Cheap Things I Do

by Ouida on November 6, 2010

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!

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Your Money or Your Life

by Ouida on November 3, 2010

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.

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Understanding Financial Porn

by Ouida on September 21, 2010

I first came across the term, financial porn, about a year ago. A friend sent me the article The Best Financial Advice You’ll Never Get while doing additional research after reading that article, I ran across the term financial porn then its cousin, investment porn.  I was shocked, honestly.  When I first became interested in financial literacy, I purchased all of the recommended magazines, Money, Smart Money and Kiplinger’s Personal Finance.  I also joined every financial newsletter that I could, subscribed to the Wall Street Journal and Investor’s Business Daily and the Motley Fool.  I also joined the Association of Individual Investors.  Little did I know, the Big Three:  Kipplinger’s, Money and Smart Money have been labeled the top purveyors of financial porn.

Financial Porn Defined:

A slang term used to describe sensationalist reports of financial news and products causing irrational buying that can be detrimental to investors’ financial health. Short-term focus by the media on a financial topic can create excitement that does little to help investors make smart, long-term financial decisions, and in many cases clouds investors’ decision-making ability.

Investment Porn Defined:

Investment porn is therefore material which is exciting and makes you think you’re getting inside information, an inside track and a chance to do well in the markets ahead of everyone else. But it’s basically public information, so you’re deluding yourself if you think this kind of data is really going to give you an advantage.

*****

With the publication of Rich Dad, Poor Dad, Robert Kiyosaki warned of a coming financial disaster and urged everyone to gain financial education;  it is tough to understand that when you are subscribing to the most popular financial publications around that you are probably not getting educated, but rather titillated.  I am grateful today that my 401K has only offered bonds and index funds.  Given the information overload to which I subjected myself a decade ago and the constant media messages that I was only a few hot stock or mutual fund choices away from “real wealth”, I would have traded my life savings away.

The financial publication that meant the most to me was published by the now defunct Hume Group.  This publication was a monthly newsletter that covered topics like amortization tables and how to calculate simple interest.  Boring stuff I know, but if you have ever bought anything on time you have dealt with those two topics and not understanding them can all but ruin your life.

About 3 years after I subscribed to the “Big Three” financial publications I began to cancel the subscriptions.  Money, Smart Money and Kiplinger’s really didn’t bring me financial peace.  I felt pressure to pick the next great stock when the latest edition of those magazines arrived in the mail, I could not abide by the sense of discomfort I felt at not taking the actions they recommended and I could never understand how a group of journalists could put together a group of articles about investing when they, themselves were likely not investors apart from their company-sponsored plans.  About two years ago, on a Business Week podcast about credit, credit scores and debt, the correspondent being interviewed about the cover story she wrote confessed that she 1) didn’t know what her credit score was 2) held no investments outside of her company-sponsored and 529 plans 3) had some cash that had been gifted to her and decided to plow that into her child’s 529 plan.  This was her recommendation for what to do with additional cash. Her 529 plan and her company-sponsored plans where her idea of investing.  Additionally she considered her dollar cost averaging by making monthly contributions into those plans investing.  This podcast aired in October 2008.  Anyone doing what she did would lose an additional 1/3 of their portfolio between October 2008 and March 2009.  I wish she would have told people to make sure they had a gooooood cash cushion and then deleverage, but she didn’t.

Financial writer Jane Bryant Quinn has been credited with coining the term Financial Porn in the 1990’s, she has this to say about financial reporting by journalists:  “I was getting at the newspapers and magazines that make investing sound easy. “Three ways to double your money.” “Ten hot stocks.” The articles that make it sound like the journalist knows the right stocks or mutual funds to buy. And the fact is we don’t know. Journalists don’t have any business pretending they’re investment analysts. We can talk about stocks, investment ideas and what people are saying. But journalists shouldn’t say that certain stocks will increase in value. Nobody knows. Soft-core though, the Net is hard-core.”

Get a load of this article title from CNNMoney: 6-Figure Jobs, No Degree Needed.  You see that and what do you think?  The title is structured simply to get you to read it.  When you do you find that to earn six figures you probably will need a college degree because the competition to make that kind of income  is so stiff and it takes 30 years in the jobs profiled to earn six-figures.  Humm.

What do you have to do to protect yourself from financial porn? 1) get educated by reading books and the occasional financial position paper. I always urge people to “get educated” on this blog and I suppose it is a bit boring but if the general public really understood financial principles like income to debt ratios and financial tools like variable rate, interest only and negative amortization mortgages, the impact of the mortgage collapse would have been significantly limited 2) re-evaluate what you learn by tracking your numbers, your investment returns.  Read books by people who actually invest, Swenson and  Bernstein are examples of well-respected investors who write in a lucid and coherent manner.  The book, Your Money or Your Life does a great job of helping you define your priorities and what money means to you before you begin investing.  Understand that you will read some duds.  Books by David Bach will never help you gain wealth but they will help you kick your latte habit.  3) understanding that you will never get rich running after the next stock tip 4) understand that sound financial principles pave the way to wealth and living well below your means is financial principle number one.

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The Truth About Savings

by Ouida on August 24, 2010

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.

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