Enjoy Your Money!

I've Got to Change My Shopping Habits

2010-06-10T07:25:00.002-04:00

J.D. Roth, a very successful personal finance blogger (www.getrichslowly.org), wrote a very helpful post on "Eating Well on One Dollar a Day." He's actually referencing another fellow's blog who details (pictures of receipts, etc.) precisely what he bought and how he bought it to average spending under $1 per day for a month of food.

The reason I'm referencing J.D.'s post rather than the original is that J.D. indexes it in a helpful way to get at the information. From this, I can see that some of my shopping has been all wrong. Especially with feeding all these boys, I needed a primer in cheap shopping!

Infinite Banking and Bank on Yourself: Scams or Wise Investments?

2010-03-22T08:44:00.004-04:00

A friend was considering buying into "Infinite Banking" or "Bank on Yourself", which is a sort of whole life insurance policy that allows you to borrow on your own money once you're fully vested. At first, it seems like a really cool deal: why borrow from a bank when you could borrow from yourself, paying yourself interest rather than the bank?

But the more I read, I determined that some of the supposed benefits were largely illusory. Yet, the fascinating thing was that, after reading for hours on the subject (and I was always good at Math and consider myself pretty good at personal finance and investing - hey, I wrote an entire book on it!), there was still a mental cloud that hung over it. It's sort of like those mathematical puzzles where Sally buys something, sells something, then something complicated happens and you know you're applying all the right equations, but in the end the numbers always come out wrong. When your mind tries to retrace the steps, it gets lost in sort of a fog.

But in this case, the fog eventually cleared for me. Here are my conclusions that I shared with my friend. Feel free to interact if you're considering this. But you may want to go straight to the Kiplinger site, where a ton of interaction is going on. You can read people arguing pro and con, and eventually you, like my experience, might see the fog clearing up.

Here's the Kiplinger discussion, which any person considering "Infinite Banking" should carefully consider:

http://forums.kiplinger.com/showthread.php?t=10496&page=3&pp=15

During the first pages of the discussion, many of the comments are positive toward Infinite Banking, but as people delve into it more, you find more and more negatives. So make sure to keep reading. This is a ton of money you're considering putting into this, so study it carefully. Remember Solomon's warning: "The fool believes everything he hears."

So here are some of my red flags, concerns and questions I'd ask for someone trying to sell me this policy:

Questions, Concerns and Red Flags

1) What is the name of the insurance company you'd be using? I’d like to see how it’s rated. Here's an authoritative source for rating insurance companies:

http://www3.ambest.com/lh/default.asp

But even if it’s rated excellent, that’s lots of money tied up in one company. If that's where most of your savings is going, you're putting a lot of eggs into one basket. Is it insured by the FDIC? If so, up to what level? What happens to the money if the company goes broke? (Just before Enron went belly-up, it was still given the highest ratings. People didn’t know what was going on inside until the very end.)

2) The Websites for these groups immediately start explaining why Dave Ramsey and Suze Orman are against them, saying stuff like “They don’t understand these policies.” Well, from what I’ve read of Suze, although I don't always agree with her, she's pretty thorough on things, particularly insurance. I’d want to know precisely why Suze and Dave are against this. If you don't understand their criticisms, you don't know both sides.

2) Some are saying this isn’t anything new, it’s just being marketed differently. So, if it isn’t new, then why did the others stop doing it? Maybe it’s something that sells well when the economy is looking bad and everyone is scared, but nobody wants to get in when things are going well.

3) Why aren’t the major insurance companies selling this? Are they? I’d like to see what the big insurance associations say about them.

4) The way this is being marketing looks more like hype than solid information. Look at Pamela Yellen's book, Bank on Yourself in Amazon. So it has almost 100 reviews, and a significant percent are five star. But any author can get lots of associates and friends to write five star reviews, particularly if you're selling a product and have other product sales people under you who have a vested interest in making the book look good. But a significant 12% of the reviews are only one star. I often see this in financial books that have some good stuff in them, but also some crap. Lots of five-star fans, but also a significant portion of one-star critics saying, "This is crazy!" Read these one-star reviews carefully.

http://www.amazon.com/Bank-Yourself-Life-Changing-Protecting-Financial/product-reviews/B003156AXW/ref=cm_cr_dp_hist_1?ie=UTF8&showViewpoints=0&filterBy=addOneStar

My Bottom Lines

1) It’s a type of whole life insurance policy. Don’t get it unless your main reason for doing it is to give money to a loved one at the time of your death. Even then, make sure that it’s a good policy compared to other life insurance policies. Example: how much of all that money you’ve saved actually goes to your beneficiaries in the end?

The vast majority of financial counselors that I read say to buy term insurance (which is much less expensive) and invest what you save, until you've saved up enough to be self-insured. If you're 55 years old and you've got lots of money saved up for retirement, you just need to insure the difference between what you've saved and what your loved one would need if you died. So you need less and less life insurance as you go through life. After you've got enough to retire, you probably don't need life insurance at all.

2) The concept of “being your own bank” and “infinite banking” seems largely illusory. I got fascinated with it and was up till 1:00 AM trying to understand people’s arguments back and forth in this regard. When I woke up the next morning, I suppose my mind had been working on it during my sleep, and it seemed clearer to me. I think the quote at the end of this post will show clearly that, if you need to borrow money, in most cases, you’d be better off just finding the lowest cost loan than borrowing from your own money in your insurance policy.

As an aside, I'm in the habit of saving up and buying things, so that I've never made payments on depreciating assets like a car or furniture. Don't borrow on a depreciating asset. And don't borrow on an appreciating asset unless it's absolutely necessary. Borrowing is sometimes a necessity (a medical emergency or to buy a house), but never safe. Even if you're borrowing from your own insurance policy, "the borrower is the lender's slave." There are consequences if you don't pay it back, and you need to know precisely what those consequences are.

3) In what cases are smart people justifying buying one of these policies. Only in limited situations. Some who argue for the wisdom of such a policy are saying that “it’s not a substitute for your retirement, but if you’ve already got a great retirement set up, and if you’re currently making a high salary, so that you’re not likely to default on your payments, then it may be a way to further diversify the assets that you want to go to loved ones at your death.”

4) Some say that they weren’t saving anything for the future, and this is forced savings, like when you have to make your mortgage payment each month. They say it works for them, but it seems pretty expensive to me. You're paying tons of money for the policy that could be growing in a low-cost mutual fund. And if you’re an undisciplined spender today, then might you also over borrow from your insurance fund and get in trouble trying to pay it back?

5) I’d want to know exactly what happens if you can’t keep up your payments, or if you borrow from it and can’t pay it back on time. And can those rules change over time?

6) I’d want to know exactly how the 5% (or whatever) growth per year works. What is the rate based on - how well the company’s doing? If so, what if this type of policy goes out of favor and new people stop putting money in? Will the percentage increase drop?

7) I'd want to see an exact comparison, all costs considered (taxes, service fees, etc.), of how the money you'd put into a policy like this would stack up against a fairly conservative investment in stocks, bonds and cash equivalents at a respected firm like Vanguard.

8) Some people are talking about paying up these policies with the equity in their houses or using this as their retirement plan. This would be a huge step and makes no sense to me at all. What if this company goes belly up? Again, you've got a lot of eggs in one basket. Sure, stocks and bonds and banks and real estate can be scary. But that's why we diversify. If my stock mutual funds are diversified between thousands of companies, then the worth of all those companies could never drop to nothing, except in an Armageddon scenario. And in an Armageddon scenario, say goodbye to your insurance and the FDIC as well. If you're looking for Armageddon, get your life right with God (for your long-term outlook) and invest in guns and knives (for your short-term outlook).

A Comparison of Banking for Yourself (from your insurance policy) and Borrowing from Your Real Bank

I'm just slightly revising one of the posts from the Kipplinger discussion group. The important thing here is to keep your eye on how much the transaction is costing you out of pocket over time. I think you'll see that in all three cases, you're spending the same amount to borrow the money. Banking for yourself is in reality giving you no real benefit that I can see over taking out a traditional loan.

Example 1: Using CASH for purchase. $10,000 account earning 5% interest.

I take out the $10,000 and make purchase. It is no longer earning 5%. So, after 1 year, I have lost $500 in interest, correct? Well, lets say at the end of the year I put back the $10,000 + $500 ($10500). So, it was as if I never took money out in the first place because I added $500 out of my pocket to make up for the lost interest. The opportunity cost of using the money was 5%, but I made it up by "charging myself" 5%.

This transaction cost me $500 out-of-pocket and I now have $10,500 in my account.

Example 2: Commercial loan. $10,000 at 5% interest

I take a 5% loan from a bank and leave my $10,000 in the bank, still earning 5% interest. At the end of the year, I pay off the loan in full for $10,000 + an additional out pocket $500. My bank account earned $500, but the loan interest cost me $500. The opportunity cost of using this method was 0, but the interest cost of using this money was 5%.

This transaction cost $500 out-of-pocket and I now have $10,500 in my account.

Example 3 (Infinite Banking): Policy loan for $10000, current loan rate 5%

I take a 5% loan from my policy and make my $10,000 of cash value collateral, still earning 5% interest + dividends. At the end of the year, I pay off the loan in full for $10000 plus an additional out of pocket $500 to free up my collateral. My cash value earned $500, but the loan interest cost me $500. The opportunity cost of using this money was 0, but the interest cost that I needed to pay to free up my collateral was 5%.

This transaction cost $500 out-of-pocket and I have $10,500 in my account.

Also, I should mention, I can borrow money on my home equity loan presently for much less than 5%. And some car loans are at 0%. If I "borrow" from my cash account that's getting pitiful interest, like my Money Market fund, then my out-of-pocket opportunity loss would be only about 1% over a year. My point? Even if you had an "infinite banking" account to borrow from, in many cases you'd be better off borrowing elsewhere.

The bottom line? What benefit was it to me to borrow from my insurance policy?

Moheban Argues: Don't Expect Hyperinflation or the Collapse of the Dollar

2009-12-25T02:39:00.004-05:00

Need to understand basic macroeconomics? I just read this book: Debunking the Hyperinflation of Peter Schiff and the Gold Bugs: A Guide for Investors, by Moheban. Recommended read. here's my review.

Peter Schiff predicts "surging long-term interest rates," "runaway inflation" and the ultimate "collapse of the dollar." Will it happen?

Many people proclaim to know the future of the economy. In the 1990's many financial advisers "just knew" that we had entered a "new economy" where technology stocks would continue to rise in value. They had great arguments to back up their claims. Alas, they were wrong; and those who followed their advice lost fortunes. A few years ago, many top economists argued that the housing market wasn't in a bubble and that defaults on the new, creative loans wouldn't cause severe economic problems. They were wrong.

So today many experts argue, with great confidence, that the Fed will have to print tons of paper money to pay off its debts, resulting in hyper-inflation and the collapse of the American dollar. Those who subscribe to this theory and act upon it should, they say, buy precious metals (even at inflated prices) and weight their stock holdings toward foreign securities. While this is a possible scenario, Richard Moheban argues that it's highly unlikely, thus providing a useful counterpoint to Peter Schiff's claims.

I began reading Moheban's book fully expecting to give it a quick read and find a bit of value, but in the end resell it on Amazon. Instead, I underlined, interacted with my pen and kept it for future reference.

Rather than use insider, technical economic speak, Moheban explains the basics of macroeconomics in language that is not only easy to understand, but actually entertaining. During my before-bedtime read, I felt compelled to interrupt my wife's reading to repeat Moheban's illustration of how inflation would occur in a fishing village, as opposed to something as bewilderingly complex as the US economy.

His lucid arguments and helpful analogies resulted in several "Aha!" moments for me, which I wasn't expecting, since I'm a financial writer.

Here's why I recommend Moheban's book:

1.He introduces macroeconomics to the uninitiated. To evaluate arguments concerning our economic future, you need a quick, lucid introduction. This book works.

2.He provides a helpful counter-argument to Schiff and company. To maintain objectivity in any academic endeavor, open-mindedly read intelligent opposing positions. Read Schiff. Read Moheban. Whether you agree or disagree with Moheban, you'll realize that there's another side to these important issues.

3.He helps us to understand just how tenuous economic predictions are when dealing with large, complex economies. Consistent with this, Moheban doesn't declare with certainty where the economy is headed. On the one hand, America may learn its lessons, pay down its excessive debts, and continue to lead the world's economy with its leadership in such areas as higher education and innovation. On the other hand, people may lose confidence in the dollar, cash in their stocks and bonds, pull their money out of the banks and buy guns, knives and gold.

Either scenario is possible; but our economy is so large and complex that we can't make predictions with certainty. And for those who correctly predicted the present economic mess, how can we know with any degree of certainty that they can correctly predict the next stage?

It's important to note that Moheban doesn't believe that all is well with the American economy. He's particularly concerned that if investors in short-term government bonds decide not to continually reinvest, how will the government continue to finance the deficits? Again, we can't know for certain what will happen, so get used to making decisions in the light of economic uncertainty. As Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

J. Steve Miller
Author of Enjoy Your Money! How to Make It, Save It, Invest It and Give It

Money: Teens Don't Get It

2009-09-16T05:52:00.003-04:00

I've long been a proponent of teens living at a time in their lives when they can save vast amounts of money. Though their income may be small, they have very few expenses, seeing that their room and board and virtually all their living expenses are paid for.

Warren Buffett seems to be one of the few teens who understood "the power of early" - the vast potential of saving in the the early years so that it could multiply in the latter years. That's how he saved (in today's money, accounting for inflation) $47,000 by high school graduation.

Now you'd think that perhaps the current recession has made teens rethink their spending and begin to save toward an uncertain future. Yet, a recent survey of over 61,000 teens in over 31 countries found 15 percent or less spending less on movies and music. Less than 20% are spending less on console and computer games. I assume that means that about 80% of teens haven't changed many of their spending habits at all because of "The Great Recession."

Does this strike anyone but me as odd? I've heard that adults are spending less and saving more. Why hasn't this trickled down to our young people?

50% of Generation Y Has No Savings

2009-08-14T13:37:00.003-04:00

The recent survey also found 18 to 34-year-olds giving themselves Cs, Ds or Fs in personal finance skills such as budgeting and effective savings. Further, they were mostly likely, among working age adults, to be putting no money toward retirement. "The survey was released by the National Foundation for Credit Counseling, which polled 1,000 adults nationwide in March."

This is such a shame! I suppose the baby boomers are partially to blame for mentoring a life of spending rather than saving. But it's a shame, because

those early years can be times for incredible savings. As I share in my book for that age, Enjoy Your Money! How to Make It, Save It, Invest It and Give It, Warren Buffett started the habit of making and saving money before age 10, and continued these useful habits through high school so that he was able to graduate with today's equivalent (adjusted for inflation) of about $47,000.
they're leaving themselves wide open for an emergency to put them into long-term debt. If you have no savings when you car dies; have no savings when you have an extended illness; then you end up borrowing and paying it off over the long-haul. These emergencies happen on average every 10 years or so, meaning we should plan for them.

What do you think?

Schwab Study Finds People more Vigilant with Personal Finances

2009-08-13T14:37:00.003-04:00

A June survey by Charles Schwab found

51 percent of investors thinking of their finances daily.
Before the big market drop in 2008, only 27 percent thought daily about their finances.
Forty-five percent are committed to adopting stricter personal budgets.
Thirty-eight percent want to keep a closer watch on the economy.
Forty-six percent want to pay closer attention to what they save and invest.
One in four are considering changing financial advisers and brokers.

It would seem that it takes a significant market downturn to make people re-evaluate their finances. For the years prior to the crash, personal savings had been at all time lows, with Americans averaging somewhere close to no savings at all. That indicates to me that most people assumed that good times would go on forever - they'd never lose a job, the economy would continue moving forward, they'd never have an emergency that might require some of today's cash.

One lesson of the crash is that we should all consider worst-case scenarios. Example: is your car paid for? If not, and you lost your job, would you also lose your car due to an inability to pay? Debt introduces risk, making worst-case scenarios more devastating.

How has this economy changed your money habits?

Teens Worry About Money

2009-08-10T10:11:00.005-04:00

Young adults aren't just obsessed with their friends, dates and video games. They also worry about their money, according to a survey released this week by Seventeen Magazine and Bank of America. They interviewed 2,000 young people, ages 16-21. Their interesting findings include:

Teens worry about money and the economy:

85% of the teen girls worry about the economy, vs. 75% of the guys.
88% of the girls worry about money, vs. 82% of the boys.
65% of the teens have changed their spending habits due to the economy.

Yet, they're optimistic:

82% of the girls think they'll one day be better off than their parents.

And altruistic:

64% would rather have a job that makes a difference over one that makes a lot of money.

Ruminations:

1. Young people should be very motivated to study personal financial management and business classes. Their worry could translate into motivation to learn these skills.

2. Americans tend to err to the side of optimism, which on the good side makes for lots of adventurous entrepreneurs, but on the negative side can lead to disappointed expectations. Is there really any reason to expect that this generation will do better financially than the last? Do they think they're smarter, harder workers? Do they think the economy will simply be better? I'd like to know why they think they'll do better.

Comments? Ideas?

Can Experts Predict the Economy?

2009-07-30T12:41:00.008-04:00

Many of us need to know our country's economic future, so that we can decide if it's a good time to start a business, expand a business, invest in the stock market, buy a home, etc. Thus, we listen to experts - those with academic credentials in economics, who teach economics in our universities, and who spend their days eagerly studying the minutia of economic indicators.

Thus, the media regularly reports the economic forecasts of these experts.

But how accurate are their predictions? Should we really base any decisions on their predictions?

There's actually a pretty easy way to judge their ability to predict the economy: see how well they've predicted it in the past. Fortunately, researchers have already done this. Here's an example:

"Can the Fed Predict the State of the Economy?"

A June 10, 2009 research paper with this title, written by three members of the Economics department of The George Washington University, studied the Fed's predictions for the years 1965-2001. Why study the Federal Reserve's predictions? First, it strives for objectivity. Secondly, its predictions are taken into account when our government makes policy decisions. Third, it has plenty of money and intellectual resources to gather the necessary facts.

This study examined the Fed's predictions in three areas: economic growth (as measured by the GNP), inflation, and unemployment.

It's conclusion?

"...the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead."

What's So Difficult about Predicting the Economy?

Now I'm no economist, but I'd venture that it's the same difficulty people have predicting the future of the stock market - the past isn't prologue. In other words, just because something happened in the past doesn't mean that it will happen in the future.

Let's imagine that the last six recessions were followed, within a year, by growing inflation. Can we assume that inflation will follow this recession within a year? No. Why? Because the past isn't prologue. The current recession may not have the same causes and cures as the last recession. A war could break out or end; a significant virus could shut down the internet. Any number of things could happen make the end of this recession differ from the last six recessions.

A Helpful Exercise

When a leading economic organization publishes its latest predictions, go back in history to see how their former predictions played out, especially prior to major economic shifts. Concerning the future of stocks, most forecasters fail. Examine their records. One popular media personality who recommends stocks, if you were to look at the results of his past predictions, well, you'd never listen to him again.

When someone asked Warren Buffett about the future of interest rates, he quipped, "There are only two people who know the future of interest rates. Both of them live in Switzerland...and they disagree with each other."

But Some Organizations Have Predicted the Economy Much Better than the Fed

True. But again, that's the past. Is their past performance predictive of their future performance? Only if we can know they succeeded by their skill rather than by luck. And how can we know this?

Studies of coin-flippers show that they come up with much longer strings of "heads" or "tails" than you'd imagine. Thus, what might appear as skill in a different context may simply be luck.

Imagine that hundreds of apes are released, one at a time, into a cage full of bananas. Written on each banana is a possible unemployment rate, from 1% to 20%. If this event were repeated for 10 years, many of the apes would have consistently chosen startlingly accurate predictions of the next year's unemployment rate. But nobody should conclude that the top apes were therefore more economically acute than the others. It was simply luck.

So, perhaps some organization out there can predict the economy pretty well. But how will we ever know for certain whether skill or luck is making them come out ahead?

The Outcome

We can know something about today's economy, but very little about the future. Thus, when making decisions, take into account both best-case scenarios and worst-case scenarios. If you're planning on buying a house, what if interest rates go up? What if they go down? What if you lose your job? What if you get a huge raise?

As author Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

It would appear that we must live life on earth knowing that the future is basically unknown. Plan accordingly.

Interesting Quotes

"I regularly hear the accusation that economic forecasting is no better than weather forecasting, but this does a disservice to weather forecasters," joked Jon Faust, a former Federal Reserve Board economist who is now a professor of at Johns Hopkins University.

"When one does economic forecasting, you have to realize your forecast is going to be wrong," said Harvard economist James Stock.

"We are forecasting solid growth for 2008," top White House economist Edward Lazear told reporters. (Nov., 2007 prediction.)

"CBO forecasts that GDP will grow by 2.3 percent in real terms in calendar year 2007 but by 3.0 percent in 2008" (Report by Congressional Budget Office, which provides "objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget."

Stock prices "should rise 10% to 12% next year (2008) amid calming credit markets and modest economic growth" (The UCLA Anderson Forecast is "one of the nation's premier quarterly barometers for California and the country's economic health.")

Update

A recent (Sept. 6, '09) New York Times article asked, concerning the current, deep recession, How Did Economists Get It So Wrong? They answered that, in part, economists had come to feel that the prevailing theory regarding macro-economics, supported by nerds with calculators, had failed to take into account all the variables that can happen in an economy.

"Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation."

"It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems."

2009-07-28T15:30:00.003-04:00

A helpful angle on long-term savings versus short-term spending was well expressed in a memoir that my wife is reading:

"I had seen a shiny new Nash roadster parked at the store in Sacred Heart and had been captivated by it. I'll have one of those one day, I assured Barney. I would find a way to make a huge amount of money. Barney put on his older brother hat and asked me why I wanted a huge amount of money. I said I'd buy a Nash. Maybe even a Packard. Barney was not impressed. If you have food to eat and a warm, dry home, there's just one thing money is really useful for, Barney told me. You can use it to buy your life back. Then you don't have to waste time doing things you don't like to do just to make money. I didn't understand this theory, so he explained it. Don't look for a way to make money; find a way to make a living doing what you like to do anyway. Otherwise you're just raising funds to buy yourself out of slavery."

From "Seldom Disappointed, by Tony Hillerman: a Memoir (2001).

Who Wants to Be a Millionaire? Change Your Car Buying Habits.

2009-06-06T10:30:00.001-04:00

Many who lament not being able to save any money could save millions by changing the way they buy cars. Often, a small change of habits can make huge differences, like the difference between retiring financially free or having to greet people into Wal-Mart in your later years.

In 2007 Consumer Report studied the difference between buying a new Honda Civic EX and maintaining it for 15 years, versus buying a new one every 5 years. If you kept it 15 years, you'd save about $1400 per year. (They were pretty thorough in this study, figuring in the costs of repairs, etc.) Do that for a lifetime and invest that $1400 at the market average of 10% per year and in 60 years of driving you've got $4.5 million!

Think about this. It's astounding. Just by keeping a car longer, you could save a fortune. Even if you just kept the car for 10 years instead of 5, the savings would be astounding.

One of my cars, a Mazda Millenia, has 230,000 miles on it and is running great. I can't find a good reason to trade it in.

If you want to save even more, do what I do. (Don't turn me off here...I know it's radical.) Think of a car as reliable transportation, period. Forget the image thing. Get over the peer pressure to have a car that reflects a high status - many never get over it, and it costs them millions.

Find a good, trustworthy mechanic who sells used cars that have already depreciated greatly. I bought a car last month with under 80,000 miles for $1400, including four new tires. I buy cars outright, never making payments. It runs great and I hope to get 200,000 miles out of it. But the reason it sold so cheap was that it has a big dent in a part of the car that's difficult and costly to repair. But it doesn't affect the performance of the car in the least. I have no plans to repair it.

I don't feel embarrassed to drive a car like this. I actually feel rather smug for beating the system. I recall recently speaking to a lawyer who'd been downsized out of his practice and had to launch out on his own. Money was suddently tight and he was stuck making huge payments on his exorbitant car. "I thought I was pretty smart when I bought it," he told me. "But now I feel pretty dumb."

One of the reasons that self-made billionaires Warren Buffett and Sam Walton did so well was that they were totally unconcerned about the appearance of wealth. They drove normal cars (Walton drove an old truck), especially in their early days. Their frugal, early decisions paid off over time in both their personal and business finances.

Many people could be having a lot more fun and saving a lot more money if they simply didn't have a car payment. Work toward paying off that car, save up for the next one, and get on the road to financial freedom.

Textbook for Personal Money Management

2009-05-26T10:05:00.004-04:00

I believe in getting massive input before publishing a book. The more people who read the manuscript of Enjoy Your Money!, the more I saw a theme coming in like a mantra: "We've got to get this into the schools! Every young person needs to read this book in order to learn personal finances before they get in a financial mess!"

Thus, as I continued to rewrite, I included discussion questions, assignments, riddles, web-based teacher resources - anything and everything to make it easy on teachers and captivating for students.

If you're looking for a personal financial management text (for public or private schools, home schoolers and service organizations), see the appropriate page on the publisher's site to promote it as a personal finance text.

N.Y. Times Financial Reporter Faces Financial Ruin

2009-05-16T09:05:00.005-04:00

He should have known better. Edmund Andrews is a seasoned economics reporter for a major newspaper. He'd covered the Asian financial crisis of 1997, the Russian economic crisis of 1998, the dot-com crisis of 2000. He warned people about risky mortgages even as the current mortgage crisis developed.

So why did this middle-aged economic expert take out his own extravagant, risky mortgage in 2004, plunging him into the depressing world of unpaid bills, badgering debt-collectors, strained personal relationships and panic attacks? Today, his house awaits foreclosure and his once pristine credit score lies in shambles, making him a poster child for "Victims of the Mortgage Crisis."

His recent N.Y. Times article describing his personal woes deserves a slow, reflective read.

Here are some of my takeaways:

1) Rather than taking comfort in "what everyone else is doing" or "what many experts are saying," don't make big financial decisions without thinking them through dispassionately and rigorously.

Warren Buffett's mentor, Benjamin Graham, put it this way concerning investing:

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." (The Intelligent Investor, revised edition, 2003, p. 524).

2) Get plenty of objective wise counsel, particularly on issue where emotions may hijack our reason.

Mr. Andrews had tons of information available to him. But emotions (e.g., "I'm in love and must find a decent place to live!") can bias information to serve its purposes. I recall, I believe it was a researcher, saying that if you torture the data enough, you can make it tell you whatever you want it to. When we want something badly enough, it's human nature to torture the figures to make them tell us, "It's okay to buy the house."

3) Before you flaunt the tried and true rules of thumb, make sure you're truly an exception.

So what are some tried and true rules of thumb for home buying? Unfortunately, when the mortgage crisis was brewing, the rules of thumb changed. From one blog a couple of years ago:

"Northwest Community Credit Union says 1.5 times your gross annual income:

If you and your spouse have a total income of $50,000 the general rule would be that you shouldn't borrow more than $75,000 for your home.

CNN Money says 2.5 times:

The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary.

Washington Mutual Bank suggests anywhere from 3 to 5 times:

As a broad generalization, most people can afford to purchase a house worth about three times their total (gross) annual income, assuming a 20% down payment and a moderate amount of other long-term debts, such as car or student loan payments. With no other debts, you can probably afford a house worth up to four or even five times your annual income."

In retrospect, no wonder Washington Mutual went down.

When mom and dad bought their house 40 years ago, the rule of thumb given to them was that you could afford to purchase a house up to 2x your salary. That's if you put down 20% and don't have other significant debt. (They were neither making car payments nor repaying student loans.)

Crown Ministries suggests this rule of thumb: "Purchase/rent only if payments – mortgage, taxes, insurance, utilities, phone, and maintenance – don't exceed 38 percent of your net spendable income."

4) Don't assume "Best Case Scenarios." Always consider "Worst Case Scenarios."

Mr. Andrews knew that his salary would only cover the new house payments and his alimony payments. He assumed that his partner could land a good enough job to pay for everything else in their lives. What if she didn't land a job? What if she didn't land a good enough job? What if the job doesn't last? What if there's an economic downturn? What if emergencies happened?

Typically, Americans are overconfident about their investments, their abilities, and their future. Don't let your overconfidence lead you to over-borrow.

Other insights from this story?

What's It All For?

2009-04-28T12:19:00.004-04:00

Most money books give advice on how to amass wealth, but fail to ask the deeper questions:

"What am I doing all this for?"

"How do I define success?"

"Precisely what am I trying to achieve by bettering my personal finances?"

In Enjoy Your Money, I argue that most of us are searching for deep and lasting happiness. To see if that's your ultimate goal, do this little dialogue with Socrates (substitute your financial goal for the "Corvette" and substitute your name for "Bob"):

Socrates: Give me one of your financial goals.
Bob: I want a Corvette by my 35th birthday.
Socrates: Why do you want a Corvette?
Bob: Because Corvettes are super fast and look cool!
Socrates: And just why do you want something that's fast and cool?
Bob: Because people would look up to me and respect me.
Socrates: And why do you want people to respect you?
Bob: Because if I could get people to respect me...I suppose they'd want to hang around me.
Socrates: And why do you want people to hang around you?
Bob: Because if people wanted to hang around me, I'd be happier.
Socrates: So, you want the Corvette because you think it will make you happier. In other words, if you knew that buying a Corvette wouldn't make you happier, you wouldn't buy it. Right?
Bob: Right.

I think Socrates would tend to lead us back to happiness as one of our ultimate goals no matter what our financial goals may be, which helps us to clear away a lot of fog and simply ask the question, "How can I be a happier person?" Attaining certain financial goals may indeed make us happier. Others may not. We'd do well to think it through.

Fortunately, Psychologists have done some pretty extensive studies to try to narrow down what makes some happier than others. Interestingly, once we've crawled above the poverty line and have basics such as food and shelter, just making $5000 or $10,000 more per year doesn't do much for our happiness. What does?

In part, psychologists have found that giving people are happier people. Those who seek hardest for wealth in itself are less happy than those who seek hardest for the welfare of others. I noticed that today, as I was inexplicably down this morning. With my mind distracted by life's heartaches and troubles, life looked grim.

Around noon, a neighbor knocked on the door, leaving a card. In it, she thanked us exuberantly for a little act of kindness we did last Saturday. Having just found out that her husband was recovering from a stroke, my wife and I walked over to find him trying to fix his lawn mower. I asked what we could do to help and he suggested that it would take a couple of hours for him to pick up all the pine cones left from the winter, so that he could mow.

No problem. I asked David and Paul, my 15-year-old twins, to come over and help out our neighbor. It took a bit over an hour. While we were picking up, another neighbor saw us and asked if I was making extra money (which wouldn't be beneath me, I might add). I told him about the stroke and he said, "after you get the pine cones picked up, I'll do the mowing."

To us, it was no big deal. To the family reeling from an unexpected blow, it meant the world. And hey, what could be a better memory to build with my kids?

So we brought a bit of happiness to a struggling family. In return, they gave us a deep feeling of fulfillment. Even now, three days later, their card pulled me through a downer morning.

So my answer to the "what's it all for?" question involves serving others. Is one of your long-term goals "to be the greatest possible assistance to the less fortunate by using my God-given gifts and abilities?"

I'm able to pick up pine cones. What can you do?

As Albert Einstein once stated concerning life's meaning:

"The life of the individual has meaning only insofar as it aids in making the life of every living thing nobler and more beautiful." (Albert Einstein)

Meaningfulness...and happiness, today's scientists might add.

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 5

2009-04-24T15:41:00.004-04:00

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #6: Three Things to Do If You're Losing Hope

1 - Get up! Take action! Get moving!

Don't wait for Congress or the President to rescue you. There's a great place for you to go when you're broke: to work! If you don't have a job, talk to everyone. Think creatively, be proactive.

2 - Don't participate in loser talk!

One survey found that your income will likely be within 10% of your closest friends. Some have "The Spirit of Eeyore" upon them, because they sit around moping with their loser friends.

Read "Who Moved My Cheese?" Our cheese has been moved. We've got to start thinking different. Be a reader. Keep learning.

3 - Learn to Give Again

Give extra during difficult times. If you don't have money, give of your time. Serve the homeless, serve soup at the union mission. Visit someone in a nursing home. The more you give hope, the more hope you'll receive.

Thanks, Dave, for an inspirational, fun-filled, hope-filled evening!

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 4

2009-04-24T15:28:00.004-04:00

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #5: Don't Fear

Your faith in God should keep you from fear. If a spirit of fear pervades our lives, we're paying too much attention to the news and not enough attention to our heavenly Father. Dave's wife reminded him of this one day in New York, when Dave allowed the depressing talk of others to get him down.

But faith and work must be kept in balance. As someone said, "Trust as if it all depends upon God; work as if it all depends upon you."

Once upon a time, a person came to visit a beautiful ranch and commented to the owner, "How blessed you are that God has given you this wonderful ranch." To which the owner replied, "Truly, I'm blessed. But you should have seen it when only God had it."

Some of the greatest companies began during recessions or depressions. Dave listed several, including Hobby Lobby and Microsoft, encouraging us to keep working and innovating. Don't be immobilized with fear!

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 3

2009-04-24T15:14:00.003-04:00

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #4: It's a Great Time to Invest!

For the long term, that is. As far as stocks are concerned, it's like K-Mart is running a blue-light special on stocks. We don't know if they'll go down further. We don't know when they'll come back up. But for the past 100 years, they've always bounced back, and buying them when they're so far depressed is a good idea.

Don't buy gold. Sure, it's gone way up recently. But don't buy it while it's so high. Some buy gold because they fear that our currency might be in danger and that we'd have to return to trading gold. But the last time people went to trading gold after an economic setback was during the Roman Empire.

Real estate can also be a great investment. You can get great deals and the interest rates are lower than they've been in decades.

But don't invest if you don't have the money to invest. In his early years, Ramsey went from controlling over $1,000,000 of real estate to losing it all. Six months later, a friend sat him down, told him to quit whining and take responsibility and move on. He did.

More next blog...

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 2

2009-04-24T14:39:00.004-04:00

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #2: Don't Go Hysteric!

At this point, we're not looking at a full-blown depression. So we have 4% more people out of work. Granted, many are hurting, and we don't want to minimize that. But we're not all standing in soup lines, the stock market hasn't tanked nearly as much as in the Great Depression, and the worst of the foreclosures are restricted to five states.

Ramsey's point? Employment is well over 90%. Scramble around and find work! Get new training for new jobs! As Solomon said three thousand years ago, "The diligent prosper." Sitting around sulking and watching negative news doesn't qualify as "diligent." Get out and make something happen. That's what Americans are known for.

Takeaway #3: Look for the Silver Lining

Yes, it's a storm. But storms often have silver linings.

First, recessions and depressions have a way of shaking us up and re-ordering our priorities. Our grandparents, who experienced The Great Depression, might pull out an old nail and use it again. Many of us have become wasteful and flabby.

Second, recessions weed out the slackers in our fields. Some serious realtors are selling properties again, and have less competition.

Third, recessions make us work harder at serving our customers. A restaurant that fails to provide great food while making customers feel special deserves to die. Money is simply a certificate of appreciation for a great service or a great product. If you're providing neither, prepare to be run over by those who do.

Fourth, a recession can bring us back to our senses about wise money management. Now is a great time to reintroduce a lost word in the English language: "No!"

So someone wants you to loan them money to buy a house. But they're broke. You say, "No. You're broke. You can't afford a house." When broke people buy houses, they become broker. That's why they call the people who seal the deals "brokers."

So your teenager doesn't have a decent job but wants you to buy him a Corvette. You say, "No. You can't afford a Corvette. Why should I help you to buy one?"

More to come...

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 1

2009-04-24T07:45:00.005-04:00

Last night I attended Dave Ramsey's Town Hall for Hope. I figured that since some people are looking to me as some kind of money expert, I should be up on an event of this magnitude.

What's the occasion? Why would Ramsey go to all the trouble to do a free telecast and do enough advertising to attract over 1,000,000 people to personally attend at the 6,000 locations? He wasn't announcing a new product. He wasn't running for office. He seemed to just have a passion to do all in his power to snap America out of despondency over the economy. Over the next several blogs, I'll try to summarize my main reflections and takeaways.

Takeaway #1: Don't Allow Bad News to Immobilize You!

Bad news travels through a lightning fast T2 line; good news through snail mail. I've noticed that, even during good times, the news is quick to print how many jobs were lost in any given month, but fail to report that the new jobs created during that month more than made up for the losses. Bad news sells. As a result, everyone is soaking up reports of dismal job markets, retirement funds disappearing, businesses going under. Ramsey example: the stock market went up 20% in recent weeks. How many saw that in the headlines?

Ramsey's fear is that many are immobilized by bad news. So you lose your job or your hours are cut back. Rather than learning new skills to start a new job or beating the bushes to see who's hiring, you sit at home, watch Oprah, and complain to your friends about the dismal market.

The Ramsey remedy? Choose Tigger over Eeyore. Be an optimist instead of a pessimist. Be proactive rather than reactive. If you've just been thrown off a cliff, you've got a choice: either allow your body to bounce along the cliff, or spread your wings and fly. Perhaps you've been thrown out of the nest for a reason. Don't despair! Move on to the next thing.

(More Next Blog)

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Why Save Money?

2009-04-19T15:21:00.005-04:00

That's the question a student asked of our panel at KSU Thursday night. I appreciated her candor. Her parents keep nagging her to save, but she simply couldn't see why they made such a big deal about it. Although other interesting questions involved the best places to put investment money and the future of interest rates, I felt, in retrospect, that the question about saving might have been the most significant. Why save? Because:

1) Saving breeds more savings.

The more you save, the more you can take advantage of bulk purchases. If you save up for items rather than making payments on credit cards over time, you save tons. Saving up for a car and buying it outright (instead of making payments) can save many tens of thousands of dollars over a lifetime. By paying for things outright, you avoid expensive payments and can invest more each month for future needs.

2) Saving protects us from debt.

Most people run into serious debt because of an emergency, like a job loss or medical issue. Had they saved up enough ahead of time, many of these could have weathered the storm without incurring crippling debt.

3) Savings can grow into millions.

As we've said before, just $20 per week stashed away in long-term investments can multiply into well over $1 million by retirement.

Money guru Ron Blue spend a lifetime studying, writing about, and counseling people about their personal finances. One day someone asked him to sum up in a sentence what he'd learned. He thought about it and responded,

"Spend less than you earn, and do it for a long time."

As Solomon wrote thousands of years ago:

"There is precious treasure and oil in the dwelling of the wise,
But a foolish man swallows it up."

It's foolish to swallow up all that we make before the next paycheck. Perhaps savings could be considered the cornerstone to successful money management.

The questioner bought a copy of my book (Enjoy Your Money! How to Make It, Save It, Invest It and Give It) after the discussion. I hope that reading it helps motivate her start the most powerful habit she could adopt: living way beneath her means in order to find financial freedom.

The Power of "Making Do"

2009-04-15T13:29:00.003-04:00

Frugality is in! And long overdue, in my opinion. Many major newspapers include columns and blogs about how to cut back and save money. But frugality isn't just about surviving the recession. It's about wise money management.

When Professor Stanley (The Millionaire Next Door) studied self-made millionaires, he was surprised to find them living in normal houses, driving normal cars, and saving money any way they could. One of his chapters described them as "Frugal, Frugal, Frugal."

And it makes sense. To amass wealth, you've got to live beneath your means. And since savings aren't taxed, $1000 saved may net you just as much as a $2000 earned. And when you think about it, $1000 is simply a year of $20 weekly savings. Invest $20 a week starting after high school graduation and invest it wisely to retire with over $1,000,000. Don't believe me? Google "interest calculator" and put in $1000 per year at 10% interest (average stock market gain) and see what you've got in 50 years.

That sure does simplify things. All young people have to do is to come up with $20 at the end of each week. If all our earnings are gone by the next paycheck, we can either earn an extra $20 by mowing a yard or babysitting, or, we can find ways to cut back. That's where "making do" comes in.

My brother works as an engineer for a large company. He recently walked into the coffee room to find that, apparently, the coffee machine carafe (the glass container that the coffee drips into) had broken and his engineer friend had "made do" instead of purchasing a new machine. To the right is his fix looked.

Now most of us would have gone right out and bought a new coffee maker for about $20. Former generations were more innovative and not embarrassed in the least to "make do" with what they had.

I've noticed that my grandad often replaced a tool handle with his own piece of wood rather than throw it away and buy a new one. I watch mom tear off a tattered collar, turn it over, and sew it back on to keep a comfortable shirt she liked. No wonder she saved plenty to retire comfortably.

The next time something breaks, don't immediately replace it. See if there's a way to make do. Make do every week and invest your savings and you just might become wealthy.

Lessons from Warren Buffett's 2009 Shareholder's Letter

2009-03-09T15:15:00.002-04:00

Why Listen to Buffett?

What can we learn from Warren Buffett about our personal finances and running our businesses? Much more than I can mention in a brief blog, but I'd like to at least reflect on some practical lessons from his most recent report to his shareholders.

Warren Buffett, the world's richest man (worth over $50 billion), didn't inherit his money - he earned it starting at age 6 selling Chicklets (candy-coated chewing gum) in his front yard. He added to this money from other rather ordinary jobs - caddying, finding and selling golf balls, paper routes, etc. Rather than spending his money, he saved it and began investing at age 11. Fascinated with business and investing, he had read over 100 books on the subjects by high school graduation. So he learned business by both running them and studying them.

In the 44 years that he's invested his money (and other fortunate investor's money) through Berkshire Hathaway, he's averaged yearly returns of over 20%, more than doubling the gain of the S & P 500 during the same time period.

From my study of Buffett, his extraordinary returns come, not so much from his knowledge of movements in the stock market (which he claims are rather unpredictable, particularly in the short term), but from his unsurpassed understanding of businesses. He knows what extraordinary businesses look like; that's how he knows which businesses to buy. So what can we learn from such a financial wizard?

Lessons

I'm extrapolating here, so don't put this in Buffett's mouth. When he talks of a business doing things right, I'm applying it to individuals.

1. Don't give up. The economy's in shambles, and will probably remain that way for some time. But don't assume life as we know it is disappearing. Plan toward a bright economic future. Over the past 100 years, the free market economic system has worked wonderfully, increasing our standard of living seven-times in the 1900's, while the Dow rose from 66 to 11,497. In his opinion, "America's best days lie ahead."

2. Plan for inflation. The battered economy and bailout by the government will probably result in inflation. (Steve's note: houses rise in value with inflation. If you live in a relatively stable area, like us in metro Atlanta, owning your house and a rental house, if you don't have to incur debt, might be a good idea.)

3. Save massively during the good times, so that you'll have cash during difficult times. Birkshire is in great shape to weather extended hard times, since they stored up huge cash reserves during the good times. Now they can purchase great businesses at bargain prices and help their existing businesses to weather the hard times.

4. Keep your near-term obligations modest. Don't overborrow. Don't live beyond your means.

5. Continue to develop "new and varied streams of earnings."

6. Invest in great leadership. Being the manager of my family and a small business, that means, first of all, increasing my own skills and productivity, as well as my children.

7. Do the basics right. Speaking of Birkshire principles, he praises one of his CEO's for focusing on "blocking and tackling, day by day doing the little things right and never getting off course."

8. Don't buy a house unless you can afford one. If you can't put down at least 10% and if you can't comfortably make the payments on your current income, don't buy it. As basic as this sounds, those ignoring it both from the borrowing and lending side, were major players in the present crisis.

Your ideas? Share them below.

On Predicting the Economy

2009-03-02T12:21:00.006-05:00

To make business plans or retirement plans or even plan for a summer vacation, we'd like to take into account the future of the economy. If things are to get worse, we need to go conservative. If they'll pick up in six months, we'd like to start paddling out into the surf so that we're ready to catch the next wave of growth and prosperity.

Since we're not economic experts, we rely on the opinions of those who spend their days researching the economy, interviewing people on the economy, and helping to set government policy concerning the economy. That's probably why CNBC has record ratings during this economic crisis. We crave expert advice.

Which brings up an important point: can the experts be trusted when they make pronouncements like, "The next six months will be rough, but I see us getting back to steady, albeit slow growth in the last half of the year."?

Unfortunately, I don't believe there's adequate evidence that the experts can predict the future of the economy. Here's why...

1) Governmental figures and most heads of companies have every reason to bias their reports toward the positive. This is shown on a smaller scale by how CEO's of failing companies keep giving hope to their employees and stockholders, even when all the facts in their grasp tell them that the company will fold completely in six months. If they were to admit that the company's failing, stockholders would immediately sell all their shares and employees would bail for other jobs.

Aren't government officials in the same position? If they felt the evidence led them to think we were headed for a depression that history would label "The Greater Depression," they couldn't speak out about it, lest everyone lose confidence in the economy and sell off all their stocks, thus ushering in an even worse recession.

2) Studies show that experts do a poor job of predicting the economy. Professor Philip Tetlock teaches at the University of California-Berkeley. He's an expert on top experts. For about 19 years (culminating in 2003), he studied 300 academics, economists, policymakers and journalists, to find out how they made their economic forecasts and chart how often they were right. According to Tetlock, "we found that our experts' predictions barely beat random guesses - the statistical equivalent of a dart-throwing chimp.... Ironically the more famous the expert, the less accurate his or her predictions tended to be."(1) Thus, odds are, that expert you heard forecasting the economy on the evening news, if you were to chart his past predictions, would probably have been wrong as often as he was right.

My guess as to their inability to conjure up an accurate picture of our economic future is that, in order to predict it, they'd have know many facts that nobody can possibly know. For example:

If our economy did better after government intervention following the last depression, how can we know for certain that the government intervention was the cause of the recovery.
Since no two economies are ever identical (in a sense, a visit to the past is a visit to a foreign country), how can we know that what worked then will work now?
The world's economies are more entertwined than ever before. How can we know what may happen in another country to either delay or speed our recovery?

Those are just three of the difficulties that I see springing up from a veritable Pandora's Box of economic possibilities.

So what do I do in the present economic climate? Despair?

No, I simply do what everyone should have been doing when most economists were predicting more cheery economic futures - don't believe them. Nobody knows. Realize that at any time, things could turn around and we'd be off to a prosperous decade, so that whoever bought up the cheap stocks would look brilliant in retrospect. Alternately realize that at any time, the economy could go to hell and we'll see a repeat of the Great Depression. Then again, things may continue as they are now for some time, neither getting better nor worse.

As author Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

In other words, we don't know the future. Once we accept that, we can go about our plans with that in mind. That's why we major on the basics that work in any economy:

work hard. You never know when you might get sick or your services might no longer be required.
keep sharpening your skills so that you'll be the last one fired in a downturn and the first promoted in good times.
save all you can.
keep a large emergency fund on hand in case you lose a job for an extended time.
don't live beyond your means. Debt is always scary, good times or bad.
diversify your investments. Since the past isn't prologue, we can't know if the long-term gains of stocks or bonds or CD's or real estate will be the same as the past. Since we can't know which will do better, we diversify.

Disagree? Agree? Want to add to the discussion? Feel free to post your opinion below.

End Note

1) Eric Schurenberg, Why the Experts Missed the Crash, Money Magazine, February 18, 2009, 4:10 PM, ET.

Recent Interview: 5000 Years of Money Experience

2008-12-10T14:20:00.005-05:00

In my ongoing interviews (100 people over 50 years of age), I spoke to a lady in L.A. and a man in Atlanta.

L.A. Lady: "Understand Your Investments"

She looked to be about 70 years (I never ask women their age), and she was distraught about her retirement. She normally goes to Mammoth Mountain every year to enjoy the wilderness, but she couldn't go this year. Due to the fall in the stock market, things were too tight.

I asked what she would advise the younger generation about the money and she responded, "Don't fall in love with your investments. I should have sold my stocks earlier this year, but my financial adviser kept telling me to 'stay on course.' As a result, I lost 2/3 of the value of my stock funds. When my son studied my situation, he told me I should sell my stocks to avoid losing more. After all, I could live several years on that money. So I sold."

She was so distraught at her huge loss that she didn't want to think about it. So I refrained from asking her any more questions. But here are my thoughts:

#1 - Since she was so close to retirement, why did she have such a large proportion of her retirement in stocks, seeing that she thought she would need the money soon? My mother's investments (she's well over 70) weren't really affected by the current crash, since she's not invested heavily in stocks.

#2 - She did what "the herd" always seems to do: sell low. When the stock market's this low, Warren Buffett's on a buying frenzy. In general, I don't want to be selling when Buffett's buying.

#3 - People simply must understand their investments. I feel really badly for her. People need to understand that stock funds can go down 2/3 and not bounce back for some time. If you don't want that kind of volatility, don't be in stocks.

Atlanta Man: Just Walk In and Ask People for Jobs

He's 72 years old and driving the shuttle from the Atlanta Airport. His advice to the younger generations:

#1 - Working is better than not working, even if it's at a low-paying job. You can't get ahead while you're not working. Sometimes he worked more than one job, just to see which one turned out better before dumping the worse job.

#2 - If you need a job, just walk up to people and ask them for a job, whether they say they're hiring or not. Employers seem to respect that kind of initiative. If they don't have a job, ask if they know anyone else who's hiring. (This advice jives with studies of those looking for jobs. Advertised job openings are flooded with applicants, making your odds on getting the job slim. Instead, decide what kind of job you want and approach those companies for a job, whether they are hiring or not. Maybe they just lost someone and you're the answer to their prayers. The last thing many companies want to do is to take time off from profitable work to start interviewing scores of people.)

Personal and Business Advice in Turbulent Times

2008-10-15T09:37:00.002-04:00

Last night I attended a Town Hall Meeting at Kennesaw State University. I heard some great advice I felt I should pass on.

The Economic Summit Town Hall Meeting, held Tuesday evening at the KSU Center, allowed individuals and business owners to voice their economic concerns and get responses from experts. Sponsored by the Kennesaw State division of the Small Business Development Center and KSU’s Econometric Center, the panelists included Joseph Brannen, President of the Georgia Bankers Association; Tony Britton, Senior Vice President of Wachovia; Dr. Gene Henssler, President of G.W. Henssler & Associates and host of the popular radio program, Money Talks; and Dr. Donald Sabbarese, Director of KSU’s Econometric Center.

After opening remarks by Dr. Lendley Black, Provost & Vice President for Academic Affairs, Lydia C. Jones of the SBDC introduced the discussion format and established an informal, accessible atmosphere to discuss potentially volatile and emotional issues. “Please, no political comments!” Jones warned.

Although we hear abundant reports and advice on the economy, the unique value of this meeting was the opportunity to ask specific questions and to get answers that applied specifically to our region.

The bad news is that building and manufacturing are suffering. One in six homeowners are “under water,” owing more than their homes could sell for. Although exports have been the good news in recent years, now other countries are hurting, which will of course negatively impact overseas sales. But then, we’ve heard all the bad news over and over.

What about the good news?

Ninety six percent of our banks are well-funded. Two thirds are profitable.

The government has acted to restore confidence in the markets. The FDIC now guarantees our bank holdings for up to $250,000. (The time when the government failed to act was 1929, allowing the Great Depression to take hold.)

Five hundred people per day are moving to Georgia.

Atlanta is well-diversified, has no geographical boundaries, has a world-class airport and is business-friendly. No wonder it’s growing at two times the rate of the country. Atlanta real estate hasn’t “burst.” It’s only down 6.9%, one of the lowest declines in the country. (Compare this to Miami, where house values are off 44%.

Specific answers to people’s concerns:

Should I get out of stocks? “This is the dumbest time ever to get out of the stock market,” advised Hennsler. When stocks are cheap, this is the ideal time to buy, not sell.
What about unemployment? Sure, unemployment is creeping up. But in recent years it’s been at an unprecedented 5%. Manufacturing is hurting, so move into growth areas like education and health.
Are banks doomed to failure? No. They’re simply changing  getting back to basics  like coaches concentrating on blocking and tackling. We had gotten away from that. People with good jobs and good credit can still get loans for houses and businesses. People with bad credit and shaky jobs and no collateral won’t be able to get loans. That’s the way it’s supposed to be. We had gotten away from that. Build relationships with bankers. Give them a detailed business plan. So much of business is about relationships. Pursue them.
How can the government give away all that money? Won’t we have to pay for it? Henssler believes that the government could actually make money on these bailouts. Companies will have to pay on the loans and the government will own assets that they’ll be able to sell, hopefully at a profit, in more stable times.

In the end, Lydia Jones asked the panelists to each share pitfalls we should avoid. They responded:

1. Don’t get rid of your key people.
2. Be informed, but don’t take drastic measures.
3. Keep your optimism.
4. Don’t overreact. Keep the lines of communication open.
5. Don’t cut back on marketing. Sell, sell, sell!

Wise Investing Advice for Turbulent Times

2008-10-02T08:11:00.004-04:00

These are scary times. I heard last Friday that my bank had shut its doors. Fortunately, another company had bought them out, so that I can still write checks, visit the ATM and receive automatic deposits from my companies. What if they'd not been bought out? How could I access my funds?

These are just a few of the questions people are asking these days. David Hultstrom is a financial adviser I respect. He gave me permission to reprint his recent newsletter below.

Subject: Financial Foundations October 2008 Newsletter, by David Hultstrom.

There seem to be a lot of questions out there about what is going on currently, so this month's newsletter will touch on a number of items and provide links to useful resources.

1) If you need a counterbalance to all the blaring headlines and breathless reporting about the current state of the financial markets, I highly recommend listening to the presentation at http://www.dfaus.com/library/videos/different/.

2) As you undoubtedly know, bank deposits are covered by FDIC insurance. If you would like specific information about how the coverage works, see http://www.fdic.gov/deposit/deposits/insuringdeposits/index.html.

3) Investment accounts are covered by SIPC insurance and information about that and other issues related to the failure of investment firms can be found at http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/P116996.

4) There are a number of services that rate the safety of banks (see http://www.fdic.gov/bank/individual/bank/index.html), unfortunately most of them cost more than it is worth for a consumer who simply wants to know how their bank is doing. However, Bankrate.com does have a free search to see how your bank is rated at http://www.bankrate.com/brm/safesound/ss_home.asp.

5) The New York Times had a good interactive graphic that gave a sense of the size of the problems, see http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html and move your mouse over the listings. Note the data is a few weeks old now, which seems like an eternity in these fast-moving times. Also, this graphic gives a sense of the size of the Lehman bankruptcy http://www.investmentpostcards.com/2008/09/24/picture-du-jour-10-largest-us-bankruptcies/print/.

6) Based on monthly data since World War II, there have been 6 severe stock market downturns (declines over 20% in nominal terms). In these, the average decline has been about 1/3, and they have lasted an average of slightly over 3 years (in other words, the time from a peak through a 20% or more decline then on to a new high). In the worst of these (1973-74 and 2000-02), the market declines have been on the order of 45% and lasted 4-6 years until portfolios were back to their previous values. Currently, the U.S. stock market is down approximately 20% from its high almost a year ago. There is no way to know if it will go higher or lower from here. This is subtle but important. If there was a consensus that the market was going down further it would already be down to reflect that consensus. Conversely, if there was a consensus view that the market was headed higher, it would already be higher to reflect that expectation. There are only two ways to "win": 1) be smarter than the collective wisdom of everyone participating in the market, or 2) ignore short term fluctuations and remain with your target investment portfolio knowing that in the long run, you will be better off than the vast majority of folks who tried to time the market getting in and out. In this, as with many things, slow and steady wins the race. Occasionally, the market seems to get irrational and I think you may be able to profit from being less subject to the current hysteria (either positive or negative), this does not appear to me to be one of those times. I think the possible outcomes are much more uncertain than normal from this point and there is a significant chance of further deterioration and also a significant chance that the market could recover from this point. I don't know, and I know that I don't know (which might possibly make me smarter than the TV talking heads though less entertaining - I leave that for you to decide). Uncertainty and risk is why none of our clients have a 100% stock portfolio and none of our clients have 100% of the stocks they do own located solely in the U.S.

My tentative plan is to write next month about lessons that can be learned from both the technology bubble in the late 90's and the lending bubble we are still recovering from. Until then, if you need anything - even just to talk about what is going on - please feel free to contact us.

Note: Our clients are located around the country (and world), if you know someone we may be able to help, we would be happy to do so. While Financial Foundations is intended primarily for our clients, we are happy to expand our readership so feel free to pass this along. If you have received this from someone else in that manner and would prefer to get it directly from us each month, please let us know. Similarly, if for some reason you no longer wish to receive this (as unimaginable as that seems) simply let us know that as well.

Regards,

David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
Address: 107 Weatherstone Drive, Suite 510
Woodstock, GA 30188
Phone: 770-517-8160
Fax: 770-517-8159
Toll Free: 888-Fin-Arch (888-346-2724)
E-mail: David@FinancialArchitectsLLC.com
Web Site: www.FinancialArchitectsLLC.com

Disclaimer: The information contained herein or as an attachment is intended solely for the individual or entity to whom it is addressed and may contain confidential and/or privileged material. All information is believed to be correct but accuracy cannot be guaranteed. Opinions expressed are subject to change without notice. All investments are subject to financial risk and there can be no guarantees that performance results will meet or exceed expectations. Any review, retransmission, dissemination, or acting in reliance on this information by persons or entities other than the intended recipient is prohibited. If you have received this transmittal in error, we apologize for the inconvenience. Please contact the sender and immediately delete and/or shred all copies. Thank you.

Frugal, Frugal, Frugal

2008-08-23T15:10:00.002-04:00

I stole this title from the title of one of Stanley and Danko's chapters in The Millionaire Next Door, reflecting the findings of their surveys of people who had accumulated over $1,000,000. It's counter intuitive to think of the wealthy as frugal, I know, since we've all seen "The Lifestyles of the Rich and Famous" and assume that all wealthy people continually indulge themselves with yachts and extravagant vacations.

But it makes sense when you think about it: to accumulate wealth, you've got to live beneath your means; to accumulate extraordinary wealth, you've got to live wayyyy beneath your means. What distinguished these people was not so much how much they made, since they were spread out among many ordinary vocations. They were distinguished, in part, by spending much less than they made - living in neighborhoods with those who made far less, buying conservative, reliable cars. They accumulated wealth by refusing to throw it away.

This is the way my parents lived, thus instilling in me a different mentality than most of the culture I sense around me. Mom's favorite place to shop for clothes is, to this day, her favorite thrift store. Her favorite car is the one she's owned for ten years. She has plenty of money saved for retirement, believe me. Yet, she detests spending money needlessly and relishes a great bargain.

In the spirit of mom and the millionaires surveyed by Stanley and Danko, I've kept my eye out for ski equipment over the months. I take some of my kids skiing once each Winter, but I detest paying such exhorbitant fees for equipment rental. If we could purchase our own equipment cheaply and avoid the rental, we'd only have to purchase a lift ticket. Enter the local Good Will store and Play It Again Sports (selling used sporting goods).

If I bought brand new ski equipment, it would be new only until I used it once. For the rest of my life, it would be used. If you can buy quality used equipment, why not skip that first "brand new" day and start off used?

(By the way, my wife's in full agreement about my frugality. We had a Saturday morning date to Goodwill and she was delighted. She picked up a small table we needed for the laundry room. Reference Stanley and Danko's findings on marrying a frugal mate!)

So I got a nice pair of skis, Saloman ski boots in my size, poles and nice carrying bag, all for under $30.00.

Looking at sporting goods sites, it appears that new skis cost anywhere from $125 to $700. Saloman Ski boots from $125 to $450, poles from $20 to $50, carrying bags starting at $50.

So it appears that, even if you took the cheapest prices, I've saved over $300 in ski equipment by shopping used in the off-season. I'm also in the process of helping my 14-year-old twins purchase snow boards. If they save a similar amount, we're talking $900 in savings as a family, which, if invested in a stock market index fund that might return the historic average (10%), would give me over $100,000 in 50 years!

It's just one item. But the impact can be huge. Doesn't it make Stanley and Danko's findings make sense? These first-generation millionaires understood the power of frugle and applied it to their cars, homes, clothes, vacations, etc. So don't be embarrassed to frequent thrift stores, shop off-season and peruse Craig's List. When you do, you're thinking like a millionaire!

Common Problems with Sudden Wealth

2008-08-05T09:11:00.002-04:00

David Hultstrom is a financial planner and wealth manager for whom I have a lot of respect. His most recent newsletter was very insightful and I thought others would be interested. His contact information is at the end if you'd like to subscribe.

Financial Foundations August 2008 Newsletter

This month I would like to talk about the psychology of "sudden wealth". While probably all of us have had pleasant daydreams about the possibility of suddenly coming into a large amount of money, in fact it can cause a great deal of stress. The source of sudden wealth doesn't necessarily have to be winning a lottery or receiving an unexpected inheritance. Many people face adjustment issues even from the sale of a business, or the rollover of a large 401(k) upon retirement. In those cases, even though net worth is unchanged, having the wealth more accessible and liquid somehow makes it seem more real. Following, in no particular order, are some comments that I think might be instructive:

1) People who are prudent with small amounts of money tend to be prudent with large amounts of money. People who are profligate before an unexpected inflow will be profligate with that inflow. Or, in other words, more income or wealth won't solve what is fundamentally a spending problem. This is undoubtedly the reason that studies have found between a third and half of lottery winners end up declaring bankruptcy.

2) Far too often people who come into sudden wealth seem to almost be trying to lose the money - and subconsciously, they might be. Most people become comfortable with a certain lifestyle, self-image, etc. When something happens to change that, they may try (perhaps subconsciously) to get back to where they were previously. This is the financial equivalent of the biological process of homeostasis.

3) People think that lump sums will go further than they actually will. Someone who has made $50,000 per year all their lives may see the $500,000 in their 401(k) at retirement as an incredible amount of money, when it really isn't. The most extreme example of this that I have seen is a very successful attorney who was approaching retirement. His main assets were about $1,000,000 in his 401(k) and the value of his partnership share which his partners would buy from him for about $500,000. I asked the couple how much they needed to live on in retirement and his wife replied, "We have a fairly modest lifestyle, if we continue to get what he makes now, we should be just fine." I asked the obvious follow up question, "What do you make now?" To which he responded: "About $500,000." I wanted to ask what they planned to live on in year four (but I didn't). I also didn't get them as clients. My guess is they went with an advisor who said they were in fine shape.

4) People sometimes try to "prove something" to someone such as a spouse or a parent (even if the parent is deceased). It is not uncommon for someone to lose a great deal of sudden wealth in investments or businesses trying to demonstrate how skilled they are at investing or business.

5) Sometimes people don't know what to do so they ignore the funds completely. I once did a financial plan for a schoolteacher who lived very frugally on her salary. Her primary concern was whether she could afford to buy a condo to live in rather than continuing to rent an apartment. Her father had left her some stocks when he died more than 20 years previously, and she not only didn't spend any of the money, she had never bought or sold anything in the account. It was untouched for more than 20 years and her net worth was just under $1,000,000.

6) The receipt of sudden wealth can also cause strains with existing friends and family members. Many wealthy people are treated differently and not uncommonly feel taken advantage of. Of course, new "friends" and "advisors" become prevalent as well.

So, what is the solution? The main thing is to proceed slowly. It is OK to leave the wealth in cash while becoming acclimated to the new situation. It may not be prudent to immediately move to a nicer area, a bigger house, etc. As a first step, paying off all debt, and committing to remain debt-free is probably prudent. In addition, thinking of the wealth as an income stream, rather than a lump sum may be helpful. As I covered in the July 2007 Financial Foundations, the sustainable withdrawal rate from a portfolio is about 4% per year. Thinking of a million dollar windfall as being able to pay off a $500,000 mortgage and then have $20,000 per year from the remaining portfolio to spend, may lead to vastly different decisions than thinking about what to do with a million dollars.

Regards,
David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
Address: 107 Weatherstone Drive, Suite 510
Woodstock, GA 30188
Phone: 770-517-8160
Fax: 770-517-8159
Toll Free: 888-Fin-Arch (888-346-2724)
E-mail: David@FinancialArchitectsLLC.com
Web Site: www.FinancialArchitectsLLC.com

Stumbling on Happiness (Summary and Applications)

2008-08-05T07:44:00.003-04:00

Daniel Gilbert, Stumbling on Happiness (New York: Vintage Books, 2005).

Many of our money decisions, both investing and spending, involve imagining how these decisions will pan out in the future. Many of our plans and decisions are made by asking the question, "What will make us happy?" But how accurately can we predict what will make our future selves happy? Will working a different job, living in a different location, or trading in our present family for a new one really make us happy? Harvard Psychologist Daniel Gilbert contends that our brains often fool us into choosing wrong paths to our future happiness. By better understanding how our minds work to construct our often skewed visions of future happiness, perhaps we can aim better at finding true happiness. As Gilbert puts it:

"By the time you finish these chapters, I hope you will understand why most of us spend so much of our lives turning rudders and hoisting sails, only to find that Shangri-la isn't what and where we thought it would be."

Gilbert is a great writer, entertaining as he educates. Almost every page gives me something to smile about. Often I find myself laughing aloud. Sure, he does his homework, pulling together research from psychology, cognitive neuroscience, philosophy, and behavioral economics. But then he presents it in a captivating, humorous style. That's my kind of book!

So far (I'm on p. 178) he's big on describing the problems but short on suggesting solutions. I'll concentrate on my proposed solutions to the problems.

Here are my takeaways:

1. Happiness is one of, if not THE, most fundamental want in people's lives. p. 36 - "Everyone who has observed human behavior for more than thirty continuous seconds seems to have noticed that people are strongly, perhaps even primarily, perhaps even single-mindedly, motivated to feel happy. If there has ever been a group of human beings who prefer despair to delight, frustration to satisfaction, and pain to pleasure, they must be very good at hiding because no one has ever seen them. People want to be happy, and all other things they want are typically meant to be means to that end. Even when people forgo happiness in the moment - by dieting when they could be eating, or working late when they could be sleeping - they are usually doing so in order to increase its future yield."

Freud put it this way, "What do they (humans) demand of life and wish to achieve in it? The answer to this can hardly be in doubt. They strive after happiness; they want to become happy and to remain so."

Blaise Pascal said, "All men seek happiness. This is without exception. Whatever different means they employ, they all tend to this end. The cause of some going to war, and of others avoiding it, is the same desire in both, attended with different views. The will never takes the least step but to this object. This is the motive of every action of every man, even of those who hang themselves."

I'm trying to explore the many and varied implications of this. Here are a few:

Educators, employers and parents have tremendous leverage to use here! We can't assume that every child wants to be a great athlete, great intellectual, amass great wealth, be married, or have a nice house in a nice subdivision. Assuming that these ends are desired and trying to motivate on those bases will make you miss your motivational mark. "But I don't want to have a big house," many youth will mentally object when you try to use that end as a motivation to do their homework or save their money. But we CAN assume that they want to be happy, so find studies and people stories that connect doing homework or saving money to finding happiness and you just might have their attention!

Study and analyze and debate about and reflect upon the things that lead to happiness and misery. Isn't this, in the final analysis, more important to our future success than memorizing the presidents of the United States or Kings of England?

Find ways to put our understanding of happiness into handy acrostics and hook them to devices that embed them in our minds and make them easy to apply.

Take specific lifestyle issues that we want to influence people about and reflect upon them with relation to the ultimate happiness. Example: many studies show that the best sex happens in the context of a secure, committed, long-term relationship - what we traditionally call marriage. Early sex with multiple partners can put a lifetime of good to great sex in jeapardy, with the threat of STD's, etc.

2. Acquire a healthy skepticism about my assessment of past events. In order to save brain space and allow us to make quick decisions, our brains tend to assign a title to an experience and save that title rather than the entire experience. Thus, if I heard an orchestra and thought afterward, "It was generally good but I felt it ended poorly," I might remember only that it was second rate. I can't rewind to experience it again and retrieve all of my original feelings.

Thus, when I say that "I hated Middle School" or that "my high school years were the best of my life," I've probably wiped out huge blocks of experience which, if I could bring them back, would cause me to reassess.

Additionally, we tend to remember past emotions and events in the light of today's emotions. When college students changed their minds about an issue due to a persuasive speech, they "remember" that they always felt that way about the issue.

3) People can experience high levels of happiness in seemingly difficult circumstances. Lori and Reba Schappel are Siamese twins, joined at the forehead. Yet, they are joyful, playful, and optimistic. They say emphatically that they do not wish to be separated. That's not weird among Siamese twins. An exhaustive search of the medical literature reveals the "desire to remain together to be so widespread among communicating conjoined twins as to be practically universal." They truly enjoy being together and don't pine for privacy.

You might object, "But they don't know what it's like to experience independence and privacy. If they experienced it, they would realize that they're not nearly as happy as they could be."

Gilbert argues against this view, saying, in part, that although Lori and Reba can't know what privacy would be like, neither can we know the depth of communion and sharing that they experience. They certainly show every outward sign of happiness, with Reba having recorded an award-winning country music album and Lori being "outgoing, wisecracking" and following her dreams as well.

4) New experiences can influence our future assessment of happiness. Gilbert first smoked a cigar in high school. Although he doesn't smoke regularly, he can't get the full blast of pleasure out of kicking back and relaxing in a lounge chair at a beach resort without having a cigar in his mouth. It makes one wonder...had he never experienced a cigar, could he experience the same amount of happiness at the beach without one? It reminds me of alcoholics, or any fans of alcohol, who can't imagine a social event without a drink in their hands. Are they really having more fun than the others at the social, or have they simply acquired a habit that they now have to continue in order to experience the level of happiness that others are experiencing without the alcohol? The bottom line? Be careful what you experience even once!

5) Question my ability to picture my ideal future. Every day we're making big and small decisions based on what we think will give us the greatest amount of happiness. "If I can win 'Teacher of the Year' I'll be happy." If I marry her, I'll be happier than if I marry her. If I order the Big Mac, I'll be happier than if I order the Quarter Pounder." "I'd be happier as CEO than as a labor union activist."

Gilbert puts that last statement to the test with a real-life example. Adolph Fischer's labor union challenged Chicago's powerful industrialists and he found himself facing a hangman's noose as a result of trumped-up charges. He surprised everyone by declaring with his last words, "This is the happiest moment of my life."

George Eastman became one of the richest men in the world by developing the revolutionary Kodak camera. "On March 14, 1932, the beloved inventor and humanitarian sat down at his desk, wrote a brief note, neatly capped his fountain pen, and smoked a cigarette. Then he surprised everyone by killing himself."

Before Eastman's suicide, how many people would have longed for his life of super-wealth and success. Apparently, our dream of what life would be like in his situation doesn't match what life was actually like in his situation.

"Mr. Destiny" is one of my favorite films. James Belushi plays Larry Burrows, a man who married a sweet by slightly dingy girl who can't seem to keep enough of his favorite cereal in the cupboard. His working class home and working class wife and working class job and working class friends are OK, but he blames his mediocre existence on one event: the day he struck out on the last play of the biggest game of the season in front of a crowd that contained everybody that was anybody. "If I'd only hit that ball," he often found himself musing, "my life would have turned out differently."

So the controller of destiny mixes up a drink that puts Larry into the other life - the one he would have lived had he hit the ball out of the park. He married the homecoming queen, who's dad made Larry the CEO of his company, which allowed him to live in a mansion with all the toys and cars he could dream of.

At first, Larry was ecstatic. But soon he found downsides to his new life. His workers hated him, including the best friend and wife from his former life. A power-hungry associate was out to destroy him. Rich folk's wines sucked in comparison with his "Brewski" beer.

When he got the life he always wanted - the one he always envisioned bringing him the ultimate happiness - he discovered that the new circumstances didn't bring about the expected happiness.

Solomon once said that we never know another man's joys or sorrows. How apt! Before you envy the CEO, the movie star, the guy all the girls like - remember that you see a small portion of that person's life. If you saw the whole, you might thank God daily that you don't have that life.

So how do we recognize the potential flaws in our dreams and tweak them to make them more accurately represent what would really make us happy?

6. Understand how my dreams of the future get skewed. (more to come)

One More Thing I'd Like to Know

The books I've read on this issue (how our brains fool us) often summarize studies with statements like, "people in this study tended to be more optimistic than their available facts warrant." That's interesting, but I'd like to know what percentage of the people were too optimistic. Fifty-one percent? Ninety-nine percent? Both percentages could be described by the statement that people "tended to be more optimistic," but it makes a huge difference in how I assess the extent of the problem. Surely some of us are more objective about our abilities and assessing our futures than others. If not, shouldn't we all assume that we're being too optimistic when we assess the odds of our new business succeeding? If so, we should all adjust our expectations accordingly when making decisions.

On Money and Happiness

2008-08-04T15:52:00.002-04:00

The final chapter of my book, Enjoy Your Money, addresses the relationship between money and happiness. When does more money make us happier? When does it not? I pulled part of my research from psychologist David Myers. Here's a summary of one of his books:

David G. Myers, The American Paradox: Spiritual Hunger in an Age of Plenty (New Haven: Yale University Press, 2000)

Why do we have more stuff and comforts than we've ever had, yet people report more misery and dissatisfaction with life than when people had much less? Thus the paradox that Myers, a respected social psychologist, tries to explain.

Citing abundant studies and reflecting on their accuracy and meaning, Myers concludes that, although money helps our happiness when it lifts us above the poverty line, it doesn't really help our well-being when it grants us more than we need. Supporting this thesis are studies that find lottery winners initially exuberant, but later adjusting to their former level of happiness. Similarly, accident victims who lose their eyesight or find themselves suddenly quadraplegic, initially fight depression but eventually find themselves with about the same level of happiness as before the accident.

Who finds themselves less happy than others? Those who strive most for material wealth. How fascinating! While many give lip service to the religious teachings and wisdom of the wise who insist that "it's better to give than to receive" and that "real happiness comes more from caring relationships than accumulating lots of stuff," Myers demonstrates from study after study that these teachings are true.

Myers comes with sound credentials. As professor of Psychology at Hope College, his research and writings can be found in over sixty periodicals. His psychology textbooks are used in nearly one thousand colleges and universities.

Applications

1. Poverty isn't good. Some may cry "duh!", but many hold a noble ideal of leaving the corporate rat-race, working minimum wage or part-time and earning minimum wage and playing their guitar on street corners for spare change. Others are so mission-minded that they want to live in the ghetto and serve those around them. While this may be fine for singles, it's not good for raising children. They'll likely grow up in fear, choosing the wrong role models in a crack neighborhood. Plan on making enough money to live in a decent neighborhood, send your children to decent schools, and have decent health care. Find ways to help those who are in poverty and support policies that help people out of poverty.

2. Materialism leads to misery. Studies show that those who strive most for wealth are less happy than those who put relationships first.

3. Do everything we can to promote stable families. The sexual revolution that started in the 60's brought more misery than happiness. The best sex happens in the context of a committed, long-term relationship - what we traditionally call marriage. Much of the depression and anxiety and maladjustment and violence of youth can be traced directly to their unstable homes. Sure, we all need a village - but we also need a family. Much, much research shows the power of the stable family unit to produce productive, happy children. A huge amount of today's poverty can be a attributed ruptured families that must survive with single parents. Promote government policies that promote stable families. Stay faithful to your spouse and children.

4. Promote living for others and community rather than radical individualism. Myers identifies the latter as one of the most remarkable characteristics of the present age. It's also the root of much of today's misery. This has been a huge shift in attitude since the 50's. Today, people typically seek personal peace and affluence above all else. Paradoxically, those who strive hardest to satisfy me, me, me end up less satisfied with life than those who are more concerned with others. The most obvious place we see this is in marriage. Those who go into it for what they can get end up unfilled and often divorced. Those who go into it with more selfless aspirations get the most fulfillment.

5. Character education must continue to grow and prosper in our schools. Communities agree on many traits they want to see in their students, such as honesty, diligence, concern for others, etc. Schools have the responsibility to partner with parents and community leaders to reinforce these traits in the school.

6. Religion is a positive force in the world. Sure, there are plenty of examples of religious people and organizations who've been negative. But when you look at the big picture, religion has been extremely positive for the world. The vast majority of work with the poor and down and out is done directly by religious organizations or done through secular organizations by religous people. Deeply religious people also report significantly greater happiness than the irreligious.

7. Involvement in corporate worship is essential for spiritual growth. The individualism of our age impact many people's approach to religion. They see little need to meet with other religious people when they feel they can just as easily worship and please God on their own. Yet, Myers sites numerous studies that find that meeting with people of similar beliefs strengthens your own beliefs. Also, studies find that those who don't meet with other believers neither serve nor give like believers who take corporate worship seriously.

Saving on Repairs: A Few Simple Questions That Can Save Hundreds of Dollars

2008-07-20T16:11:00.001-04:00

When I have to get something repaired - whether it be my dishwasher, car, lawnmower or leaky faucet - I've started asking a few simple questions that are starting to reap benefits. Here's what they are (specific to my lawnmower):

Question #1: When people bring in a lawnmower that won't start, is it typically the same few trouble spots 80% of the time? (They almost always answer "Yes!")

Question #2: What are the typical problems? (Example: clogged air filter, low oil, needs new spark plug.)

Knowing the answers to these questions for my plumbing, lawnmower and furnace (change the dirty filter!) saves me hundreds of dollars.

Example: Yesterday I took my pushmower, which wouldn't start, to the cheap-o repairman down the street who works out of his home (I reasoned: "low overhead can lead to lower prices.") I asked him the questions, to which he replied, "new spark plug, clean air filter, change or put in new oil."

You might think people would be reluctant to share their secrets, but I find them honored by asking for their wisdom within their area of expertise.

Next, he said he wanted to pull off the air filter to check the carburator, so that he could give me a better estimate as to what the repair will run me. As he looked into it, he grimaced to inform me that the carburator was all black, indicating that he'd need to rebuild the carburator. Also, he'd need to do a full service (filters, plug and oil), and oh yes, that blade needs to be replaced. The bottom line - $100 worth of repairs.

It was my turn to grimace as I told him politely that I'd rather not spend so much on something I could buy new for $135, so I put the mower back in my car and went my way. On a whim, I stopped at an Auto Zone and purchased a new spark plug for $1.50. When I got home, I put in the new plug (about a two minute process) and cranked it up. It hummed like a new machine and has worked fine ever since.

A couple of things about that episode keep reminding me of the word "shyster." First, he didn't want to replace the carburator - he wanted to "rebuild" it, meaning that if he did nothing to the existing carburator, I would have never known without being a mechanic and taking it apart. Second, call me a mechanical idiot, but a mower blade has a lot in common with a knife - if you sharpen it and it cuts stuff, it probably needs no further repair.

So, whether I'm dealing with honest repair people or shysters, here are my lessons learned for saving money:

You often don't have to know everything about a product to be able to do simple, routine repairs.
Doing a simple repair myself gives me a wonderful feeling of independence and "beating the system."
I can often save myself loads of money - in this case, $98.50, which might be the equivalent of $200 earned, once FICA and taxes are taken out of your earnings.
Keep asking the question, "What are the most common repairs that most people need?" The answers may save many thousands of dollars over a lifetime.
Don't brag to your wife or mother after you've made a successful repair. They'll start asking you to fix everything.

Other ideas for saving on routine repairs? Post some ideas!

Making More by Saving More: How I Plan to Make $2000 More Dollars This Year With My Writing

2008-07-20T16:07:00.001-04:00

I plan to save $1500. That's it.

No, the difference in numbers isn't a typo. Let me explain.

Money management gurus drive home the need to curtail spending. They often put it this way:

"A dollar saved equals two dollars earned."

Here's their angle: If you want to net $1 more through writing this year, you can do it in one of two ways:

#1: Earn an extra $2. If you're in a higher tax bracket, half of those earnings will disappear in the form of taxes, leaving you with your $1.

#2: Save $1. You keep it all. The IRS doesn't tax savings.

Now I'm not in a high tax bracket, so let's imagine that for me, $1500 saved equals $2000 earned.

The amazing thing is that the way I'm saving won't hurt me at all. It's not like I'm committing to eat Ramen Noodles for the rest of the year, or cutting my marketing budget. I simply compared prices on some of my services and winged better deals.

My primary savings came from changing my merchant account (the company that processes my credit cards for online purchases of my writing.) Cherie had been complaining for some time that too much of our earnings were being eaten up by our merchant account. I'd always respond, "Well, you know we compared before we got the service several years ago. I guess it just costs a lot."

But when they said they decided to charge us $40 more per month (ostensibly in order to serve us better!), I fired up my calculator and began asking around about the top merchant services. One ministry said they had changed merchants every two years, because companies would advertise a killer rate, inching up to an exorbitant rate before you knew what had hit you. He ended up with PayPal. I'm making the change, which should save me about $1200 per year. (Before the increase, they were charging us over six times the amount that PayPal charges for the same service!)

I've also found that you can bargain with Internet Service Providers. Mine was charging me about $70 per month for DSL wireless (allowing me about five computers to access). I got an advertisement in the mail that said I could get a competing service for about $45 per month. But I didn't want to go through the hassle of changing (change e-mail addresses, etc.). So I called my provider and said, "I like you guys, but your competitor is offering me the same service for $45 per month."

"We can beat that," he said. So immediately I began saving another $300 per year.

In my book on personal finance, I quote the CEO of Wherehouse Music as saying,

"Manage costs, not revenue. And remember that there is no such thing as a fixed cost."

Cutting costs frees up writers to take the assignments and write the books we're passionate about, rather than having to always go for the best paying. Extend this to paying less for houses, cars, etc., and you'll be that much closer to making a decent living from your writing.

Why This New Blog?

2008-06-15T08:04:00.000-04:00

Since I'm doing final edits on my latest book - Enjoy Your Money!: How to Make It, Save It, Invest It and Give It - it seemed wise to begin blogging on the topic, especially since my research yields so much more than my book can contain. I plan to deal with a wide range of aspects of personal money management.

I'll post my book summaries and reviews from my reading on money, what's working and not working with finances in my own family, etc.

Thoughtful and practical. Those words will drive this blog. Hope to hear from you!