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Slow-pay by the State of Illinois

March 3, 2019 Government Finance Comments Off on Slow-pay by the State of Illinois

You may know that the State of Illinois has the lowest credit-rating of any state and is in a financial death-spiral from colossal state employee pension liabilities and over spending. For at least 8 years, Illinois has been very slow in paying suppliers of all kinds. From nursing-home patients, to prison guards trying to get bullets, to lottery winners, and even state income tax refunds – nobody gets paid within a reasonable period of time. According to an Illinois vendor survey, 40% wait 5 months for payment and 36% wait 6-12 months for payment. I know a Michigan dentist, who has two patients that work for the State of Illinois, and she says she won’t accept any more of them because she’d go bankrupt – it takes at least 8 months to get paid. 

Have there been any consequences for this structural habit of slow payment?

  • To pay unpaid bills, the state ratcheted property taxes so high it resulted in the emigration of residents to other states.
  • Legislators have received eviction notices for their district offices and had their phone lines cut off. Banks won’t lend to entities relying upon payments from the state.
  • The state is slow to pay townships and cities, resulting in a “deadbeat” reputation across the entire state. Many suppliers insist upon payment upfront in advance of sending goods.
  • Lending companies started cropping up 7 years ago, offering quick payments to Illinois vendors, but those payments are discounted, you receive less than what you are owed. Many more lenders are needed, but Illinois also has usury laws disallowing rates commensurate with high risk: loans to a government entity cannot exceed 6%.
  • Non-profits and foundations have closed or are floundering, according to the CEO of the Illinois Donor’s Forum. Funds are generally raised from 3 entities (businesses, individuals, and the state), but corporations are leaving the state, individuals are struggling, the only one left is the state and they are not following through with their commitments.
  • A lawsuit forced the State of Illinois to speed up Medicaid payments. Medicaid patients have doubled in the last 15 years, causing yet another financial strain on the state’s finances. 
  • Availability of social services is diminishing: mental health services, food for homebound seniors, domestic violence centers, libraries, and state colleges are laying off staff and deferring maintenance.

On top of all of this, small businesses have been closing and medium/large companies have been moving out of the state. The only way to turn around Illinois’ gigantic deficits and unpaid bills is to:

1. Cut spending (which they’ve been unwilling to do in 20 years)

2. Cut state pension obligations (but that is illegal in Illinois)

3. Possibly increase taxes (but they are already so high that individuals and businesses have been fleeing the state).

Four additional casinos to avoid

February 25, 2019 Investing Comments Off on Four additional casinos to avoid

Aside from an actual casino, there are 4 other gambling activities where people are most likely to lose money. Let’s review some generalities:

  • The poor gamble with lottery tickets – a certain loss the more you play, states only payout 50% of their lottery revenue in prizes (although each state awards at a different rate).
  • The middle class gamble with stock tips and day-trading – studies show that 80-90% lose money doing this until they quit within 2 years.
  • The rich gamble with private placements (equity in start-up companies) – the vast majority of start-up businesses fail within the first 5 years. You have to buy into a lot of businesses to get a lucky big winner to pay for all the floundering and bankrupt companies you bet upon.
  • And the wealthy gamble with things like race horses or drilling oil wells. Oil wells can cost $5-10 million minimum investment. 10% of them will be dry holes and many never break-even; you have to buy enough wells to get a lucky “gusher” to pay for all the losing wells.

The average person who casually gambles at a casino leaves a financial loser. I knew someone who lives in Las Vegas who scratches out a minimal living at the baccarat tables, but he is a very rare exception. It is the same for these other casinos: someone determined and focused may be able to find a slight edge but, for the most part, the average gambler or speculator also leaves a financial loser.

There are other reasons to participate in 4 casinos, such as entertainment, investment diversification, oil depletion allowance, for a few examples. However, placing much money into any of these is highly likely to exacerbate your losses.

Continually add new job skills

February 17, 2019 Career Comments Off on Continually add new job skills

There are many elements to career planning but the element I notice that is missing the most is annual skill building. If you would like an upward career trajectory for challenge, income, responsibility, control, fun, or whatever – it can only happen if you collect the necessary skills and experience to be awarded those jobs and promotions. The most certain way to make that happen is to add or advance one new skill per year. It could be learning a new foreign language, learning a new coding language, taking a course in negotiation, or a new technical certification. Today, there are endless ways to learn something valuable to offer potential clients or companies.

Most careers include moves to other companies, industries, and geographic areas. Naturally, the best way to get hired is to have a unique collection of valuable skills to offer potential employers. I’ve observed that workers in their 50s and 60s who lose their job fall into two groups. The first group was complacent, having never added or enhanced their skillsets – so they were reduced to a replaceable commodity that is younger and cheaper. People in this first group are either never hired again, or if they are, it is at a vastly lower pay than their last position. An example of this group would be someone performing a physical task in a warehouse who was automated out of a job. The second group found a way to accumulate highly specialized skills or knowledge that kept them in high demand. They usually find new employment quickly at their same level of compensation, possibly higher. An example of this second group would be someone who was active in bringing new speakers to their career association group, staying on top of changes in their industry, and getting certifications in upcoming methods of efficiency.

To build a career that is improving and growing, it must be nurtured and supported with new skills. The world economy will always slowly change and become more efficient, so you need new skills need to keep pace. If a new process puts your career on a downward spiral of obsolescence, then it is time to re-assess and focus on a career shift to one with an increasing demand.

The 2-income finance model

February 10, 2019 Personal Finance Comments Off on The 2-income finance model

Rob Grownkowski, a tight-end for the New England Patriots, just won his third Super Bowl ring a few days ago. Unlike other pro-athletes that are bankrupt 2-3 years after their career ends, Gronkowski hasn’t spent a single penny of his NFL salary from his 8 years in the league. He even banked 100% of his original signing bonus. Instead, Gronkowski just lives on money that he makes in endorsement income. He has now teamed up with Capital One to offer tips on his “Gronkonomics,” challenging people to save money.

His other tips:

  • No designer clothes, he wears old clothes until they are rags
  • No outrageously expensive jewelry, homes, or big-ticket luxury items (although he has splurged on a few cars recently – only from endorsement earnings)
  • If I do spend extra money, it is usually on charity through my foundation

FinnApp estimates Rob Gronkowski’s net worth at $153 million, far more than anyone would expect from his annual salary. He currently has a base salary of $5.25 million and it can go up to $10.75 million, depending on how much time he plays and how well he does.

Comedian Jay Leno has a similar financial habit. “When I first started out as a kid and an unknown comic, I’ve always had 2 incomes – one to bank and one to spend, and I only spent the smaller one. I made money at a car dealership and from comic gigs.” At the peak of his career, when he was making $30 million a year from NBC’s Tonight Show, he still never touched it; Leno only spent the money he made from comedy shows on the side. “So I made sure that I had at least 150 comedy shows a year, to make certain I never touched a dime of the Tonight Show money. So many entertainers blow all their money but savings gives me peace of mind. If my career ended right now, financially I’ll be fine.” Jay Leno is 68-years-old and still performs comedy gigs plus he has a TV show, Jay Leno’s Garage that is 4 years old. Jay Leno’s net worth is estimated to be $400 million.

You do not have to be a high-income celebrity to employ this 2-income tactic, all you need is a second income source:

  • I know several couples that bank one salary while the other salary is used for living expenses.
  • A family acquaintance is single and while he has a job, he would spend weekends working a multi-level marketing program with cleaning products. He kept it up until that side income paid two times his salary, then he saved 100% of his salary while only spending the MLM income.
  • A relative’s second income is flipping real estate. She and her husband both work (and have 2 children) and they buy a cheap fixer-upper to live in while they make repairs to it on weekends. After 2 years (to maximize the IRS tax-exemption), they would sell the home and roll all of their equity into their next larger fixer-upper. They repeated this again and again, into more expensive homes, and worked their way up to multi-million dollar fixer-uppers for very large capital gains.

Of course, you can save a portion of one income, it doesn’t have to be 50-50 – but consider it a target: having two incomes and saving one of them for your maximum financial stability.

Zero commission stock trading

February 3, 2019 Investing Comments Off on Zero commission stock trading

As long as I can remember, to entice new customers, investment brokerages have offered a few upfront commission-free stock trades. In the last couple decades, there have been several online broker startups with no-commission trading as a business model. Because nothing is free, there is always a downside trade-off with these companies, such as batched trades at the end of the day, poor bid/ask spread, or they quickly go out of business. Last year, one of the zero-commission firms (Robin Hood) had a couple software glitches in their options platform, messing up orders that created large losses for customers; and they called it “erroneous option execution, sorry for the confusion” Um, no thanks – I think I’ll take my business elsewhere!

Now, the big boys are entering the no-cost commission game:

  • Bank of America (Merrill Lynch) offers 10 free trades per month
  • Chase Bank (JP Morgan) offers 100 free trades per year
  • Wells Fargo (WellsTrade) offers 100 free trades per year
  • Fidelity has free trading for 25 of their iShares ETFs
  • Vanguard offers free trading on their ETFs
  • Schwab offers free trading on their 8 ETFs

Some of these companies have minimum requirements to qualify for these free trades, such as $25,000 or $50,000 in your account. If you do not qualify for free-commission trading, there are many firms that charge as little as $2.95 per trade. A quick online search can show you which firms and more importantly, reviews from users. For example, I used the company Interactive Brokers for a couple years because they are super cheap. But their platform was just too cumbersome for me to use quickly and elegantly with multiple accounts. If you begin trading frequently (which I do not recommend) you can always try to negotiate a lower commission rate. I knew someone that inherited an old stock account at Raymond James in 2016, along with their $175 commission rate from the 1980s. Since the Raymond James broker wouldn’t even return his phone call, he transferred the account to TD Ameritrade for $6.95 commissions and saved a fortune when he rebalanced the portfolio. As the brokerage industry landscape changes, make sure to periodically shop around to get best deal for your circumstances, and possibly no-cost commissions to reduce your costs.

Alexandria Ocasio-Cortez wants a 70% marginal tax rate

January 27, 2019 Government Finance Comments Off on Alexandria Ocasio-Cortez wants a 70% marginal tax rate

New U.S. Congresswoman, Ocasio-Cortez would like a confiscatory tax rate of 70% for personal income above $10 million dollars to pay for her socialist government goals. Setting aside socialism, let’s examine two critical questions: will this tax plan work and how will taxpayers react?

The first question, will it work, we can already assess by many recent examples of this new income tax. The states of Maryland, New Jersey, Washington DC, and others have imposed a “millionaire tax” for their highest income earners in the last few years. What happened? The income taxes collected from their highest earners fell – it backfired for all of these states. The exact same result happened recently in France and Canada when their socialist presidents tried it (Hollande and Trudeau). Why does a higher marginal income tax rate mostly backfire? Anytime you increase someone’s opportunity cost, they go far out of their way in effort and money to avoid it. (For example, the anecdotal evidence from Maryland, D.C., and New Jersey was that many of their high-income earners had a second or third home in a lower taxation state, and they simply changed their declared domicile to that other state. If they didn’t have this option, they simply moved out of state, usually to Florida, and took their entourages of advisors with them).

Now the second question: How will taxpayers react? Let’s examine; who actually earns more than $10 million a year? Nearly all of them are business owners, aside from a few movie, music, and sports stars. How do they pay their income taxes? Each year, they sit down with their tax attorney, accounting firm, banker, insurance agent, investment broker, and other advisers to map out and coordinate the next 5 years of activities and tax laws. Together, they optimize the high-income earner’s financial situation and minimize their lifetime tax liabilities. Some top earners also consider the tax consequences for several generations of inheritance. As a business owner, they have many “levers” to manipulate:

  1. How much salary they want to take
  2. How much dividends and/or capital gains they want to take
  3. How much deferred compensation they want to take
  4. How much of one type of income they want to convert into another type of income
  5. When to time spending and donations for tax deductions
  6. How to increase depreciation or other IRS incentives to reduce taxes
  7. Which tax credits do they want to select to reduce their taxes
  8. And many more levers such as life-insurance arbitrage or captive insurance

I have attended one of these meetings and was rather shocked at the size of their tax-lowering menu that they can choose among. One of the options is to actually pay zero income taxes and there are two ways someone wealthy can achieve this within two or three years. First, purchase many apartment buildings (or commercial real estate) and the depreciation will drive your taxable income much lower, and if you want, all the way down to nothing. (One acquaintance started with 1 rental property and now has 6,300 units; he cannot remember the last time he paid income taxes to the state or federal government.)

The second method allowing a wealthy business owner to pay zero income taxes is to choose not to have any income and borrow all of the money that they spend. The high-income earner could change their salary and dividend withdrawals to zero, and let’s say they spend $5 million a year on their luxury lifestyle. They borrow $5 million, every year, for the rest of their life for spending money. The cumulative loans and interest are re-paid at their death from insurance policies and/or their pledged business assets. This is exactly how many earners in the top 0.01% already pay nothing in income tax all over the world. Because they don’t have any income, they just spend loaned money, perhaps from an offshore trust. If confiscation tax rates were enacted at the federal level, these strategies (and many, many others) would quickly become commonplace for incomes much lower than $10 million.

When a politician increases income tax rates, let’s say to grab an extra $2 million from someone very rich – they only see the new money that they can spend on pet projects. What these politicians ignore is that the taxpayer now has a $2 million incentive to lower his or her tax burden. Plus, they can spend $1.9 million of that money on tax experts to find a way to make that happen and still come out ahead. In my opinion, Congresswoman Ocasio-Cortez’s new 70% marginal tax rate, if enacted, would result in yet another taxation backfire for the socialists.

The consequences of buying “toys”

January 20, 2019 Personal Finance Comments Off on The consequences of buying “toys”

There is nothing the matter with rewarding yourself with fancier gadgets, vehicles, apparel, boats, or increasing your lifestyle. However, many people do not consider the deeper consequences of owning them until there is irreparable trouble. When a new item begins taking up your time, money, and effort, then these limited resources must be taken from where you used to place them: someone or something else. These “others” could be your spouse, kids, work, business, relatives, retirement savings, friends, and personal goals. Can these prior relationships or activities survive with your diminished time, money, and effort? As an example, I know someone who was divorced after he began spending big on several exotic cars plus driving trips with buddies. That may not have been the primary reason for the divorce; however, it was the last straw that the relationship could not survive. (It is also a classic move to short a stock once the CEO starts spending more time on his yacht or court-side seats than working; because the company performance will soon tank from the CEO’s lack of attention).

Once we have acquired something new and expensive, we feel like we have to use it a lot or the purchase was a waste; whether it is an Xbox console or a $750 pair of Louboutin shoes.

What are some of these items with sink-holes of consequences of time, money, and effort?

  • A large screen TV – more hours per week on movies and television, holding parties for watching
  • Buying a horse, or even a dog – exercising them for hours each week plus potential medical bills
  • Any boat, let alone one that has sleeping berths for overnight stays – current boat owners keep the old joke fresh, “A boat is a hole in the water that you throw your money into”
  • Hobbies – your own pilot’s license, yacht captain’s license, racing bicycles
  • Apparel and accessories – it is tough to stay home alone or dine at Taco Bell if your closet is filled with the latest high-end designer goods
  • Any kind of club: country club, book club, shooting club, dance club, garden club, etc.
  • Collecting: watches, antiques, cars, art (a friend spends a fortune on Persian rugs every year)
  • A second home – requiring twice the home maintenance plus the added travel

There is nothing wrong with taking up a musical instrument or buying 2 mega yachts. The critical question is: Have you considered where the time, money, and effort will come from to support and maintain all of it? Is everyone else in agreement with you about the new lifestyle – or will it strain and break the relationship? Will you lose or job or business in the process? For example, I know someone who lost his job and doomed his career because he didn’t realize how much time he needed to devote (during work hours) on the build-out of his spectacular trophy home for weekends in a distant coastal town. So before you begin adding new elements to your lifestyle, carefully evaluate all of their costs, over time, to the parts of your life that are most important to you.

Do you dabble with investing?

January 13, 2019 Investing Comments Off on Do you dabble with investing?

The world of investing is extremely competitive, and yet people attempt to make money by casually dabbling in it on the side. Anyone financially ambitious will come across ads for books and courses about how to make money with: real estate, stock trading, bitcoin, futures, along with home-based businesses such as blogging, AirBnB, Fiverr, selling on Craigslist, Amazon, Shopify, or eBay – and many other activities. However, it is highly unlikely you can be successful at investing or a small business by treating it as a trifle.

For example, if you would like to be successful at stock trading or real estate, you must approach it like a PhD dissertation. This means full-time immersion for several years – reading, researching, studying, learning, experimenting, getting mentors, joining groups in the field, taking courses, and adapting methods to fit with your personality and situation. In order to sustain you through this, you must develop a fanatical desire and love of the subject matter in order to keep learning and experimenting. If it isn’t for you, it will become clear, which means it is time to drop that and find a different money-making activity that suits you better.  

Sure, amateurs can sometimes get lucky when they start out, but they rarely keep that profit or sustain the activity for the long-term without a solid base of knowledge to build upon. Beginners usually make all of the common amateur mistakes – which can be catastrophically expensive. You cannot avoid these costly mistakes if you do not know what they are. It takes intense and sustained focus to become competent in anything, particularly with investing and business as their landscape is always changing. In general, by the time the masses hear about a totally new opportunity the easy money is long gone. This is why so many people turn to selling courses as a guru instead of actually making money from that trading or business method.

Where to begin your study? Many people watch free YouTube videos by experts. There are many places where like-minded people chat and share information:

  • For stocks there is SeekingAlpha.com or BetterInvesting.org
  • For real estate there many popular blogs like BiggerPockets.com and local real estate associations
  • MeetUp.com for all kinds of investing and business activities
  • Run from any “guru” that only talks about their own alleged success instead of highlighting their numerous successful students with documented proof

Avoid the distraction, lost time, and lost money from dabbling in many competitive environments, let alone concurrently. Instead, slowly and carefully narrow down to a single area of interest, find a mentor with lots of highly successful students, and then immerse yourself into a long period of learning.   

A loss isn’t a loss?

January 6, 2019 Investing Comments Off on A loss isn’t a loss?

One income-investment newsletter writer says it is beyond ridiculous when his customers complain that his recommendations, that they purchased, fall in price. His comeback reply, “a loss isn’t really a loss! This is because you’re still receiving the income and you can purchase more at a lower price at that point, which slightly increases your investment yield.”

My oh my. I’m afraid the reality is that: a capital loss is actually a real loss. Whether you realize the loss with a sale or not, you still have a capital loss. While he believes if you hold forever, then capital losses are irrelevant. (This is untrue, you always have opportunity costs – whether you acknowledge them or not). The fixed-income securities market is a slightly more sophisticated market than the stock market, and in general, there is usually a logical reason that a publicly-traded security, with a big following, is falling in value.

In my opinion, this newsletter writer has a dangerous blind spot from 2 investment risks:

1. Interest rate risk. When interest-rates rise on securities that are comparable to your fixed-income investment, then your investment will also fall in value. Conversely, if rates fall then your security will rise in value. When general interest rates are rising then the pricing of nearly all bonds fall. Interest rates today have been slightly rising from historic lows, leaving a whole lot of room for interest rates to rise across the yield curve. This would permanently reduce the price of any income security that doesn’t have a maturity date.

2. Impairment risk. Impairment refers to the company having a more difficult time continuing its payout rate of interest or dividends. As the potential reduction in payouts grows (and possibly a reduction in the credit rating), then the price of the security falls to reflect the potential future-reduced investment yield for current investors. This impairment may be company specific, industry specific, or from the general economy.  

As an example, I owned a REIT that only held AAA mortgages and barely moved in price for 13 years. What could be more solid? Even though their mortgages remained stable, the company imploded in 2007 from leverage: the company’s lenders called their loans and no one would offer them new funding. While the dividends from the REIT were great, when the price stumbled, I was quick to exit with only a 12% capital loss as the price continued plummeting, all the way to zero. The company ceased operations just months later. Even though the company’s assets remained solid the entire time, the capital structure of the company was not stable at all. Investors recognized this risk as the shares dropped in price. This scenario occurs all the time: seemingly stable securities, funds, or companies are stung by recessions, interest rates, lawsuits, or unusual situations, and then disappear. By ignoring capital losses on your securities, you may end up riding them all the way down to an exchange delisting and needlessly lose 100% of your investment.

This newsletter writer is not the first investor or investment professional that has this beginner viewpoint. However, if you were some kind of financial fiduciary claiming that “a loss isn’t really a loss,” that would probably prompt your compliance officer to immediately resign, your accountant and lawyer to walk out the door, and trigger the licensing authorities to take a very close look at what you’ve been doing.

Instead, I recommend acknowledging and dealing in reality by recognizing that any capital loss is a real loss at that time. Plus, take a much closer look at the security, company, or fund. Hopefully, before you made your purchase, you created some money management rules for reducing, exiting, or hedging your position to avoid any large losses. Avoiding large losses is the #1 rule for all professional investors, including Warren Buffett who considers it the only rule for investing. And you cannot avoid large losses if you “pretend” they aren’t real.

How did your Holiday Season spending go?

December 31, 2018 Personal Finance Comments Off on How did your Holiday Season spending go?

A recent study claims the average American plans on spending $992 over the holidays, and of those that will borrow money, they are expecting to put $1,054 on credit. Any time that you are unable to pay off your credit card balance each month, it is likely that may be spending beyond your means.

While some people are naturally frugal, many of the rest of us:

  • Don’t consider budgeting until all our credit cards are maxed out
  • Don’t consider starting a car reserve until our car dies there is no way to get to work
  • Don’t start set aside money for medical issues until we can’t afford a treatment
  • Don’t open and add to retirement accounts until we see our relatives struggle in retirement
  • Don’t start saving money until we have plans for a home or wedding
  • Don’t contribute to an annual gift reserve until we’re still paying for last year’s gifts and are buying new ones on credit
  • Don’t make “paying yourself first” a permanent part of our financial planning until you, or someone close to you, loses their job for an extended period of time

Basically, we know we should budget and save. However, we do not have enough motivation to actually pay attention and do it until we take a hit on the chin so hard that we don’t want that to happen ever again. The better path is to read enough and learn enough from others’ financial mistakes and advice. Then move toward the sustainable living-below-your-means lifestyle on our own, without a calamity forcing us to re-evaluate our financial habits. It is my best advice that you do not wait for that calamity, because it can take years to dig out of a financial hole that you do not even realize that you are in.

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