that to mean find a job, sell your crap, sell your ideas, what ever you can to establish an income stream then save 30-40% so that you can buy things that generate cashflow.  The truth is that most folks generate income to pay the bills, but that is a pretty narrow view of money.  Each dollar generated has to pay the bills today and work to build a future.  It is a lot to ask of a dollar to do two and three jobs at once, but we have to do it.  Creating a situation where each dollar does more than one job versus only doing one job is the difference between taking a leisurely stroll in the park on a sunny day versus running an endless marathon in the mud.

Please comment.

I love encouraging things to grow.  My backyard garden is bigger and brighter this year than it was last year.  Each year it blooms and surprises me because it never looks the same from one year to the next.  I have been thinking about this post for over a year.  The idea for it came to me one day while I was watching the birds feeding outside my window.  Before I get into this post, though, let me tell you about my ants and aphids.  I hate them both.  A few years ago, I began spot spraying in my yard.  Aphids love fast growing plants.  They tend to congregate on new growth and literally suck the life out of that new growth, distorting the plant, injecting viruses and depending on the plant’s age and overall health, destroy a plant.  Ant’s help the aphids by transporting  them up the target plant and, together, they force the new growth to secrete the juices that both insects seem to love.  I see an aphid and I go into Rambo mode, get out the insecticide and scream “die, die, die” as I spray jets of poison onto the affected plant.  Looking for aphids is part of my daily routine.  Trouble is that spraying is a vicious cycle.  I spot spray because I know I have beneficial insects in my garden that I do not want to harm.  I have aphids, however, because they seem not to be doing their jobs.  There is a part of me that screams, “kill the lot of them, and start over,” then rationality takes over and I look for other ways to solve my pest problem.  When I spot spray, I will control the pests in one area of my yard for a month or so then the problem recurs.  Once you spray, you have to continue to spray and therein lies the problem.  Pesticide is cheap, though, and what I need to do to control the problem naturally is comparatively more expensive.

Turns out that birds and wasps love ants.  Lady bugs love aphids but will get swarmed by the ants if they are present on the same plant.  I have decided that every creature in my yard must have a job and do that job.  The birds are no exception.  In order to keep them around, I actually have to set multiple water stops and feeders around the yard. Funny thing is that when the feeders are full, the birds won’t eat the ants.  A couple of days ago, I watched a beautiful green oriole perch itself on the broad leaf of a sunflower plant.  Patiently it picked at the ants.  The feeders were empty.  I imagined that perching itself on a leaf while eating was hard for that bird.

When I put bird feed out, birds eat in a predictable pattern easiest to hardest.  First they eat the seed that fell on the ground when I filled the feeder, then they sit in the open feeder and feed, then they feed at the hanging feeders with perches on them.  To use these feeders the birds have to perch on a bar or small platform and pick their food.  Then and only then do the birds forage on the ground or perch on the plants for food.

What I realized is that when it comes to personal finance, we are like birds.  We do what is easiest first and we do the hard only when forced to.  So the easiest thing in the short term is not to have a financial plan at all.  The next step up is to start saving a portion of earnings each and every month.  The next step is to decide what to do with those savings by deciding the asset classes we want to invest in, analyze investments and make sound investments while simultaneously incurring, yet minimizing, the risk of loss.  Somewhere along the way we have to protect our income and assets through the proper use of disability and life insurance.

Not having a financial plan is like standing on the ground and eating the food that just happens to spill to the ground either when the feeder was filled or while the other birds feed from the feeder.  Setting up a savings plan is like hopping into the feeder.  It requires a bit more effort, but the long term rewards are significantly greater than just waiting around on the ground.  Analyzing and purchasing investments and protecting your income and assets is like foraging on the ground or perching on the plants and picking food.  It requires a great deal of effort and some risk, but the food is in abundance.  I have ants, worms and beetles galore in my yard but I also have predators.  One year I watched a bird and a bull snake tumble on the ground near a stand of trumpet honeysuckle.  The bird lost the good fight.

The next time you have trouble putting your financial plan into action, consider the next bird that you see and realize that your brain is so much bigger than his!

Please comment!

A while back I blogged about the book, The Secret Currency of Love.  Now I am reading Financial Infidelity by Bonnie Eaker Weil.  There was an article on CNNMoney some time ago about the financial crimes committed in relationships and this book was referenced.  The contributors to The Secret Currency of Love, many of them high income earners,  were ashamed to admit that they wanted to be taken care of financially.  Dr. Weil reveals that at least a third of women desire to be taken care of financially regardless of their level of income.  This concerns me.  To be out of control and blissfully ignorant financially is to be a slave.  And I am of the belief that their are no benign slave masters even if that master is your domestic partner.  There is also a startling statistic:  either through divorce or death of a partner a woman will, at some point in her life, find that she has become head of household.  AARP data indicates that 48% of women over 75 will live alone.

Over the years I have worked with women whose spouses suddenly died or filed for divorce.  One of my friends told me of the humiliation that she felt when she realized that as as a result of her divorce, she was getting stuck with half of her husband’s credit card debts most of which were incurred while he entertained his mistress.  One of my colleagues experienced the sudden death of her husband only to find her grief turned to outrage and fear when she discovered that he had allowed his life insurance policy to lapse and he had amassed credit card debt that she knew nothing about.  She told me that for several months after her husband’s death opening the mail and packing his things revealed debt and expenses that she was simply unaware of.  She said that being at home was like waiting for bombs to go off as she discovered more and more about how her husband really ran their household.  I’ve worked with nurses who have had to endure personal bankruptcy because there were no marital assets to divide in divorce and the debt outstripped their income.  The converse is also true.  Women who are financially “in-the-know” can choose to leave unsavory relationships because they have the means to do so. A financially savvy nurse recently told me that she was happy she had the financial resources to leave her husband of 20 years after she learned that he was having an affair and refused to end it. As Carla Fried writes in her CBS MoneyWatch post:  “If women don’t see the value in being an active decision-maker in their financial security, then they bear plenty of responsibility for any future financial disadvantage.”  And therein lies the rub.  There is risk, not bliss, in ignorance.

Dr. Weil articulates that money is a stand in for many issues in relationships.  Issues that often began in childhood and were nurtured into adulthood.  She asserts that 33% of women will be be secretive in the area of money and, therefore, damage their relationship with their partner while 26% of men will.  A partner’s unwillingness to be open in the arena of money is a sure sign that the couple needs to go for counseling because deception or lack of openness in one area is a sign of deception in others.

I have simply seen too many women who refused to participate in their household finances find themselves left with relatively little after even decades of marriage failing to understand that the situations in which they were living were on some level simply unsustainable. Some of the wealthiest men I have come to know over the years have credited their wives with their success.  These men are business owners  with 30 to 50 years of marriage and I have found two traits they have come to value in their wives:  active involvement in the running of the family business(es) and frugality.

What can women do?  The road to becoming actively involved in family finances may be a rocky one and may require the aid of a counselor to navigate well.  These are strategies that I have found in the world of personal finance that women can use to become more actively involved:  1) review trusts and wills, regularly making adjustments as children age. 2) regularly review insurance especially life insurance.  Are the coverage amounts sufficient to replace at least 3-5 years of lost income?               3) review credit reports at least yearly. 4) review all bank accounts and the reasons for those accounts. 5) develop a household spending plan and stick to it.  6) regularly review retirement accounts.  7) know where all important documents are being kept.

These few strategies can help women remain in touch with their household’s relative wealth so that they can make responsible financial decisions regardless of their stage of life.

What are your thoughts? Please comment.

Every business coach and mentor I have ever had from Robert Kiyosaki to author Phil Laut, stress that a sale occurs when value meets price.  In other words, a person determines how much something is worth to them before they pay for it.  They can evaluate the experience of owing a product or the presumed experience of owning that product before they buy.  Apple gets high margins for its products because the user values the experience he  has owning an Apple product enough to pay a premium for that experience.  I drive a Prius because I place a premium on the feeling I get while driving it.  I buy whole rather than processed food, because I value the overall effect whole foods have on my health.  Ellen Ruppel Schell argues in Cheap: The High Cost of Discount Culture that we have become so focused on price that we have lost sight of the value proposition.  What is the value proposition? When looking at an item or service, that we intend to buy, we determine its value in our lives.   When the value of the item or service exceeds the price we are willing to pay, we have a value proposition.  The value of the item or service we are buying is actually worth more to us than the money we are going to part with.   About 20 years  ago I went shopping for shoes with my friend, Robin.  Her grand parents had just sent her $200 dollars.  Before I knew it we were on 5th Avenue in Manhattan and Robin was handing over the entire sum for a single pair of shoes. I was flabbergasted.  Robin told me that her family taught her that you never skimp on shoes.  Robin bought shoes that could be resoled and repaired, shoes that were intended to last years.  Having a pair of shoes that would last for years was more important to Robin than the $200 dollars in her wallet. I used to be a pretty enthusiastic skier.  Because I have very narrow feet, most ski boots are ill-fitting.  I went to a local shop in Durango about 15 years ago and the boot fitter fitted me with a pair of Rossignols.  The fit was great, but the price tag was $600 dollars.  About a month later, I went to a ski shop in Albuquerque and plopped down $450 dollars on a boot that fit just okay, but had the advantage of being cheaper.  Thus began my boot fitting nightmare.  Six years later I had shin and ankle injuries and had gone to every boot fitter I could find between Taos, Breckenridge, Purgatory, Wolf Creek…you get the picture…trying to make the cheaper boot fit properly so that I could actually enjoy skiing in it.  I finally went to a boot fitter in Aspen and walked out with the Rossignols.  I asked for and got a discount, but that wouldn’t have mattered.  I had learned my lesson:  when it comes to ski boots, the fit is key and trumps everything else including price. I spent hundreds of dollars more than I needed to because I let price trump value when it came to that pair of ski boots.

Several years ago I read The Wal-Mart Effect: How the World’s Most Powerful Company Really Works–and How It’s Transforming the American Economy.  That Wal-Mart is a powerful company is really an understatement.  They can save forests by demanding that their suppliers reduce their packaging, they can support wild-caught fisheries rather than farmed fishing and save coastlines, they can undercut the competition and drive local small business out of business.  Wal-mart is the nation’s largest low-wage employer.  Their current motto:  “Save money, Live better”.  At the time The Wal-Mart Effect was written their motto was “Always Low Prices, Always.”  The Wal-Mart Effect was about the high cost of those low prices.  Catchy isn’t it?

One of the featured stories in the book was of Snapper, maker of lawn mowers.  They stopped being a Wal-Mart supplier because they could not make a quality lawn mower to meet the Wal-Mart price point of less than $100 dollars.  Snapper concluded that there are worse things than not being a Wal-Mart supplier.  Charles Fishman, author of, The Wal-Mart Effect, mused that at the prices Wal-Mart charged for its lawn mowers, you could afford to get one every year.  Which is good, because at those prices, you don’t expect one to last longer than a year and it probably isn’t worth repairing anyway.  We just replaced our lawn mower, purchased in 2006 for $100 dollars with a $200 dollar model purchased last week.  Both from Wal-Mart.  Frustrated with a mower we could barely get to work each year, we were hoping for quality by going with the higher price point.  What is our real cost?  So far $100 dollars per year for lawn mowers with the added cost in frustration and stress of having a product that is difficult to start.

I am not too old to remember the time when a family purchased a lawn mower and that mower lasted season after season with perhaps a tune up every other year.  Not so any more.  In our culture today we value price over performance.  It wasn’t always that way, but it is now.  I have a Poulon Weedeater purchased at, you guessed it, Wal-Mart.  It’s cost was $87 dollars.  Its heart and soul are plastic and therein lies the rub.  Parts that should not fatigue and break from simple use, do.  Why, because they are plastic.  I replaced the plastic choke housing a few years ago, for $18 dollars.  Now there are so many other broken parts, all plastic, that the cost of the parts exceeds the original cost of the machine.  I replaced the Weedeater with simple garden shears, and a lawn service, but I wonder about our land fills being filled with useless and poorly-made equipment.

Is this what happens when price trumps common sense? That we are doomed to pay more for an item over the long haul because we are constantly having to pay for replacements?  By my count, our $100 dollar lawn mower actually costs $300 dollars and counting.

How do you work out your value proposition? Please comment.

I might as well have written I would streak naked down the streets of Gallup, New Mexico.  This is just as incendiary a post title as that.  I don’t mean it to be so.  I was sitting here reading Ellen Ruppel Shell’s, Cheap: The High Cost of Discount Culture when this post title came to me.  I have been taking in the details of the lives of many of my friends as they lend to family, some of it repayed, most of it not.  Loan cosigners usually cosign for family and end up paying for, then owning, the thing they cosigned for.

Just as I don’t believe you should pay for a child’s education, I actually don’t believe you should lend to family.  I do believe under certain circumstances you can, and should, gift to family then walk away from whatever sum of money it was.  When money is considered a gift, not a loan, the amount of money given will generally be smaller than the amount of money loaned.  You will give only what you can contemplate doing without;  you will loan much more than that.

Families are a funny business, some family members feel entitled to the fruit produced by other family members forgetting that all, having been raised in similar circumstances, had the same opportunity for advancement.  Other family members feel complete discomfort around having achieved more than their siblings and parents and stand at the ready to meet every family need often doing so at great personal cost.

Some time ago I was on a conference call with a financial strategist whose name I cannot even remember,  he discussed this very problem within families, lending money, and proposed something more formal.  A family bank.  The truth is that most adults, given time, can solve their own problems.  It is human nature, though, to take the path of least resistance and ask for money from a relative.  Asking for and receiving money from a relative may forestall austerity measures that the person requesting the money probably needs to take but would prefer to avoid.  The person who needs $800 dollars to stay in their apartment probably needs to bite the bullet and rent a cheaper apartment.  The person who needs $4000 to make a mortgage payment probably needs to loose the home and rent a cheaper place.  Personal loans are often asked for in confidence and one sibling may not know that his sister Sallie also received loans from Mom, Dad and brothers Dave and Sam.  When deciding whether or not to loan or give money it would be wise to ask yourself whether or not this loan or gift will address a temporary or on-going situation.  Unfortunately, when family is involved, we don’t ask those questions.

A family bank is what it sounds like.  It is a bank that all family members contribute to.  The bank’s capital will be accessed under certain circumstances and the loans repaid under terms agreed to by all.  If someone defaults on a loan from the family bank, they can never access the bank’s capital again.  When I first heard this idea, I grew very excited and told as many people as I could about it.  Most were very uncomfortable with the idea.  One person told me that in her family one person would access the bank all the time.  Having to do so formally would isolate her from the rest of the family.  Another person told me that only “rich white folks” would do that and she didn’t want to hear any more about it.  Actually family banks are now used by the wealthy to distribute an inheritance with strings attached to an heir who might otherwise squander it.

Whether or not to loan money within families is a complicated issue.  In general, I believe people are uncomfortable discussing issues of money.  Treating a loan within a family like the business transaction it really is would make most people squirm, but that does not make it a bad idea to do it.  What I have found is that not doing so is much worse.  The person who is constantly in need, generates anger and resentment within a family and those feelings only grow with time.  Family gatherings become uncomfortable and that person ends up isolated anyway.  I was just speaking with a friend of mine who is constantly helping out family members.  He has come to the conclusion that in the long run, the financial assistance he provides really does not help.  The recipients just create a new problem and a new need.

Do you loan to family?  What is the result?  Please comment.

“That wasn’t your Patronus!” said a Death Eater. “That was a stag, it was Potter’s!”

“Stag!” roared the barman, and he pulled out a wand.  “Stag! You idiot –expecto patronum!”

Something huge and horned erupted from the wand:  head down it charged towards the High Street and out of sight.

“That’s not what I saw–” said the Death Eater , though with less certainty.

“I still say I saw a stag Patronus!” shouted the first Death Eater.

“Stag?” roared the barman. “It’s a goat, idiot!”

Harry Potter and the Deathly Hallows, JK Rowling

And so begins deception.  You know something because you have seen it, yet somewhere along the way you begin to doubt what you have seen.  And you doubt what you have seen because another, presenting a reasonable facsimile, tells you that you are mistaken. The stock market is the way to a sure retirement, yet there have been two bear markets in a matter of a decade wiping out trillions in retiree wealth and pushing back planned retirement dates.  Home prices would always rise yet we are in the midst of one of the worse housing markets in 2 decades.  The popping of this most recent bubble has wiped out 1 trillion in home owner wealth.  Anyone who bought home in the late 1980’s and early 1990’s and saw the aftermath of the Savings and Loan debacle knew that home prices could not possibly continue to rise unchecked, yet financial pundits and mainstream media armed with charts and graphs insisted that they could. And so many ignored the lessons of history and bought.  Deutsche Bank now predicts that through 2011 some 25 million homeowners will be upside down on their mortgage.

Too many tell us that what we see as and know to be a stag is really a goat.  What I have found as I plan for retirement is that without the pension plan that I thought I would not need, retirement would not be possible until well into my 60s despite saving regularly into my 401K and having a generous company match.  I don’t have to search very far to read the same pablum that I have read for 15 years: maximize your 401K, maximize your match, diversify your portfolio.  Why didn’t I think I would need my pension?  Because the 401K is king.  Now I am glad to have my pension because the King is really a Joker.

Financial planners have taught millions to do net worth calculations when they should have been focusing on cashflow.  The real question should be how much of my net worth can be converted to cashflow for me to live on in retirement?  For far too many, a high net worth translates into too little cashflow. Sure your home may be paid for in retirement, but what is your cashflow?  Does it make sense  to have $200K tied up in a home in retirement or does it make sense to liberate half of that money, avoid income tax and carry half in a small mortgage over 30 years?

Many of us see stags running around the streets of our financial lives, yet we are too willing to believe that what we see is a goat because an entire industry is predicated upon our doing just that.  What would happen to the stock market if people stuffed their 401ks with bonds rather than stock mutual funds?

What would happen if people began to focus on cashflow and therefore chose to create the extra time to start a small business? We are told that starting a business is too hard and too time consuming, yet I can think of nothing more wasteful  and nothing more risky to one’s overall financial well being than spending 30 years thinking  a stag is a goat only to find in the end it was a stag after all.

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