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Adult Conversation

by Ouida on November 17, 2010

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?

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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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