Dual Income No Kids

Mourning Detroit

2009-11-20T11:10:00.006-05:00

A little while back I traveled to Michigan to visit a friend of mine who's at the University of Michigan getting his PhD. Since we're both hockey fans, we planned the trip for the weekend that the Washington Capitals were going to be in Detroit playing the Red Wings. We've all heard about the struggles that Detroit has been facing recently, and with the decline of the American automotive industry we're basically seeing what happened to Flint, Michigan in 1980s all over again, just on a larger scale. Just look at some of the problems facing the city:

* The unemployment rate recently hit a record 28.9%. It's unbelievable to think that a major American city has nearly 1/3 of its population unemployed.

* It's estimated that nearly 1,000 people are leaving per month, reducing population levels to between 750,000 and 1 million residents. Detroit used to be the U.S.'s fourth largest city.

* A murder rate that was at 14% last year and was lauded as a good thing, prompting mayoral candidate Stanley Christmas to say: "I don't mean to be sarcastic, but there just isn't anyone left to kill." There are more people murdered in Detroit than in New York City, despite the fact that New York City has nearly 10 times the population.

* A public education system so broken that it has been put in a state of emergency and has been taken over the state government. A study conducted in 2008 by researchers from Michigan State found Detroit's public High School graduation rate to be just under 32%.

* The median home price in Detroit in July was around $7,000. That's about 4 months worth of rent at what I'm currently paying. I was so blown away by this I spent 15 minutes on Google, verifying and re-verifying that this was true.

I could go on, but you get the idea. Detroit has some serious systemic problems, and despite encouraging words from state and local politicians (what else are they going to say?) there doesn't appear to be a way back. Like so much of Michigan, Detroit was built by the automotive industry, and its rise and falls has directly correlated with the rise and fall of the auto industry.

The thing that struck me the most about Detroit when I was there, traveling downtown to go to the rink, were the abandoned buildings. Abandoned industrial complexes aren't something completely new to me; the south side of Indianapolis has its share of warehouses and manufacturing plants that were forced to close and exist without a tenant, and same can be said for other major U.S. cities. The Federal Hill neighborhood in Baltimore (and Baltimore in general I suppose) had many of the same problems until the last 10 years, when gentrification revitalized the neighborhood and surrounding areas. But the number of buildings in Detroit and their current state of disrepair right in the heart of the city was overwhelming. The buildings in Detroit had everything from broken windows and cracked facades grass and other plants overtaking their grounds. Whole buildings were burnt out, or even partially demolished.

Detroit is a sad case study in poor city management. Their entire economy relied on the automotive industry, and the general consensus was that it would never go away. When it did, Detroit had nothing - analogous to investing all of your money in one security. One political party more or less dominated local politics for 30 years, a stretch of time marked by ineffectiveness, wasteful spending and corruption - former mayor Kwame Kilpatrick was recently released from prison after serving a four-month term after being convicted of obstruction of justice stemming from an extra-marital affair.

The road back to financial viability will be difficult for Detroit, especially considering the current state of the economy across the U.S. The weather in Michigan is brutal - discouraging many young people from moving there - and there hasn't exactly been a massive influx of new businesses to Detroit. But its new mayor, Dave Bing, is an intelligent and hard working man. With time, they may have a chance, but it seems like it will be a tough road back. Which is very sad for what used to be one of America's premier cities.

Michael

Exploring Detroit's Beautiful Ruins

Question: Are Rich People Smarter?

2009-11-19T17:55:00.006-05:00

Answer: No.

According to research by Moshe Levy published in 2002 in the Journal of Economic Theory:

We formulate a general stochastic process of wealth accumulation by capital investment and analyze the conditions required to ensure convergence to the empirically observed Pareto wealth distribution. While homogeneous investment talent leads to the Pareto distribution under very general conditions, even a mild degree of differential investment talent results in a non-Pareto wealth distribution. This finding suggests that chance, rather than differential investment talent, is the dominant factor in the process of wealth accumulation by financial investment. Our findings conform with market efficiency and may have implications regarding the origins, the economic significance, and the social desirability of wealth inequality at the high-wealth range.

In plain English, rich people are rich because of dumb luck, not because of investing smarts - at least as it pertains to stocks.

Five Basic Types of Stock Market Orders

2009-11-18T11:12:00.005-05:00

Purchasing a share of stock doesn't have to be a simple transaction. Investors are often presented with a variety of different mechanisms by which they can execute a trade. Scottrade, for example, offers me five: Market, Limit, Stop, Stop Limit and Trailing Stop.

* Market: Market Orders are the most simple, most straightforward means of purchasing a security. Executing a market order just means purchasing shares of a stock at whatever rate the stock is currently trading at. Since market orders are executed at the best available price at the time of execution, inherent market volatility will likely mean you will pay a price that is close to, but not exactly the same as, the price you saw when you initiated the purchase.

* Limit: Limit Orders give the investor a little bit more control over the price that they pay for their shares. With a limit, you specify the highest price that you are willing to pay per share. Obviously, there is risk that the order never gets filled, if the share price does not breach the specified limit.

* Stop: A Stop Order (also known as a Stop Loss Order) is similar to a limit order. A stop order tells your broker to execute a buy market order whenever a stock's price rises above a certain threshold.

* Stop Limit: A Stop Limit is basically a combination of a stop order and a limit order. When the stop price is reached, a limit order is then executed, meaning once the stop price is triggered, shares are purchased at a rate no more than another specified limit price.

* Trailing Stop: A Trailing Stop does exactly what the name implies. This is most easily illustrated through use of a sell example, as opposed to a buy, which is how we've viewed the previous examples. When initializing a trailing stop order on a sell, you specify either percentage drop or a hard drop amount that will be your stopping price. For example, that value can be something like a decline in share price of 10%, or a $2 drop in share price. So if you buy a share at $20 and set a trailing stop of 10%, your broker will enter a market order to sell if the stock price decreases to $18. However, if the stock goes up, the stop price moves with it. For example, if the stock then shoots up to $30 a share, the stop price now become 10% * 30 = $27. In this instance, losses are managed when the share price falls and maximized when the share price increases.

These categories also apply to selling stocks. There exists many more combinations and exotic rules than the five I've described above. Learning the different mechanisms by which someone can execute trades can save you some money and make your investing process more efficient - especially if you are moving larger blocks of shares.

Also its nice to be a bit of technical geek when you are talking with other stock traders. People who are really into stocks sometimes have a specialized vocabulary, so its good to be able to speak the lingo.

Michael

Four Tips For Dealing With Budget Problems

2009-11-17T20:14:00.007-05:00

Hi All,

Budgeting can be a fine art. If you're like 99% of the rest of the human race, you may be experiencing occasional issues sticking to a budget. If so, here are some tips you might consider for staying on track.

1) Write it down. When you write something down, it tends to make it more concrete in your mind. Writing it down is about clearing your head, identifying what you want, and setting your intent. There isn't any right way to do this, just do it.

2) Try the envelope system. Its a little old fashioned, but here is how it works. Take some envelopes, write the budget categories on the envelopes, then put the amount of cash you've got budgeted for each category in the envelope. Then once the money in the envelope is gone, don't buy anything else in that budget category. Its that easy.

3) Decompose the problem. One way that people can sabotage themselves is by focusing on the negative. So, one way to stay motivated is to break your budget down into smaller problems. Say, for example if you are constantly over running your entertainment and your clothes budget, you might consider setting a goal to meet your targets for your entertainment budget only. Sometimes dividing a problem up is easier than addressing it all at once.

4) Stay away from situations that tempt you to spend. Some people's daily routines brings them into situations or into contact with persons that temp them to spend. For example if you enjoy picking up a cup of coffee on the way home from work, consider taking a different route home to avoid the temptation. Also, if you have friends who are big spenders, it might make sense to plan activities that are low cost, such as going for a walk or seeing a movie, rather than a pricier event like a sit down restaurant dinner.

Hopefully some of this helps. If you have other ideas for sticking to a budget, feel free to let us know!

Happy Budgeting!

Best,

James

The Pitfalls of Trading Penny Stocks

2009-11-17T00:08:00.005-05:00

For those of us who are prudent, its enough to see solid, modest returns on our investments. We spend a great deal of time playing with stocks screeners and researching investing techniques advocated by sensible gurus like Peter Lynch. However, instead of putting in the homework to come up with a profitable investing strategy, some people don't want to exert the effort. They want the fast easy money right away.

Therein lies the appeal of penny stocks. For those who are unfamiliar, a penny stock is a security with a price per share of less than $5 that is not traded on one of the major stock exchanges. Penny stocks are appealing due to their extremely low price (allowing an investor to scoop up a large number of shares) and a perceived high growth potential. Often, penny stock traders aren't investing for the long term, instead, they will buy a large number of shares in a security, wait for some upward movement, and then sell. A movement of a few cents can yield a tidy profit if you own enough shares.

Although that may appear appealing, there are two problems associated with trading penny stocks: susceptibility to fraud/scams and unavailability of good financial information.

First, penny stocks scams are common in equity markets. We're all aware of various stock frauds, and it seems like every couple of months we hear about more corporate fraud cases. They're common enough with regular stocks, but even more prevalent in the penny stock system.

A good book on this subject is Jordan Belfort's The Wolf of Wall Street, detailing his rise and fall as a stock manipulator. If you read his book - or have seen the movie Boiler Room, they deal with the same issue - then you're probably familiar with the popular "pump and dump" scheme, where a stock manipulator will buy a large number of shares in a company, then through a variety of means such as cold calls to potential investors, paying off supposedly independent stock evaluators in the media, etc... will "pump" up the value of the stock. Shortly thereafter, the manipulator will sell of their shares in the security, and with the sudden lack of momentum the stock value will fall and all the new investors will lose their money.

Penny stocks are an ideal mechanism for performing this type of manipulation due to their inherent volatility, lack of media attention and their inherent attractiveness to unwitting investors looking to make a lot of money quickly. By the way, that is just one example of potential fraud when dealing with penny stocks!

Second, in addition to their susceptibility to manipulation, penny stocks are difficult to invest in because there isn't a lot of information about them. On the other hand with a larger company like Google or McDonald's there is a lot of financial data for you to analyze. Since penny stocks aren't listed on a major stock exchange they aren't subject to the same financial disclosure obligations other securities are.

Personally, I've had a variety of people try to talk me into dabbling in penny stocks, but you'll never convince me. If I'm going to gamble then I'll find a sportsbook or a poker game. There's no way to effectively evaluate a penny stock, and there's so much fraud and manipulation out there you can't ever be 100% sure that what you're participating in is legit.

Readers, any of you have experience with penny stocks?

- Michael

p.s. For more info on stocks click here.

Ducking the Multilevel Marketing Bullet

2009-11-16T09:00:00.000-05:00

A couple of years ago I found myself at Safeway late in the evening picking up a snack. Unfortunately, it was semi-busy and they only had one cashier working. While we waited, the gentleman in front of me struck up a conversation, eventually asking what I did for the living. I told him that I was a software engineer and he seemed genuinely interested. He mentioned that he worked in "e-commerce" and could use someone with my skills. I've been approached before to work on websites and such, so this wasn't that strange.

We exchanged contact information and later that week he called him and said that he had a meeting at a local hotel with some of his fellow "small business owners" that he thought I should attend. That was an immediate red flag, but instinct didn't kick in and so yours truly showed up anyway. When I got there, he explained in vague terms the arraignment and immediately that sinking feeling set it. This got worse as we were shuffled into a conference room, and once a the speaker began his pitch, I knew it was time to get out of there.

Here's how the set up would have worked. We would buy in (literally; there were a ton of materials that had to be purchased, including "small business registration" fees) and would receive a catalog of common household goods - generic versions of the name brands. We would then sell those items - or buy them ourselves - and recruit other people to work under us doing the same thing. We would receive points for each revenue level we'd reach, based on our own sales and the sales of those working beneath us. Those points determined how much money we were paid from the parent company.

I felt terrible for being so stupid to fall for something like this. However, I may have been the only one in the room who felt that way. The speaker was great at getting everyone riled up. He talked about buying a dream car, or maybe, a dream car for every day of the week! (seriously) It was pathetic, but people were eating it up; this guy was certainly good at what he did. He paraded up the stage a bunch of people who talked about what a positive experience it was for them and how rich they were now. Not wanting to be rude I didn't immediately walk out, but took the first opportunity to bolt out of there.

It wasn't a complete loss though, and outside of wasting an evening, no money was lost. There were some interesting observations to be taken away.

* Freedom is the MLM buzzword of choice. A lot of people hate the grind of their daily jobs. The speaker harped on this "business model" giving you freedom, an idea that I think would be very attractive. The speaker obviously realized this and played on it heavily.

* Details are the enemy of MLM. I asked the guy who brought me at least three times what the initial costs were and he wouldn't tell me. By this point, it was pretty clear what the deal was but I wanted to see how much information it was possible to extract from these guys. Answer: not much. The main speaker talked for at least an hour and he never gave any program details. I didn't even know the name of the parent company.

* Cognitive Dissonance. The guy that brought me knew what was going on, that was pretty obvious, but he tried really hard to convince both himself and I that this was more legitimate than it was. Here was a textbook example of cognitive dissonance. Everyone knows that MLM benefits only those at the top, and yet people still sign up, banking on that glimmer of hope that somehow they'll be able to make some money. It just doesn't work that way.

For my part, I'm just glad I got out before I actually got involved financially.

Readers, do you have any experience with Multi-Level Marketing?

Michael

Why A Weak Dollar is Bad

2009-11-15T12:43:00.014-05:00

Hello All,

As a bit of a departure from our usual fare of nuts and bolts personal finance topics. For this posting we're taking about the importance of the US dollar as it relates to other currencies.

Financial Samurai is a very good personal finance blog associated with this website. They recently posted an article on why a weak US dollar does not matter. We respectfully disagree and wanted to tell our readers why.

First, we'll go over the reasons Financial Samurai gave for desirability of a weak dollar. These include:

1) Inflation fears are overblown
2) A weak dollar is good for exports
3) Weak dollars help to fund debt
4) Costs of weak dollars are felt only by travelers

We address each of these arguments in turn:

1) Inflation fears are overblown. Financial Samurai is basically saying that concerns about inflation are overblown. We think that FS's conclusion is too optimistic. Why? Milton Friedman classically argued that inflation is always and everywhere a monetary phenomenon. This means that inflation is caused at least in part by a large supply of money and not enough economic activity to raise demand. Given the titanic amount of stimulus the Federal reserve has pumped into the economy, we feel there is a fair chance the US will experience some inflation once interest rates increase. There are simply too many dollars in circulation for this not to happen.

2) A weak dollar is good for exports. FS is right. However this is increasingly unimportant. Without a doubt, a weak dollar is good for exports. However, exports have been declining over the past 15 years. For example, since 1991 the US balance of payments - an indicator of payments for goods exported - has been negative and getting worse. So any benefits that come from a weaker dollar are mitigated by the fact that we aren't selling as much as we used to. Don't believe me, check out some data from the US census below:

3) The weak dollar helps to fund our debt. This is the worst part of the argument for a weak dollar. Instead of advocating for a policy which allows us to carry large of amounts of debt policymakers should consider ways to reduce expenditures and prevent further debt growth. Larger amounts of debt at the federal and state level puts pressure on government budgets. This can cause higher taxes. Thus, with all things being equal, more debt means Joe and Jane average have to pay more in taxes.

In addition, more debt can impact Americas global position. A major creditor to the US is China. With mounting federal debt levels, ask yourself what is likely: will China continue throwing money down a drain (i.e. buy our worthless debt) or will they adjust and start depending on their own consumers? We think their choice is obvious. Inflating our dollar to pay debt off cheaper ultimately will destroy our ability to sell debt to nations like China, and provides a motivation for government to increase taxation on average Americans.

4) Direct costs of weakened dollars are only felt by travelers. FS maintains that if you don't have assets outside of the US dollar, weak greenbacks aren't that big of a problem. However, Americans purchase a great deal of goods and services from places like China, Europe, and Japan. This is particularly important in the case of energy. Oil is primarily imported and when our dollars buy less oil, you get stuck with the bill at the pump. So, to say that US dollar is really only felt by travelers seems to come from the antiquated idea that the world is not a globalized place.

FS says...

"If you are an American who makes a US$ denominated salary, buys US$ denominated assets like property, consumes Levi’s jeans, and never plans to leave the country, what are you freaking out about? The US Dollar can depreciate by 90% against the Euro, and it still wouldn’t really matter".

The problem is, the world is a globalized place. Gas comes from the middle east, cheap consumer stuff comes from China, electronics come from Japan and cars from Europe. Everyone gets stung by weak dollars, either directly or indirectly.

In short, the Financial Samurai team maintains a very good blog, but is unfortunately wrong about the dollar.

Thanks,

David and James

Rumor: Fake Morgan Dollars Being Made in China

2009-11-13T21:36:00.008-05:00

Hi All,

Okay, just saw this one the web. If you are buyer of silver coins or a numismatics collector, you'll be interested to know there is a rumor flying around about fake coins being made in China and sold on ebay.

Since we love a nice juicy rumor, go ahead and click here for the story, otherwise check out the picture below. Its one of the machines used to produce the fake silver.

Best,

James

Buying an Engagement Ring

2009-11-13T10:25:00.006-05:00

By far, the most expensive and significant purchase I’ve ever made was the engagement ring that I bought for my wife. I had known for a while that I wanted to marry my wife Stacy, but I wanted to wait until the timing was right. That time came in the fall of 2007, when, after stashing away money bit by bit for a while, I decided to visit a couple jewelry stores and buy that ring. I already had the situation planned out; I was going to surprise her with a trip to New York City to see The Lion King on Broadway (something she had said she always wanted to see) and afterwards I was going to propose. That was the easy part. Buying the ring, however, was a much more complicated and nerve-wracking process.

I was willing to bend a few of my own personal finance rules in order to make this happen. Most responsible people will tell you to pay cash for the ring, but I knew what I wanted to get her and subsequently, knew that it was more than I had saved up. But I was hoping to pay for as much as I could in cash up front, and then finance the rest at a 0% interest rate. As I write this, I can feel the cringes from you readers. But stay with me. From shopping around and examining rings, I got an idea of the price ranges I could expect.

First, I spoke with a company that I previous had a credit card with about a 0% interest for 12 months promotion they were currently having. So I visited a couple of places “just looking”, until I found a couple places that had what I was looking for. I ended up with two places in mind, and after work one day (after making a lame excuse to my soon-to-be fiancée about having to head up to school for a meeting with my professor) I went to the first place to sit down with a “consultant” to set about picking a ring.

The consultant was nice, even if she was pushing me to rings that were way out of my price range. She wasn’t the first salesperson I had come across so I just kind of smiled and went back to the rings that I wanted. We started talking about financing and she mentioned an interest free plan, so I had her run my credit to see if I qualified. Unfortunately, I did not (barely a year’s worth of credit history played a role in that). The saleslady said that wasn’t a problem (for her at least) and she offered one of the worst pieces of financial advise I’ve ever heard. She asked if I paid my credit card off every month, and when I indicated that I did, she said that was my problem. She suggested I carry a balance from month to month to entice creditors to extend me credit. I told her that I’d keep that in mind, but no, I wouldn’t be buying that ring.

The second place I visited was a smaller place but I liked their merchandise so I talked to the sales staff there. Right away I was told that they didn’t get paid on commission and the gentleman spent a decent amount of time with me picking out the ring. It was a better quality ring that I had seen at the first place, and the price was so much better. It was low enough that I could pay for most of it with cash, and I signed up for the offer with the credit card company for 0% interest for 12 months (the one I mentioned above) to take care of the rest. Four months later the ring was paid off, without me having to pay any interest and I was all set to propose. Buying from this company turned out to be a great decision, as we’ve had to go to them for service a couple of times (resizing of both the wedding band and the engagement rings, as well getting a tiny diamond that fell off the band fixed, all free of charge) and they’ve been great. I couldn’t be happier with how it all turned out.

Buying the engagement ring taught me some great lessons that have stuck with me:

* Planning is key. I knew I wanted to propose long before I did, but taking my time in doing so helped in a number of areas. In particular it afforded me time to save my money, and although I wasn’t able to pay for the whole thing in cash, I was able to pay for a significant portion of it.

* Know how to differentiate between good and bad advice. Not paying off my credit card in full every month was not going to be a good way to “entice” creditors to set my interest rate at 0%. I still can’t believe she suggested that to me.

* Not all risks pay off. Relying on an interest free credit card to hold the balance until I could pay it off was quite a risk. It worked out in this instance, but it was never guaranteed. If it hadn’t worked out I would have been hurting trying to pay off that debt. Although I know people who play the interest-free credit card game, it’s a risky one if it doesn’t work out.

* Shopping around always helps. The more places I looked, the better idea I had about what price ranges to expect. That certainly helped me make an informed decision.

* Buying a big ticket item isn’t always just about the item itself. By getting her ring at the second place, I not only got a great ring, but a relationship with the jewelers that has been great, and has come in handy when we needed them.

* Controlling emotions is important. It’s hard to not get wrapped up in the process when buying an engagement ring. But I didn’t want us to start out lives together in debt (a theme that would pop up again when we were planning our wedding). Controlling my emotions allowed helped me make a smart choice.

Overall it was a potentially stressful experience that turned into a real positive. I’ve tried to take what I learned during that experience and apply it to other situations. I certainly learned a lot!

Michael

Twitter: @michael_dink

New Overdraft Fee Rules

2009-11-12T15:43:00.002-05:00

Hi All,

Looks like the Federal Reserve is implementing new rules on banking overdraft fees.

The NY Times has the story.

Enjoy.

James

Saving for a Big Trip

2009-11-12T11:39:00.005-05:00

Recently a friend and I decided that 2010 was the year that we are going to make our long talked about trip to Ireland. We have been talking about this trip since we graduated from college and had always found an excuse to put it off. We didn’t have any money when we first graduated, then I had other, pricier financial obligations (buying an engagement ring, financing a wedding and a honeymoon, getting my savings straightened out so my new wife and I would be properly prepared for the future, paying for school, etc… etc… etc…). The excuses kept piling up until a couple of weeks ago when, during a phone call, my friend basically made the point that there will always be reasons why we should put the trip off to a future date, so we just have to do it. Emboldened by that and the fact that this is definitely something we want to do, we decided to plan to take this trip in the late spring of next year, so that means planning has to pretty much start now.

Most of my planning consists of the financial variety. I have my passport ready because of my honeymoon, and I will be able to save enough vacation time from my job that taking time off won’t be a problem (and I’ve already received the OK to move forward whenever, provided I provide my boss with enough lead time). So that just leaves making arraignments (a task aided by a friend of a friend who has made multiple trips to Ireland) and paying for it all. Assuming we want to leave around June 1st, 2010 and have everything paid for – outside of the normal vacation expenses such as food and activities incurred during the trip – by May 1st, that leaves me with about seven months to save up enough money, which should be plenty of time to get everything together.

The challenge for me will be in finding ways during the planning process to save money on the big ticket items – plane tickets, places to stay, pre-planned activities – that I can have some extra money left to allow myself to enjoy the things that make Ireland great. I’ll certainly keep you up to date during the planning process in case I come across some tips and tricks that could benefits you in the future.

From a personal finance point of view, big trips can run right up against many main tenants of managing your money. A vacation is supposed to be fun, and fun often costs a reasonable amount of money. I’ve worked hard to get myself to the point where I’m conscious of where my money goes and diligent in ensuring that I’m wasting as little money as possible. How am I going to reconcile that with the fact that this trip will be a huge expense? The honeymoon was easy: we saved up and bought an all expenses paid vacation. Everything (including enough activities to keep us busy) except drinks other than water at meals and souvenirs was included – I essentially dropped my wallet (and my cell phone) in the safe in the room and enjoyed myself. This trip to Ireland certainly won’t be like that. I don’t have that figured out yet, but I have realized a few things:

* The more planning the better: Pre-paid activities will be our friend. By paying up front, we’ve already taken care of the expense and we can just enjoy what we’re going to do. That and the fact that we both enjoy quiet downtime should help things. Going on the fly could get expensive, and could introduce large expenses for activities that we didn’t plan for.

* Budget tracking doesn’t stop at the border: Just because I’m on vacation doesn’t mean that I can forget where my money is going. I’m going to do my best to estimate my expenses beforehand and when I’m gone I’ll keep a record of my spending, in an effort to keep things under control.

* But most importantly, I’m going to just have fun. I’m going to accept the fact that I will be spending money and that it’s ok as long as I’ve planned for it. Vacations are the reward for hard work at home so it’s important that I enjoy myself.

When I was in college a friend of mine went on a trip overseas (interestingly enough, also to Ireland) and he ignored his finances and unfortunately ran out of money – literally. I suppose that’s a good lesson to keep in mind. I’m excited about the trip and eager to get with the planning! Readers, if any of you have any tips or interesting travel experiences, I’d be happy to hear them.

Michael

Twitter: @michael_dink

Eight Reasons Why Its Hard To Get Rich

2009-11-11T01:38:00.007-05:00

Hi All,

Have ever wondered why its so hard to get rich? In America we love and worship rich people. Guys like Warren Buffet and Donald Trump are celebrated personalities. We also value and appreciate the actions of people like George Soros or Oprah Winfrey. So, if being rich is so awesome, why aren't more people wealthy?

Consider the numbers. The population of the US is 307 million, but as of 2008 there were only 7.6 million households worth over 1 million bucks. This means that only 2.5% of Americans have crossed the seven figure line. When you think about it, its even more rare for people to achieve net worths higher than $1,000,000. For whatever reasons its very uncommon to become really rich.

So, why is it so rare to become wealthy? Well, there are substantial barriers to getting rich.

1) Economic Change. Wealth is often generated via investment vehicles such as stocks and bonds. While the performance of historical U.S. equity markets has been very good, there is no guarantee that future trends will continue. As an example of the impact of change on becoming wealthy, a lot of people were left high and dry when the tech bubble crashed in 2001. Similarly, many folks hoping to get rich quick in real estate lost a great deal of money when the market contracted in 2007. Also unpredictability in mortgage and interest rates can sabotage the wealth building processes even absent a boom.

Similarly, economic fortunes can be hindered by failure to adapt to dynamic economic conditions. For example, in the early 1800s England was hit with a sustained depression in the price of agricultural commodities. This meant that landowning families who hadn't diversified experienced a sever decline in their wealth and political power.

In short, economic trends change quite frequently. This makes it difficult to effectively generate a long term plan to achieving great wealth. And, when one has achieved some wealth, economic conditions or technological change can wipe out that fortune.

2) Culture of Debt: When I say culture, I mean that debt has seeped into American psychology. At this point debt is almost a psychological mandate, our culture seems to dictate that to live a normal life you must have debt. If you look on TV its easy to seen this: there are tons of advertisements for mortgages, rent to own schemes, payday loans, etc. In this sense, debt has become a part of whats normal and everyday.

Not only is debt a part of everyday norms, its also a part of our life cycle. Consider major points in the typical American life span. First, most people take on some level of borrowing to cover going to college. After education typically comes marriage. Weddings can cost thousands, so people put the cost of their wedding on their credit cards. After marriage, a lot of couples buy a house and along with the house comes a mortgage. The next step is children, and more credit card debt. Basically, debt is often incurred at important parts of the life cycle, education, marriage, children, etc.

It goes without saying, but the more debt you've got, the less money you have to grow your capital. Thus, debt tends to hinder ones ability to get rich.

3) Consumerism: Consumerism is the theory that the consumption of goods is economically desirable. Its also a model for economic production. One major barrier to building wealth in today's economy is that the US is geared towards consumerism. On a big picture level, we tend to focus our economic activities around manufacturing and buying low quality cruddy consumer goods. Unfortunately these aspects of macro economic activity translate to individual behavior. People often choose to spend their money improving their consumer goods rather than saving to generate capital to start a business. Thus, consumerism and a consumer oriented society is a barrier to building wealth. We buy crap instead of saving.

4) Peer Pressure: Honestly, I've noticed that the more successful one becomes, the greater the subtle degree of peer pressure NOT to achieve. Its hard to say, but most people are actually pretty mediocre. Thus, there may not actually be a lot of support from ones friend to achieve real wealth, in fact they may discourage you. This is because your own success reveals their own inadequacies.

5) Psychological Barriers: Think about it for a second. Have you ever conceived of achieving a very high degree of wealth? I don't mean sitting back and daydreaming about it, but really sat down and turned the idea over in your mind? Probably not. Probably most people haven't. Most people just don't think about achieving wealth and accordingly don't decide to make the formal commitment to becoming rich. Considering the prevalence of laziness and cynicism in American society, its clear there are substantial psychological barriers to getting rich.

6) Taxation. The average effective income tax rate in the US is 21.5% (1). All things being equal, this means that 22 cents on your dollar are not going to make you wealthier. Taxes aren't all bad, they pay for defense, police, schools, roads, and other good things. However, purely from the standpoint of barriers to wealth, its a lot easier to get rich when you've got 100% of your dollars working for you. When you've got 20% of your income going to taxes, that's a drag on your ability to achieve wealth.

7) Discrimination and the Old Boys Network: In some parts of the US there is organized social resistance to minority populations achieving wealth. Just to illustrate this with a couple of examples:

1) In the deep South, state and county Jim Crow laws prevented African Americans from full economic participation. This is well documented (1).

2) In some rural parts of Mormon dominated areas in the country today, economic discrimination is practiced against Catholics by members of the Church of Latter Day Saints. This is less well documented, but is nonetheless true.

3) Economic discrimination against Jews was common in many parts of the US in the first half of this century. This is also a matter of historical record (1).

If you live in some environments, there can sometimes be organized local resistance to your economic success based purely on ascribed characteristics like race or religious belief.

8) Chance. Pure random chance. The world is probabilistic place. This means that random things happen; hurricanes, acts of God, heart attacks. Basically random things happen everyday that are outside of anyones control but nevertheless impact your wealth building.

So, just to sum it up, there are lots of barriers to getting rich in the US. The good news however is that lots of people do manage to make a great deal of money in America, so while difficult it is entirely possible to make a fortune. In fact there are millions of millionaires, so you've just got to make it happen.

Good luck with your own wealth building!

Best,

James

Inflation Controversy

2009-11-10T01:00:00.004-05:00

In my first post in this series I talked about inflation figures as they are calculated by the Bureau of Labor Statistics. Today I'll discuss some of the criticisms of this statistic and why it might actually be higher than what is being reported.

A cursory analysis of the information-gathering methods described by the Bureau of Labor Statistics certainly raises some questions regarding the accuracy of inflation figures. Any type of survey can introduce sampling errors, and it's important for the surveyor to accurately quantify that sampling error, which the BLS does provide. However, this is nothing new within the general area of statistics, as CPI detractors focus more on the non-sampling errors. These errors include (according to the BLS) "logistical lags...difficulties in defining basic concepts and their operational implementation, and difficulties in handling the problems of quality change". These are real issues that, if improperly managed, can have a significant impact on the final CPI values, and consequently, the inflation rate. The BLS attempts to manage these potential areas by periodically reviewing their price calculation and CPI weighting algorithms, as well as relying on their commodity experts who are responsible for making sense out of the figures the field analysts return. Regardless, questions have been raised by many economists about the validity of these values.

In this post I'll discuss two main areas that critics have focused on: whether the 80,000 item index represents an impact felt by a "typical" family and how the BLS takes in account changes in the goods and services.

Having over 80,000 items in the index has its advantages and disadvantages. As far as the advantages are concerned, by having such a large index, you're tracking most of the items purchased by American consumers. This will enable high granularity information on the costs of running a household. Pretty much anything you could think of purchasing is on the list. However, that fact doubles as a disadvantage, as the entire index is too extensive to act as a strong indicator of how the impact of inflation is felt by you as an individual. The BLS admits as much on their website, stating: "It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions". Since the indexes are based on the average household experience, there will be goods and services used that are not representative of your experience.

Others have attempted to compensate for this deficiency by examining the CPI and eliminating non-essential items, or by focusing solely on major categories that are of high importance or are monitored closely. For example, housing is an area that garners a lot of attention. By focusing a specific index of the fluctuations in the housing market (and identifying differences between renting and owning, for example) you're able to gain a clearer understanding on the housing statistics, numbers that could be washed out in the overall average. The U.K. for example publishes the same figures as the U.S. However, London's The Independent compiles their own inflation figures relying on what they've identified as "core" goods and services. Their figure is often as much as twice as high as the government-released data.

Changes in goods and services present an interesting problem for the BLS. If, for example, a 2003 Buick costs the same as a 2009 Buick (same model) are they equivalent products? Obviously not, as the newer model contains improvements that increase its intrinsic value (better safety equipment, more efficient engine, etc...). If the 2009 model is $5,000 more, does that $5,000 properly represent the increase in value of the new model? So how does the BLS commodities experts quantify those differences? That is where they rely on the expertise of their economists, to make judgment calls (based on their experience and historical data) that affect how those figures are calculated. The same goes for things like technology. How much more worth is contained within an iPhone 3GS than the first generation iPhone? That is a very difficult thing to quantify.

Ultimately the issue of inflation is drawn back to income. If your income increases at a rate greater than the rate of inflation, then you are ok; you're building wealth (assuming you buy the same goods and services every year). If you receive a raise that is less than the rate of inflation, then your paycheck might be larger, but you're purchasing power is lower. While you might not necessarily be able to make a one-to-one comparison between government-released inflation figures and your own experience, it's still a good figure for examining the health of the economy as a whole.

Michael
Twitter: @michael_dink

How Is Inflation Calculated?

2009-11-09T01:33:00.003-05:00

David from The Liberty Blogger recently raised an interesting point on a post of mine a bit ago regarding discrepancies between the official government inflation rates and some alternative ways of calculating inflation. That piqued my interest in the ubiquitous economic indicator that we all have a general idea of what it means but I for one have been unclear on some of its specifics. Over the next two posts I'll be discussing inflation. In today's post I'll discuss what inflation as we commonly know it is. My next post will discuss some of the criticisms surrounding how inflation is calculated and its political and economic impact.

Inflation is regarded as the general movement of prices of goods and services in an economy over a period of time. It is also intrinsically tied to the idea of "purchasing power" - the number of good and services that can be acquired with a given unit of money. Assuming a stable income level, an increase in inflation is met with a decrease in purchasing power. For example, $5 in 1950 would allow you to purchase more goods and services than $5 in 2009; a decrease in purchasing power. Therefore, the purchasing power of a dollar decreases as prices increase.

Inflation, as we commonly know it, is calculated by measuring changes in the Consumer Price Index. The Consumer Price Index is a value that attempts to quantify the cost impact of a series of goods an services on "typical" urban families. Calculating the CPI is a two-step process. First, Census data is used to select areas in the U.S. where information on the prices of goods and services will be taken. Next, again using the Census data, a sample of around 14,500 families are selected to provide information on the types of goods and services typically purchased and where those goods and services are most commonly obtained. Then each month, analysts from the Bureau of Labor Statistics call or visit those selected retailers to gather information on the goods and services that make up the index, roughly 80,000 carefully selected items.

In addition to price information, information regarding any changes are also noted - most commonly things like reduced packaging or the discontinuation of that good or service. Once all that information is gathered, specialized analysts at the Bureau of Labor Statistics review the information, compiling the national figures while taking into account variations in the products described above. All the numbers for all the goods and services are aggregated into its designated category (including Food and Beverages, Housing, Apparel, Transportation, Medical Care, Recreation, Education and Communication and Other). Each category value is then weighted and combined with the other category to produce the final CPI value.

Of course it's not that simple, as many different CPI values can be produced. Values can be seasonally adjusted (recalculated for the effects of the season), or restricted to "core" value (removing categories like Food, as they tend to be more volatile), restricted to Wage Earners and Clerical Workers (as opposed to All Consumers), or restricted to a specific region.

In my next post I'll discuss some criticisms leveled towards this model of inflation. Stay tuned.

Michael
Twitter: @michael_dink

Don't Fall for Advertising

2009-11-07T03:40:00.003-05:00

Hi Folks,

Regular readers may have wondered if I've fallen into a hole, or off the edge of the planet. Leaning towards the later, as I'm beyond the horizon, currently in Monrovia, Liberia. I've been busy working instead of blogging, but wanted to bring you some Saturday commentary.

So here in Liberia, my reading resources have gone dry. I under-calculated my reading needs and have run out of all reading material. This meant that I started scrounging around the work guesthouse to see what I could find.

I had been reading a 2003 National Geographic magazine, when this morning I noticed the back add.

It was from AIG. The ad claimed that it was the bank that you could invest in for your great, great, great, great, great, great, great grandchildren.

Of course, fast forward a couple of years, and this is clearly a bunch of baloney to those who lost both small and massive amounts of money in AIG.

Lesson of the Day: Don't get duped into falling for advertisements. They are probably worth less than it cost them to develop.

Have a great weekend!

Miel

Seven Ways to Save Money On Cigarettes

2009-11-06T10:25:00.008-05:00

Hi All,

One thing about living in a smaller building in DC is that you get to know your neighbors. Well, one of our neighbors has a boyfriend who is a long time smoker. We got to talking money and tobacco one evening while sharing drinks on our porch and specifically about how you can shave a few bucks off your expenses if you are a smoker.

So, here are eight ways to save money on cigarettes.

1) Quitting. If you stop smoking you'll save a ton. On average, people who enjoy tobacco smoke about 10 cigarettes per day. This translates into roughly 3 and a half packs per week. At around 7 bucks a pack, you're looking at roughly $100 a month. So if you quit the tobacco then you'd add a significant margin to your budget. Cost reasons aside, another good reason to quit is public opinion. Polite company views tobacco use as ill mannered and common. This means that smokers will have a harder time getting good jobs, romantic partners or advancing in their careers. In addition there are lots of health reason to quit, but this is well covered elsewhere.

2) Plan ahead. Buy cartons when they are on sale.

3) Switch to generic brands. High end premium brands like Camel or Marlboro cost more than generic or second tier tobacco products like Mustang or Quality light. Consider downgrading to save some money.

4) Ask for discounts. You might find that your vendor has cigarette packs that have been damaged or have brands that aren't selling well. They might be willing to let you have this tobacco for a discount if you ask.

5) Look for specialty stores. Look on the internet for stores in your area that specialize in cigarettes (also known as cigarette stores or tobacco shops). These places often have better prices, are more tuned into promotional offers, and in addition they don't look down on you for being a smoker.

6) Go online. There are several websites on-line that can provide you with discounted cigarettes. The only thing is that most of these places want to sell you smokes by the carton. That's fine if you're a long term smoker, but if you just want a pack or two this might not make sense for you. Also there are a couple of good websites that can hook you up with coupons for cigarettes. Try cigarettecoupons.org or marlboro.com.

7) Other ideas. This does not work for everyone, but you could consider visiting a local Indian reservation. Many reservations are off the beaten track, but you might consider going for a cigarette buying road trip. Beware, many people maintain that cigarettes sold on Native American reservations are exempt from Federal taxation, but the truth is its a legal grey area. So be careful if you are loading up on Native American tobacco, lest you run afoul of the tax man.

Happy Smoking!

Best,

James

The Great Big List Of 75 Budgeting Tools

2009-11-05T16:24:00.004-05:00

is over at Bible Money Matters. Check it out.

Doing Things Yourself vs. Paying Someone Else

2009-11-05T10:08:00.002-05:00

My senior year of college my roommates and I emerged from finals week and realized we had to get right on to moving out of our apartment. Because we lived in University-owned student housing, that meant a thorough cleaning which would be verified by a member of the housing staff. Any violations would result in a fine and we were staring a whole apartment worth of fines straight in the face. After surveying the considerable damage, one of my roommates and closest friends turns to me and with a completely straight face suggested we hire a maid service. I emphatically rejected this proposition based on the fact that a.) we had absolutely no money to pay a maid, certainly not enough to pay a maid to clean this disaster and b.) I swore I wouldn't pay someone to do a job I'm more than capable of doing myself. We ended up cleaning the apartment ourselves, much to the chagrin of my friend, who complained the whole time.

I was reminded of this story the other day when I realized I was overdue for a trip to Jiffy Lube to get my oil changed. I hate going to some place to get my oil changed for the same reason I didn't want to hire a maid to clean my senior year apartment. I may not be the most capable auto mechanic but given the right tools I can do the basic jobs: rotate tires, change the air filter, check the spark plugs, refill fluids, change the battery, replace fuses and lights and change the oil. Unfortunately my apartment complex does not allow me to make auto repairs, to the point where they have in the past indicated that they would fine people caught taking up space to perform auto maintenance. So, begrudgingly, I take my car to the local Jiffy Lube, sit in an uncomfortable chair in a smelly room for a half an hour until the job is done. But it makes me think about the cost comparison between doing it myself and going to Jiffy Lube (or some other similar place). To do it myself, I need the following equipment:

* Ratchet - $15

* Wrench for the Oil Filter - Wrench sets usually run around $25

* Oil Pan - $10

* Funnel - $2

* Oil Filter - $5 to $10

* Oil - Let's assume four quarts at about $5 a quart, so around $20 (just like oil filters, this can be cheaper if bought in bulk)

* Rag - Negligible

Of course those are all rough estimates for the sake of argument. That's a total cost of $77-$82, but only $25-$30 of that are recurring costs. Compared with around $35 for a oil change at Jiffy Lube, it would take about a year to make your money back, quicker if you already have the necessary tools.

That isn't a lot of savings, but over the lifetime of your car, you could save a decent amount of money. Either way, I'd still rather do the work myself, on my own time, but I can certainly understand why some would choose to let someone else do it and save the hassle. Ultimately with these types of services (housekeeping comes to mind as well), what you're really paying for is the time you save. For me, a guy who sits at a computer all day, it's kind of nice to do something productive with my hands, but the time and hassle you can (potentially) save by going to a service station would certainly be nice.

What about you readers? What services are you willing to pay for, and which would you rather do yourself and why?

-Michael

Twitter: @michael_dink

Microcredit and Pre-Bankability

2009-11-04T08:12:00.000-05:00

In 2006 Muhammad Younus and the organization he founded, the Grameen Bank in Bangladesh was awarded the Nobel Peace Prize for their work in providing loans to the poor in an effort to provide a means of self-employment and a hopeful path out of poverty. As he tells in his book, "Banker To The Poor: Micro-Lending and the Battle Against World Poverty", the idea first came about when he loaned $27 of his own money to a group of stool makers in a tiny village. He famously talks in his book about how those individuals just needed a little bit of money to buy the basic materials necessary to start their business and eventually work their way out of poverty.

The essential idea of microloans is the extension of credit to those impoverished individuals with limited employment and credit history who lack the necessary collateral or other means to obtain a loan (sometimes referred to as "pre-bankable"). The loans provided to those people would be used to start a business, hopefully kick-starting an entrepreneurial enterprise that would not only benefit the individual acquiring the loan, but also other impoverished individuals as the business gets off the ground. Microcredit is considered more of a sociological initiative than a financial one, as it is viewed that helping small businesses in poor areas benefits everyone in the community. Most of the loans made are relatively small, or like in the case of organizations like Kiva, made up of a series of very small loans.

Despite the publicity and goodwill directed towards microcredit, it is not without its detractors. Some argue that external governments who provide microloan assistance become more likely to cut back on more direct-funding aid. Also, the argument has been made that issuing credit in these types of situations is no different than credit cards and consumer spending: the borrowing can be sucked into a cycle of lending that fails to improve their financial standing while making them more and more dependent on those loans. And of course there are instances of corruption. Kiva has been the target of a fair amount of criticism, mostly centering on the interest rates that are set for the loans, which can be relatively high. Kiva defends their rates by making the argument that those loans are extremely high risk, and are expensive to provide to those in under-developed nations. Additionally, Kiva has opened up microlending to the United States, a decision that was met with a sharp outcry. Kiva's critics argued that while the poor in the United States are certainly in need of assistance, they still have access to education, limited health care and government assistance, services not available to those in the developing world.

Microcredit is certainly not a perfect model for eradicating poverty world-wide. The Grameen Bank has provided great services to the poor in Bangladesh, but has also sparred with the World Bank, an organization with wide-spread influence in the fight against poverty. From a ideological standpoint, Younus has faced opposition from heads of government and skepticism from fellow economists (he once referred to credit as a "human right") but there's no question that despite the criticisms, microlending has made a significant impact in the fight against poverty. This type of aid (and although it is a loan, I would still consider it aid, due to the high risk involved and the individuals targeted) goes directly to the person most affected. Whether it is successful or not, it provides an individual the opportunity to improve their standing in life, and sometimes all that is needed is the opportunity.

If you want to learn more about the development of microlending, I suggest you read Younus' book - "Banker to the Poor" and check out websites like Kiva.

Michael
-Twitter: @michael_dink

Giveaway: The New Rules For Mortgages

2009-11-03T10:30:00.006-05:00

Hi All,

It's Tuesday on the east coast. If you are interested in learning more about the mortgage market, this is the posting for you. We are giving away a free copy of Dale Robyn Siegel's latest, The New Rules for Mortgages. Just leave a comment at the bottom of this post and we'll pick the winner at random on Friday.

Whats really valuable about this book is that its an up updated and comprehensive look at lending standards in the mortgage market. Because of the housing crash the lending market has changed considerably - gone are the days when you could get a fat loan without a job or a down payment. If you're shopping for a house or are looking to pick up an investment property, this book can provide you an updated and thorough sense of the lay of the land.

Best part of the book - its free!

Folks - don't forget, if you're interested leave a comment with a valid way to reach you. Once the winner is chosen on Friday the book will be sent to you via snail mail.

Best,

James

How Great American Fortunes Are Acheived

2009-11-02T09:33:00.009-05:00

Hello Folks,

In my spare time, I've been working through a copy of C.W. Mills The Power Elite. For those of you who haven't heard of the book, its a treatise from the 1950s by Colombia University sociologist C. Wright Mills. The work is a masterpiece and provides a convincing explaining how wealth and power are distributed in American society.

Here is what Mills has to say about how great fortunes are generated in the US. If you're interested in attaining a great fortune - and you probably are otherwise you wouldn't be reading this blog - here an excerpt from the book:

I. No man, to my knowledge has ever entered in the ranks of the great American fortunes merely by saving a surplus from his salary or wages. In one way or another, he has come into command of a strategic position which allows him the chance to appropriate big money, and usually he has to have available a considerable sum of money in order to parlay it into really big wealth. He may work and slowly accumulate up to this big jump, but at some point he must find himself in a position to take up the main chance for which he has been on the lookout. On a salary of two or three hundred thousand a year, even forgetting taxes, and living like a miser in a board shack, it has been mathematically impossible to save up a great American fortune.

II. Once he has made the big jump, once he has negotiated the main chance, the man who is rising gets involved in the accumulation of advantages, which is merely another way of saying that to him hath shall be given. To parlay considerable money into the truly big money he must be in a position to benefit from the accumulation of advantages. The more he has, and the more strategic his economic position, the greater and the surer are his chances to gain more. The more he has, the greater his credit - his opportunities to use other peoples money - and hence the less risk he need take in order to accumulate more. There comes a point in the accumulation of advantages, in fact, when the risk is no risk, but is as sure as the tax yield of the government itself.

Once you have a million, advantages will accumulate - even for a man in a coma.

I hope you'll excuse the archaic language, gender roles have become significantly more egalitarian since Mills wrote and its possible for the same processes to apply equally well to women in todays world, otherwise Mill's core insight remains relevant and important to understanding how true fortunes are built.

Enjoy,

James

Apartment Shopping? - Three Tips For Rent Negotiation

2009-11-01T10:26:00.010-05:00

Hi All,

For those of you who are renting, you'll find this posting of some interest.

Money Talks News is an underrated video series that focuses on consumer affairs and personal finance. This video is on how to negotiate your rent.

The video says three things are key for negotiating your rent:

1) Know the local rental market.

2) Having a clearly defined negotiation objective.

3) Prove you are a good tenant, bring your credit score and references.

All these make good sense. My wife Miel and I have had some limited experience with rental properties. Landlords are definitely looking for good tenants. If someone has is a good prospect owners are likely grant concessions like lower rent, a free month or a smaller deposit.

What is a good tenant? Of course, opinions are going to differ, but here are some criteria that might you might be measured against when you're applying for housing. I think that age discrimination might be illegal, but unfortunately law cannot change peoples subjective biases, as much as we'd like it to.

A) Those with good references
B) A job paying at least three times the monthly rent
C) Good credit
D) A stable rental history
E) Married
F) Older

Thanks,

James

Attitudes Towards Savings

2009-10-30T08:16:00.005-05:00

Opening a savings account is usually one of the first step towards achieving your financial goals. If you ask anyone about the steps you need to take in order to get a hold of your finances the first they usually suggest is to get a hold of your spending (by creating a budget) and the second step is usually to establish an emergency fund. That emergency fund is often in the form of a (hopefully) high interest savings account. It's just money you can put away, not touch and watch slowly grow. You're less worried about achieving the highest possible rate of return but instead it's more focused on having a stable supply of money you can draw upon in order to weather unpredictable financial storms. And although there are other conservative investment vehicles that achieve the same goals as savings accounts, the flexibility and ease of use make them especially attractive.

But savings accounts can serve purposes larger than just emergency funds. Right now I have three savings accounts set up. I have an emergency fund (which, thankfully, I've finally managed to fully fund), one for the money that I'm saving for a down payment on a house and finally, a longer-term savings account that I'm using to accumulate money for a loftier goal: opening a bar with a friend of mine some time in the future. While those goals are all different, they share a common thread: they all contain money that I'm not expecting to need anytime in the near future and I'm comfortable with having a modest return in exchange for the security of that money always being there.

And that is the beauty of savings accounts. I focus a lot of my energy on investing. Tinkering with my 401(k), IRAs and brokerage accounts in order to maximize my investment return. There is higher risk involved, but with those accounts, I'm comfortable with taking those risks and occasionally taking losses so that I can enjoy non-trivial returns. But those accounts could lose a lot of their value; even the most careful planning can become moot if there's another stock market crash or I make a significant mistake resulting in an unfortunate loss. With that in mind, it's comforting to know that I have caches of money that are far more stable, and if I get in a financial pinch, I can draw upon them and be ok. They are my financial security blanket.

The United States is the most consumer-driven economy in the world, and it represents up to 2/3rds of our total economy. With that being the case, historically the personal savings rate (as a percentage of disposable income) has been in a state of general decline since the early to mid 80s. Before that, starting from the late 1940s, the personal savings rate had generally remained flat with a slight upwards trend. The data for the years surrounding World War II are an interesting case study in an of themselves, as the country saw people save their money during the war years before post-war spending sharply cut that percentage. The year 2005 saw the personal savings rate dip below 0% for the first time since 1933. This was at the height of the run-up to the mortgage crisis that lead to the economic recession we're currently digging ourselves out of. Probably the most interesting information comes from the last three years, during the aforementioned recession. At the beginning of that period the savings rate continued to drop as the initial hit of the economic crisis was felt and budgets tightened. However, 2008 saw a (relatively) sharp increase in savings, from a declining trend bottoming out at just over 1% in the 1st Quarter of 2008 to a rate of over 3% in the 2nd Quarter of 2008. A year later, in the 2nd Quarter of 2009, the personal savings rate jumped to nearly 5%. Many economists have suggested that this correlates to people weathering the initial storm, then taking stock of their financial situation and subsequently deciding to save more money. What will really be interesting is how those rates change as the recession continues and then when we do start our recovery. Will personal savings rates return to pre-recession lows, or will people decide to hedge against future economic downturns by saving more? That, of course, remains to be seen, but I will be monitoring it closely.

My savings has been pretty steady since I started working, even when I saw my incredible APY of around 4% cut to barely over 1%. Despite those irritating cuts, I'm still comfortable savings as much as I can - while hoping those rates eventually return to somewhere near those great rates I once enjoyed!

All data regarding the personal savings rate obtain from the U.S. Department of Commerce.

-Michael
Twitter: @michael_dink

Update: This post was feautered on The Carnival of Twenty Something Finance

When $110 Million Isn't Enough

2009-10-29T08:40:00.003-05:00

"[Antoine Walker] will never have to worry about money again in his life." -former Boston Celtics president and head coach, Rick Pitino

I'm fairly obsessed with sports, but especially basketball. My Purdue Boilermakers (pre-season top 10!) and the Indiana Pacers keep me fully engrossed in the sport of basketball from late October to nearly the middle of the following summer. As such, I remember when Antoine Walker played for the Celtics just a few years ago and I detested him. He was equally capable of pounding the ball in from the blocks as he was hitting the long three with a hand in his face. Whenever I think of Antoine Walker, the first thing I always think of was his aggressiveness and (borderline) arrogance. That man never gave two thoughts to launching a 30 foot shot early the shot clock or taking on a double team instead of passing out of it like he should have. But apparently the basketball court wasn't the only place where Walker was aggressive.

I came across an article on Walker in the Boston Globe the other day ("For Walker, financial fouls mount") that is a must-read for anyone with a dual interest in sports and personal finance. The article goes on to talk about how Walker spent his considerable fortune that he made in his years as an NBA player. It is estimated that over his pro career (which, while not officially over, is probably done for after Memphis bought out his last NBA contract) Walker earned around $110 million. Even roughly accounting for taxes, $55 million is still a considerable amount of money to spend in such a short period of time to get to where he is now, essentially broke and indebted to various creditors (mostly gambling debts) for around $1.5 million.

How did he get to this point? Unfortunately, his story is not that unique amount professional athletes: lifestyle inflation, being overly generous to family and "friends", failed business endeavors and a gambling problem all contributed to his current financial state. It is because of people like Antoine Walker than many professional sports operations, such as the NFL and the NBA, feature symposiums aimed at teaching rookies how to handle their money, how to make a budget, where to go to get good financial advice, how to evaluate (and get help evaluating) the multitude of business ideas they get pitched and how to create an environment where their financial success will be able to benefit them and their families even after their career ends. Unfortunately, the message doesn't always sink in - the NBA Players Association recently released figures estimating that within 5 years of retirement, 60% of former NBA players were broke.

I suppose the only takeaway lesson from this is that everyone can make poor financial decisions, and there's no such thing as having enough money that you no longer have to worry about how it's been spent. In many ways I sympathize with many professional athletes who go broke after their career has ended. Maybe they weren't given the financial tools to handle their situation, or maybe they have family and friends back home who see them as a paycheck, and have abused their relationship with the athlete for their own financial gain. Whatever the specifics of the situation may be, it is still shocking to read articles like the one I read about Antoine Walker and his financial demise.

-Michael
Twitter: @michael_dink

Free Finance Education

2009-10-28T14:00:00.001-05:00

Hi All,

If you're thinking about starting a small business or are interested in getting into entrepreneurship, here is a great collection of links to free online courses and lectures.

Handy if you're looking to pick up some free education.

Best,

James