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Are you as smart as a squirrel with your money?

September 13, 2015 admin Personal Finance Comments Off

In its simplest terms, managing money is simply this:

Produce more than you consume, and then save the difference.

In order to survive over the winter, insects like bees perform this by storing extra honey and animals like squirrels store extra nuts.

Humans must also do likewise:

Extra savings for emergencies and maintenance
Extra savings for large purchases like vehicles, education, and vacations
Extra savings for retirement

But you cannot save until you actively produce something for the marketplace. In order to consume more you must provide more; by acquiring more skills and experience that is worth more to other people. The money that you are able to save can also be invested so that it is producing money for you as well in the form of dividends and interest income. A result of consistently saving money in excess of your expenses is that: each time you get paid, you permanently increase your net worth. Continuing in this manner, month after month, is how you build financial stability, stay out of debt trouble, and build a bankroll that is earning an increasing amount of money for you as well.

So many people do not have basic squirrel money-management down. Instead, they

Spend all their income, so they have no savings
Spend beyond their income, building up debt
Instead of increasing their income, they focus on distractions like tax tactics or coupons to save tiny amounts of money

Start with a solid foundation in squirrel money management first, and only then move on to more advanced financial concepts.

Brazil heading toward debt default

September 6, 2015 admin Government Finance Comments Off

Brazil, along with other mismanaged economies, has a currency that has been on a sharp, continual devaluation for decades. Once the currency falls near worthlessness, the Brazilian government issues a brand new currency with a different name and the same thing happens again, and again. When you have a chronically-failing currency like this, it is very expensive for the government to sell bonds because investors demand a very high interest rate to offset the falling currency. Rather than do the work to fix the economy and support the currency, the Brazilian government made a classic financial illiteracy mistake: mismatching assets and liabilities.

A year doesn’t pass by without a catastrophic currency mismatch making the news. What happens is someone borrows money in a foreign currency or makes an investment in a foreign currency, and then that currency moves the wrong way and they are financially-wiped out. This happens to individuals, companies, and governments, again and again. People take on an unhedged currency risk, for a relatively small financial gain, and think they will be the sole genius to avoid being crushed by an unfavorable currency move. (You can hedge currency risk, but it is not free, always accurate, and cannot be done for more than a year or two in the future).

Brazil issued their bonds denominated in U.S. dollars instead of their home currency. But in the last year, the Brazilian currency has plummeted by 39%, making the bond payments in dollars increasingly unaffordable. Investors are watching Brazil taking in tax revenue in a weakening currency but making debt payments in a strengthening currency. As a result, Brazilian bonds have been falling so low (yielding over 14%), that they are effectively predicting that these bonds will default. All because of financial illiteracy, a predictable and painful financial outcome for all who are involved, particularly the Brazilian residents.

If Brazil were to ask me, I’d advise them to default immediately so they don’t further deplete their current account and money that is needed to run the government during their current recession. The sooner they face reality, the sooner bond investors and Brazil can act appropriately and restructure these bonds to something affordable and sustainable.

Stock market panic and market timing

August 30, 2015 admin Investing Comments Off

When the stock market drops or becomes volatile, investors become anxious and consider ways to protect their money. One method they consider is subjectively trying to buy near price bottoms and sell near tops, called market timing. Unfortunately, all of the academic evidence points to both professionals and amateurs being very poor at timing stock market purchases and sales. This means that engaging in market timing is most likely to reduce your stock market returns by making ill-timed sales and purchases of their funds and stocks. This is the opposite of what investors are trying to achieve.

But this doesn’t stop investors from trying to use volatility to profit or minimize losses.

So what are some rules about getting into and out of the stock market that might be helpful to investors?

I use a rule for a portfolio that is otherwise for “Buy and Hold Investing” that I call The Emergency Brake. The rule is: Anytime the stock market falls by 15% from its most recent high point, I exit everything.

The stock market is in constant flux, this is the nature of the market. But this volatility also includes price drops of 25%, 50%, and a whole lot more. These are crushing financial losses that can take decades to recover from and many people don’t have decades to wait. Since the 1970’s, a new stock market low has been followed by a new all-time-high within 20 years. So a “Buy & Hold” investor will eventually recover, if this pattern holds in the future.

By selling everything, you are protected from any further losses beyond 15%, and many of these larger price drops do occur. By eliminating these significant losses, your portfolio value will be far higher than it would have been if you had taken no action. For example, I have details on 401(k) plans where two people would periodically ask me for advice. One of them used the Emergency Brake twice while the other one took no action. A few years later, having a side-by-side comparison, the account that side-stepped two significant drops had nearly twice the overall return as the account that rode out both drops.

Yes, there are risks of using the Emergency Brake. For example, you may sell at a 15% drop and that may be the price bottom and the stock market may rise from there. This would confirm the classic ill-timed market timing that reduces overall returns. But this emergency brake is a form of insurance and like all insurance, there is always a cost. There are more sophisticated ways to set a brake on your portfolio, such as buying an inverse ETF that matches your portfolio, but again, you need to have the money because there is always a cost to a hedge.

If you have employed the Emergency Brake, then when do you get back in? I use two rules. First, similar to the 15% fall, if the stock market rises 15% from a more recent low, then I buy back in. My second rule is more subjective, if the stock market “calms down” with much reduced volatility and trades sideways for quite a while. To me, the longer these occur, this indicates that the risk of an immediate and continued fall has subsided and I can start buying back in; hopefully at a lower price point than when I sold out.

Partial positions: there is no rule that you must be 100% fully invested or 100% out of the market. You can scale in and out with partial positions. For example, at the first 15% drop, you can sell a third of your stocks, at an additional 15% drop, you can sell another third of your stocks, etc. And the same thing to scale back into buying stocks.

Remember that academic research points to timing the stock market as a very bad idea for investors. However, if you want to protect yourself from a protracted fall in the stock market, then make sure your ideas have been evaluated in many types of market conditions over decades, or use the simple one that was just outlined. Additionally, you may adjust the 15%, by reducing this number, to say 12%, but be aware that it will be hit many more times, chewing up your account with sales and purchases. Or you can increase the 15% to 18% and have fewer trades but have a larger loss before you take evasive action. Be careful and thorough in your market-timing analysis, be consistent in your application of any rules that you make, and then follow your investment plan.

How to get consistent raises

August 23, 2015 admin Career Comments Off

Many articles or tips on getting a raise hinge on the wording or being willing to quit your job. These may produce a minimal raise, but in my opinion, these tactics are not the successful foundation of long-term raises and promotions.

A better strategy for raises is to build habits, that when continued over time, make your skills so valuable, that you are offered top raises and promotions to keep you from leaving for a competitor. What are some of the habits of top performers? Exactly what you’d expect:

Get to work a little earlier and stay a little later.
Focus and diligence on getting work completed.
Proactively take-on more responsibilities before you are paid to do them.
Complete certifications, trainings, and degrees to maximize your qualifications.
Join industry associations to learn and network for opportunity and learn your worth.
Become the most valuable person on your team, department, office, and company.
Request a meeting with your boss periodically to see if there are other things you can do to become a better employee (outside of a normal performance review).

Consistently building and performing these habits will move you toward being a far more valued employee. Top-ranked employees are far more likely to be granted the highest raises and the fastest promotions. Large corporations commonly make a list of their top 100 employees to mentor and advance within the company. Are your current work habit more similar to the top talent that is developed and protected or the replaceable workers that are only seen as an expense to be minimized? Are you more of a workplace warrior or the first slacker to be let go in a layoff?

As you become a top-ranked employee, you also become a target for your fellow employees who, by contrast, you are making appear as poor employees. So be ready for them to make false rumors about you. In order to weather these attacks, it is up to you to go out of your way to try to keep rapport with all of your fellow employees, as best you can.

A tactic to get a raise, even if it works once, will be an insignificant amount of money compared to a continual ratcheting of promotions and raises over your career from becoming a top performer. It is my advice that you focus on productive and valued habits and not tricks.

Beware of creeping fixed-costs

August 17, 2015 admin Personal Finance Comments Off

The illustration of a goat tied to a tree so it can be milked is an accurate depiction of what both governments and companies are continually attempting to do to your wallet. These entities would like to turn you into an ongoing annuity; making regular payments to them forevermore. Businesses call it “a subscription business model.” It is your financial role to minimize these from consuming your income. These ongoing costs raise your monthly fixed expenses, leaving you less money for saving, investing, and normal spending.

A necessary fixed expense may be rent, electricity, or car insurance. But beyond these basics, you can go crazy by adding a never-ending list of additional fixed expenses. Each additional fixed expense can slowly creep up and subsume far too much of your income.

Let’s go through some common fixed expenses that many people have:

Cable TV with extra movie channels, sports packages, and on-demand movies
Cellphone service with extra data plans, insurance, and features
Yard fertilizer service and pest control plans
Life insurance that is no longer needed
Identity theft protection and credit monitoring plan
Time share vacation package
Monthly charges for bank accounts, financial software/apps/advisors
Alarm system service
Website hosting with endless feature upgrades
Appliance maintenance plans
Hobby clubs with monthly membership billing
Computer backup plans, malware & virus plans
Health club membership
Streaming music and video subscriptions
A themed box-of-the-month subscription: coffee, wine, candles, beef jerky, etc.
Storage unit for items worth less that what you’ve paid in storage rent

The point is: a relatively small fee of $9.95 per month may appear affordable for a service, and it may be necessary for your circumstances, but when you have many of them, they accumulate to a lot of money being vacuumed from your checking account. I was helping a friend struggling with his debts and found that he had 3 monthly recurring charges on his credit card for services that he had never used! Meanwhile, the financially-aggressive people that I know actively drive down extraneous fixed expenses. They do this so they have money available to invest or splurge on items and experiences that are most important to them.

Government defaults – Puerto Rico and Detroit

August 9, 2015 admin Government Finance Comments Off

Government financial illiteracy

The Puerto Rican government just defaulted on a $227 million in bond payments. These payments were part of their $72 billion in government debt. How did tiny Puerto Rico accumulate such an unsustainable amount of debt? As tax revenue fell from their ever weakening economy, Puerto Rico borrowed an ever increasing amount of money instead of prudently laying off government employees and cutting services. This debt grew until it pushed them well beyond financial difficulty and into unsustainability. Investors were blindly attracted to Puerto Rico’s triple-tax exempt bonds (federal, state, and local tax-free) and didn’t pay attention to PR’s unsustainability until it was too late. To the financially literate, this debt default was predictable arithmetic.

The city of Detroit emerged from bankruptcy just months ago, after the judge eliminated $7 billion of its debt. After bankruptcy, Detroit’s bond credit rating jumped up from a junk level to “B”, and even “A” for revenue bonds. Too bad Detroit’s leadership doesn’t appear to have learned financial lessons from being the largest municipal bankruptcy in U.S. history. The city wasted no time in abusing their new asset, a high credit rating, by issuing $245 million in new bonds. This new debt will pay for some blight removal and public safety improvements. However, Detroit has a long history of being unable to maintain any recently improved areas: graffiti goes back up as soon as it is cleaned, scrappers return to buildings like locusts after they are boarded up, torn down homes become sites for illegal dumping, cleaned up parks go back to weeds and trash, etc. So much of this debt is likely to be spent on temporary benefits while the debt to pay for it is a permanent shackle of $12 million in annual interest expense. As additional proof of financial illiteracy, part of the bond sale will be used to to hire more police and give promotions – if you cannot sustainably hire and promote out of your current budget, then you cannot afford them! If you cannot afford to hire some police with your tax revenue, where will the additional money come from to ever pay back $245 million from a city whose population is declining? It appears to me that Detroit hasn’t missed a beat in its irresponsible financial decisions.

All flash and no cash

August 2, 2015 admin Personal Finance Comments Off

Keeping up with the illusory Joneses

Famous rap star 50 Cent just filed for personal bankruptcy. Right up until the court proceeding, 50 Cent was sending his 8 million Twitter followers images of his flashy lifestyle. His selfies frequently included exotic cars, piles of cash everywhere, and expensive jewelry. In court, he admitted that his lifestyle was a fraud: the cars, jewelry, and luxury items were borrowed. He filed for Chapter 11 bankruptcy to restructure the $50 million that he cannot repay. What prompted the bankruptcy was a new judgment he lost a couple days ago for $5 million; for a privacy violation by posting a sex-tape online without permission from the woman. This judgement was in addition to another $17 million case that he lost to a headphone company.

Just a couple years ago, 50 Cent was reported to be worth well over $100 million from a water deal. But if your spending far outstrips your income and assets, no matter how much money you start with, you’ll be headed to bankruptcy court as well.

50 Cent may not have much financial literacy (he admits that he has no idea what the value of his branding deals may be), but his paid and licensed accountant should be well versed with his finances. Apparently, this was not the case. 50 Cent’s accountant had never met him, left material assets and liabilities off of his balance sheet, and did not know key elements of his lifestyle spending. Another important financial lesson is: if you do not have expertise to perform a task, you must still know enough to manage these financial experts working on your behalf.

Yes, it is possible that this bankruptcy is just a ploy to get out of $22 million in judgments, however, it seems unlikely because he’d be committing perjury and damaging his reputation for what would be a small amount to his reported $155 million net worth just a year or two ago.

The financial literacy lesson that too many sports stars and celebrities learn too late, is that your spending must always be at a sustainable level to your income, no matter how high or variable that income may be.

How to get free* stock options

July 26, 2015 admin Personal Finance Comments Off

To be granted valuable company stock options, you normally had to be an underpaid employee at a start-up company for many years. And even then, the odds were only 1 in 10,000 that your company would be bought or become publicly traded so that the shares would be worth anything.

Now there is a company that allows you to perform a checklist of tasks to assist a start-up company in being used and promoted, and that qualifies you for a block of stock options. There is no limit to the number of companies you can do this for and you can choose only the ones that you want to support. Your stock options are a reward for being an unpaid marketing consultant and/or user of the product.

Like any lottery, most of the stock options granted will never be worth anything, but some will become valuable, and a few will possibly become a life-changing amount of money for you.

The company brokering these stock options is called RocketClub.co and is, itself, a recent start-up using this method to grow the company. Since they just began, they only have a few companies to choose among, but there are many new ones in the process of signing up.

Retirement financial failings

July 19, 2015 admin Government Finance Comments Off

For many decades, the conventional retirement plan was called, “A 3-Legged Stool.” The legs of the traditional stool consisted of:

Your company pension (but these have disappeared), government employee pensions (but these are being reduced).
Social security income (but the whole program needs to be restructured, it is losing +$80 billion a year and the Baby-Boomer generation has barely begun to retire).
The last remaining leg is your own personal savings. How is yours going so far?

The retirement stool, in general, is now wobbly and falling over. Certainly our government leaders are going to do something about it, right?

What exactly are our political leaders doing about these programs?

Social Security Retirement – financially unsustainable
Social Security Disability – financially unsustainable
State and local government pensions – many are financially unsustainable

Not much unfortunately, because they refuse to admit there is any financial problem.

Since personal savings for retirement are underfunded or nonexistent for many people, a large number of people are financially forced to work past their preferred retirement age. But if you do work after you starting to draw social security benefits, be aware that the government has two tax traps waiting for you:

If you earn more than $33,000 in retirement then 55% of your social security income is taxed at regular rates.
If you earn more than $44,000 in retirement then 85% of your social security income is taxed at regular rates.

Being taxed on social security is a penalty clawback on your retirement income that most people are unaware of until they actually incur them. Since few people know about these extra taxes, they do not plan for them and face even more financial struggle when they are least able to do something about it.

As I write this today, President Obama is speaking at the White House, claiming that “Medicare and Social Security are not in crisis.” However, the arithmetic highlights that they are in catastrophic shape:

Using generally accepted accounting rules, Medicare is unfunded today by $27.5 trillion.
Social security is unfunded today by $14.1 trillion.
As a comparison, all of the annual wages and business profits for the U.S. economy is only $17.8 trillion per year.
In addition, the U.S. federal debt is still growing much faster than the economy is growing – which is an unsustainable situation for any country.

The critical financial lesson for everyone today is:

The federal government cannot be trusted to fully pay promised social security payments.
Pension plans are increasingly reduced or eliminated.
So the only leg of the retirement stool that you can count on is your own personal savings. Make sure that you are properly supporting your retirement accounts.

Rental property is never a “passive investment”

July 12, 2015 admin Investing Comments Off

Salespeople try to sell new investors on the fantasy of rental property as a passive investment. In my opinion, there is no such thing as a passive investment, let alone one that is a physical object that needs to be maintained.

Let’s go through a few of the elements of owning a single rental property:

Up-to-date LLC formation, operating agreement, and ongoing paperwork.
Up-to-date knowledge of local and state property management regulations
Tenant marketing and tenant management
Home ownership maintenance and repair management

Does performing any of these functions appear to be passive to you?

What are a few things that can go wrong with your rental property?

Lawsuits, changes in regulations, plus all of the maintenance problems you are responsible for handling. Some of these include: Electric system, plumbing, paint, carpet, countertops, stove, refrigerator, dishwashers, washer & dryer, anything that can go wrong is your problem. You have to manage the repair or replacement and pay for all of it.

What about getting a property manager to do all of this for you? Sure, but first:

Do you know how to locate a reputable property management company?
Do you know what needs to be included or excluded from the management contract?
Do you know how to review their work to make certain things are being done and they aren’t ripping you off with inflated prices on repairs?
Do you know how to manage the property management company?
Do you know how to fire and replace the property management company?

When you hire a property management company because you do not want to physically manage the home, then you must actively manage the management company. One way or another, you must manage something or the investment will turn into a loss, possibly a large loss (due to leverage from a mortgage or other debts).

I own rental real estate and know several people who make their living solely from rental income. But the concept of a “passive investment” should never be linked with rental real estate. Someone who gets involved that views a rental as a hands-off investment is likely to learn a painful and expensive lesson.

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Financial Literacy

Timeless concepts to turn financial chaos into clarity

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