Last Word on Money: 2018

Wednesday, December 19, 2018

Small Things

“It was the best of times, it was the worst of times.” So Charles Dickens began his classic, A Tale of Two Cities. The novel contrasted the turmoil of the French Revolution going on in Paris with the relative calm of London in the late 1700’s.

We have all gone through what we might consider our best times as well as some unpleasant “worst times”. But is it possible that, like me, you had your worst times and your best times simultaneously, and didn’t even know it? It can happen.

Before our children were born, my wife and I made a decision that she would stay home with them instead of working. It was a difficult choice financially because she brought in 60% of the household income at the time. And as our two sons arrived, a year and a half apart, we did have some financial turmoil—our worst of times.

The picture turned its bleakest at Christmas one year as we considered our checking account, barely double digits, and no savings for family gifts. We still had an artificial tree we put up each year and some ornaments passed down through our families. But it was going to be pretty sparse under the tree that year.

While I fretted what to buy my wife (and to compound matters, our wedding anniversary is also in December), she seemed to have no difficulty figuring out what to get me. I came home one night to find several presents for me, wrapped nicely and placed under the tree. After all my worry, and given our financial plight, this seemed like extravagance. I became upset and chided her for spending too much money. Her eyes moistened, and I remember so distinctly her words and her sad, tear-choked tone, “You just don’t understand….”

I tried not to mention the subject anymore before Christmas, but it was sure on my mind as I fumed and thought about meeting the mortgage in two weeks. On our anniversary, two days before Christmas, she handed me a gift from under the tree. I unwrapped it and found a single bright, white t-shirt. Well, that couldn’t have cost too much. I appreciated her frugality in giving something that I truly needed. Over the next two days, as I opened all the gifts she had wrapped for me, it became clear what she had done. She had purchased two packages of underwear—three t-shirts and three pairs of shorts—opened the packages and wrapped each article separately.

I really had not understood, as she said.

So while we were having our “worst of times”, that one incident brought home to me, albeit belatedly, that it was also the best of times. We were laying a solid foundation for our children, founded in love from and between their parents, and that was worth more than a second income to us. We started small, poor even. But we tried to save money, live frugally and yet happily by enjoying the closeness of family above all else. Those are years and memories I still cherish.

Your worst of times may look very different than mine. Unemployment? Divorce? Bankruptcy? Broken family? Whatever the loss, whatever the turmoil, while it may appear there is nothing “best” about these times, perhaps there is a kernel, some small glimmer in the darkness that, even if it cannot bring a smile now, at least might become a very fond memory later. This is the season of hope, the season of promise. And the very things that break our hearts and our spirits now might be the fertile ground from which much better things will spring.

A Merry Christmas to you and all those who are dear to you,

Roger

“Who dares despise the day of small things…?” Zechariah 4:10

“This will be a sign to you: You will find a baby wrapped in cloths and lying in a manger.” Luke 2:12*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Saturday, November 24, 2018

Pause for Thanksgiving

I am not sure I’ve ever had as many people tell me that Thanksgiving is their favorite holiday as I have this year. I usually don’t ask them why they feel that way. I guess I like to imagine the reasons. Or maybe their expressed sentiments just launch me into thinking of my own Thanksgiving experiences and I become too mentally preoccupied to ask.

As a child Thanksgiving granted me a short week at school. It meant turkey (I really think that was the only time of the year I ate turkey in any form), cool days to play in the backyard with my brother (when we weren’t fighting), romping in the leaves we had raked, and swinging on the rope swing our dad had hung in the big tree.

Such simple pleasures. And they stand in stark contrast to what Christmas has become. It’s almost trite now to say Christmas has become too commercialized; it’s so obvious. It’s a mad rush, with so much pressure to finish the shopping, pick the right gift, not forget anyone, write Christmas cards (I don’t think I’m the last one that does that), and bake. To businesses, Thanksgiving has just become the gateway to Black Friday, the annual Christmas shopping days countdown, and their push to make us spend money we don’t have. They pretty much ignore Thanksgiving otherwise.

And I’m okay with that. This holiday is golden to me, and I don’t want them to touch it because they’ll turn it into dross. Let them go straight from Halloween to Christmas rush. Leave Thanksgiving to the rest of us.

Joshua Rogers, a writer and attorney who lives in Washington, D.C., wrote a poignant essay about Thanksgiving this week. He related his own experience growing up without a father and being embarrassed and ashamed by having to get free lunch at school each day because he was poor. But he ended the essay powerfully as he recalled just what Thanksgiving meant to him and should mean to us:

I wonder who might be sitting around your Thanksgiving table this year being blessed with more than turkey and pecan pie. What kid — young or old — is finding solace in that moment where they finally belong? You never know what’s going on in people’s minds and hearts around the Thanksgiving table, but it can be a sacred space.

Thanksgiving is a holiday where the gift is the presence of people who welcome you, whether you’re related to them or not. There’s no price to be paid, no expectation that gifts must be given. No matter how out-of-place some of us may feel the rest of the year, if we get Thanksgiving right, it’s an invitation to enjoy free lunch, to feel loved without feeling any shame.

Whatever your financial situation, slow down right now. Don’t let the Christmas rush sweep you up in its tide. Let the Thanksgiving spirit continue, and savor the often overlooked most valuable things in your life. Rich or poor, a spirit of thankfulness is a tonic, an antidote to materialism and the temptation to measure all things by money.

Happy Thanksgiving.

Roger

“When you become successful, don’t say ‘I’m rich and I’ve earned it myself’. Instead, remember that the Lord your God gives you the strength to make a living.” Deuteronomy 8:17, 18 CEV

Monday, November 12, 2018

Fake News

I’m not altogether certain why there is such a fuss about “fake news” these days. The National Enquirer has been around for years, and that publication is my definition of fake news. But I would agree that news can be spun in such a way that it elicits either a positive or negative response from the hearer/reader and, more to the point and purpose of the publisher of the news, causes the audience to continue giving attention to it.

I did not suspect fake news when I read the banner across the cover of the November issue of Money magazine: “This crash signal just flashed red”. As soon as I had the opportunity I turned to page 36 to get the scoop on what the Money editors were seeing that caused them to think a stock market downturn and/or recession was imminent. I found a surprisingly short article—one page, ten column inches, a graph, and a picture of stock traders that appears to be from the 1930’s.

The brief article explained the Sound Advice Risk Indicator, an index overseen by Sound Advice newsletter editor Gray Emerson Cardiff, that purports to predict stock market crashes. The measure compares the level of the S&P 500 stock index to the national median price for new houses, and when the Risk Indicator level rises above two (and we are there now), a downturn is around the corner.

According to Money the last time the Sound Advice Risk Indicator reached this level was in 1998 before the dot.com crash. It did the same before the big stock market declines of 1906, 1928, 1937, and 1965.

But here is where the reader needs to draw on his own knowledge of history and recall facts that are not in this article. For example, there was a big crash around 2007/2008. Remember that one, The Great Recession? Why didn’t this index predict that? Why didn’t it predict the recessions of November 1973 to March 1975, or the one in July 1981 to November 1982 when unemployment hit 10.8%?

And how about that supposed foretelling of the dot.com crash? The Indicator hit “two” in 1998, but the crash didn’t occur until nearly two years later. As Money quoted Cardiff acknowledging, “Stock prices often stayed high for many months, sometimes even a couple of years. However, in all cases a major decline or crash followed, pulling down stock prices by 50% or more.”

So here’s what I take away from the article: The Sound Advice Risk Indicator can predict a big stock market crash—or not. It often misses. And when it does flash red, the crash could still be a year or two away; and that’s half an eternity in the investment world.

It reminds me of an episode of the 1960’s television comedy, The Beverly Hillbillies. Granny, a self-proclaimed mountain doctor from the backwoods of Tennessee, talked up her cure for the common cold. All you had to do was take the tonic and in a week to ten days you were better. This investment tonic is about as useless, in my opinion. I go back to one of my favorite quotes, one from economist Paul Samuelson: “The stock market has predicted nine of the last five recessions.” A crystal ball that is right by accident and not always prescient is not a crystal ball at all.

The bottom line for anyone reading any “expert” advice on investing or on money matters in general is to apply common sense and his own knowledge to make judgments of what he is reading. All that’s published is not fit to read. Sometimes, like a National Enquirer headline, there’s just enough there to make a salacious headline, but the whole story is quite different.

Until next time,

Roger

“Do not call conspiracy everything this people calls a conspiracy; do not fear what they fear, and do not dread it.” Isaiah 8:12 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Thursday, November 1, 2018

So, what are you doing for Doomsday?

Unemployment is the lowest in decades, the stock market flirts with record levels (and if the recent big one-day losses there spooked you, keep it all in perspective by looking at the indexes now compared to ten years ago), and the economy is humming along. So what does that leave the rich to talk about when they get together socially? Why of course, “What do you plan to do for Doomsday?”

Bloomberg reported recently that over the past two years seven Silicon Valley entrepreneurs have purchased survival bunkers and had them transported to New Zealand. There, they are buried 10-12 feet underground with a carefully disguised entrance that most anybody would walk past and not realize it was there.

I guess you chalk this up to one of two things: these folks have more money than they know what to do with; or they have so much money that they’re worried something is going to happen to it or someone is going to harm them to get to their money. Having oodles of money and everything you want that money can buy does not add up to a carefree life.

So why New Zealand? As a manager at the bunker manufacturer told Bloomberg: “New Zealand is an enemy to no one. It’s not a nuclear target. It’s not a target for war. It’s a place where people seek refuge.” And a nice faraway destination that you can charge big bucks to ship your bunkers to.

I wouldn’t be one bit surprised to find a savvy entrepreneur across the Pacific who knows these millionaire bunker owners are not likely to come around to check on their property and is renting the bunkers for weekend getaways. “They’ll never know!”

One rich and prominent venture capitalist allegedly spelled out his big plan to friends. He has a motorcycle in his garage with a bag of guns hanging from the handlebars. When the Doomsday clock strikes midnight he’s going to bypass the traffic jams on his Harley, warding off thieves and zombies with the guns as he heads to his private plane which he will pilot to a landing strip in Nevada where a jet sits waiting in a hangar for the sole purpose of taking him and four billionaire friends and co-owners to New Zealand.

Really? I can see a number of ways that plan could go awry. As the article pointed out, an asteroid strike in the Pacific could cause a tsunami capable of swamping even the highest point of New Zealand. And there’s a small hint of potential trouble down the road in the fact that New Zealand lawmakers in August banned foreigners from buying homes. It seems they may be tiring of serving as the bailout hideaway for the desperately rich. So one more potential glitch in the Doomsday plan: an envious construction worker who helped bury the bunker gives the location to his unsavory friends who head there to shake down the millionaire the day after Doomsday.

But on that day will the money do those thieves any good? Will it do the rich any good? Economists say we do a great job at planning for the last recession. In other words, we learn from our economic mistakes and implement means to prevent them and head off the next recession; but the next crisis comes from an entirely different direction, and like the last one, no one is prepared. It’s likely to be the same way if and when there’s a Doomsday. It will come in ways unexpected and defying our plans and charts and timelines.

I’m not about stockpiling food, building a survival bunker, or having an elaborate escape plan beyond having two ways to exit my house in a fire. I try to live a modest life, give to charity, and not hoard more than I need now or far in excess of what I need to fund a decent retirement. I’m trying to live by faith that Doomsday won’t be all the bad, at least in the end. Hopefully I won’t be worrying about money.

Until next time,

Roger

“Wealth is worthless in the day of wrath, but righteousness delivers from death.” Proverbs 11:5 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Wednesday, October 24, 2018

The Measure of a Boss

A former co-worker and very good friend texted me last month to say she is leaving the job where she and I had worked together for several years as team leaders and which I left nearly nine years ago. It came as a real shock to me not only because of her longevity there and my expectation that she’d retire from there, but because of what I thought was her commitment to the job and the mission of the employer, a nonprofit medical firm. She personifies that mission and has a very real and personal stake in its success. So why leave now?

A bad boss.

Does that surprise anyone? That, in fact, was the main reason I left the company, the loser of a boss that took the reins of the department in which I worked. My friend was able to outlast that boss, as well as a couple of successors. But the newest director was another story. She said she gave him a year to see how it went, but he failed. (That is, he failed her test of his leadership. The company still has him onboard and probably thinks he’s doing a great job.) She confirmed what I guessed already: he lacked good interpersonal skills, had an oversized ego, micromanaged his employees, and killed morale with his focus on everything but the real mission, all while collecting a nice six-figure salary.

What’s wrong with bosses these days? They come out of business schools with no “soft” skills, no ability to communicate effectively. They know the business (I’m giving many of them the benefit of the doubt on that one) but don’t know how to talk to people, let alone effectively manage them to inspire the best work and build loyalty. They lack humility.

Now the Wall Street Journal reports that companies are shopping for leaders who have that elusive quality, humility. Why? Let me take a few quotes from the WSJ article, “The Best Bosses are Humble Bosses”.

“Humility is a core quality of leaders who inspire close teamwork, rapid learning and high performance in their teams.”

“Among employees, it’s [humility] linked to lower turnover and absenteeism.”

“Most of the thinking suggests leaders should be charismatic, attention-seeking and persuasive….Yet such leaders tend to ruin their companies because they take on more than they can handle, are overconfident and don’t listen to feedback from others.”

“[Humility] predicts ethical behavior and longer tenure on the job.”

Here’s a link to the article. A good read.

Of course, now that corporate America is on to humility as a desirable trait, you just know they are going to come up with a training program to teach it and assessment tools to measure it; and it’s going to ruin the whole thing. And when those bosses-in-training graduate humility class will they get a certificate that declares them humble? Funny thing about humility. As soon as you think you've got it, you've lost it. Behavior learned in a classroom by an adult is less likely to be motivated from the heart; and humility—to be genuine—needs to start there, accompanied by a respect for others. In shorthand we might just call it the Golden Rule. How does your boss measure up? How do YOU measure up?

Until next time,

Roger

“When pride comes, then comes disgrace, but with humility comes wisdom.” Proverbs 11:2 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, October 12, 2018

Simple as ABC? Not Quite

Even if you’re not sixty-five or over you can hardly help but know it’s the annual open enrollment period for Medicare just from seeing all the TV ads sponsored by insurance companies wanting to sell seniors their health care coverage. So let’s again cover some Medicare basics.

Medicare is the national insurance plan for the disabled and people over age sixty-five. It covers hospital (and other) services under Part A and physician (and other) charges in Part B. You probably have been paying premiums for the coverage for years, even if you’re not actually covered by Medicare yet. That’s because the FICA tax that comes out of your paycheck includes not only your Social Security system contribution but also a 1.45% tax on your earnings for hospital insurance. So when you actually enroll in Medicare there is no further cost for Part A coverage (unless you continue to collect wages). This is not because you saved enough in your personal account to pay for it—because there is no personal account. Benefits are being paid the accumulated taxes and by the people still working.

You will have to pay premiums for Part B coverage, and that typically comes directly out of your Social Security benefits. You must enroll for Part B when you become eligible or else pay a higher penalty rate permanently when you do enroll. There’s an exception for those who have other qualified health insurance coverage.

During the last Bush administration Medicare added prescription drug coverage, referred to as Part D. Again, enrolling when you are first eligible is critical. But you must find a separate Part D plan to cover your drug needs.

So did Medicare skip over “C”? No, Part C is what you are mostly hearing touted on TV. Companies like Humana and United Healthcare offer what are called Part C, or Medicare Advantage, plans. These are an alternative to enrolling in “regular” Medicare with the government. They must cover everything regular Medicare does but almost always offer some additional benefits like vision, hearing, or dental and even include Part D benefits (drug coverage). They may also advertise that you pay no premiums for their plan. That’s because you will continue paying your Part B premiums to Uncle Sam who then pays the insurance company to assume the financial risk for your health care needs.

Medicare Advantage plans are not the same as Medicare supplement plans. The latter are intended to cover the co-pays and deductibles of regular Medicare, which typically come to 20% or more of a beneficiary’s health care expenses. They do not cover prescription drugs and will cost the enrollee an additional premium.

In very general terms, then, complete Medicare coverage can be attained in one of the following ways:

“Regular” Medicare + a Medicare supplement plan + a Part D prescription drug plan; or

Medicare Advantage plan

At first glance it looks like a no-brainer: full coverage at no additional cost above your Part B premium? Who wouldn’t enroll in a Medicare Advantage plan? But buyer beware. Medicare Advantage plans will have a narrower network of providers. That means less choice of doctors and hospitals for you. Plus, they impose administrative burdens on the healthcare providers—like having to get pre-authorization before rendering certain types of care; or putting extra burdens on you, like having to get a referral to go to a specialist.

For that reason, many providers will not join these networks. So before signing up for a Medicare Advantage plan, thoroughly check out its network of doctors and hospitals. Are your doctors in-network? If not, you will probably have to find a new doctor or else pay mostly out-of-pocket. And don’t be surprised if the biggest and most highly advertised insurance companies’ Part C plans are NOT accepted by your doctor/hospital.

In talking to friends, and judging by my own dad’s experience, Medicare with a supplement and Part D plan will most likely cost you less out of pocket, all things considered.

So make your choice wisely over the next few weeks if you’re Medicare-eligible. Don’t take the TV hype at face value. Check out the plans. Talk to friends who might be enrolled in a Part C plan and see what their experience has been. Lots of money is at stake here. The cheapest-premium option might not be the best option for you, depending on your needs. As I always say, run the numbers.

Until next time,

Roger

“Good judgment wins favor.” Proverbs 13:15 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, September 28, 2018

Being Smart Rather than Greedy

I should be accustomed to it by now—the contradictory financial advice we get from newspapers, television, radio talk shows, books, and the buddy at work. It’s not all bad advice, necessarily. In fact, it might all be right (sometimes), but only for certain people.

This week I read an article lamenting the fact that people are taking so much money out of stocks and putting it into bonds. Stocks, in fact, had a net outflow of money while bonds had a significant influx of investment dollars over the last calendar quarter. The authors pointed out that people investing in, or transferring their money into, bonds were losing out on the money to be made in the current, record-breaking rise in the stock market.

Well, yeah, that’s probably true. But on the other hand, isn’t that exactly what financial experts have preached at us to do? When stocks are flying high, it probably means two things: investors’ have accumulated a lot of money in their accounts, and their portfolios are out of balance, with too much money in equities (stocks) because of the outsized growth in their value. So what should these people do? This is exactly the scenario in which they should harvest some of those stock gains and put it in safer investments to protect against the next downturn. It’s called selling high, and it’s a good sight better than selling an investment when it’s low and you don’t make as much on it.

What the authors of that article are forgetting is that no one can reliably predict when the market has reached its peak and stocks are at what will be their highest price before beginning to fall. That would theoretically be the best time to sell and make the most off your investment. But that is called market timing, and it’s impossible to master. I suspect that many people—the ones putting their money into bonds now—are betting that the stock market is going to start falling soon, so instead of waiting for the mad rush to sell later as prices drop precipitously, they are moving out of the high-priced stocks and buying low-priced bonds. It’s smart investing and in this case the opposite of greed.

Bonds generally have a reputation as a safe, revenue-generating investment during retirement years. That, in fact, might be another reason for the rush to bonds: more people are retiring. What’s the figure I heard quoted: 10,000 Baby Boomers retire every day? If they are investing in bonds to reduce their risk of losing a ton of money just as they are entering retirement, aren’t they just being wise? After all, a severe market downturn in the first few years of one’s retirement can, if not planned against, increase the odds of running out of money late in life.

That is exactly the strategy I’m following. I’ve gradually been moving more money into short-term bonds. They make me only very modest gains in value, but they also give me diversity in my investments and a small measure of financial protection. (I keep remembering that even bond funds took a big hit during the last recession.) And it’s a strategy that I’d bet a lot of others who are not at retirement’s door are following. They are rebalancing their portfolios so they are not too heavily into one market segment but have a balanced diversity. Financial gurus have been telling them for years to at least annually rebalance their portfolios, especially in a rising market like this one. Now they are doing it. They’ve been listening. Maybe they learned something from the recession, which was largely caused by stupidity and greed. That would be an encouraging sign for the future. Now if only the financial talking heads will leave them alone.

Until next time,

Roger

“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Ecclesiastes 11:2 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Sunday, September 16, 2018

Torching the FIRE Philosophy

Last week I wrote about FIRE, the “financial independence, retire early” philosophy embraced by tens of thousands of people in a type of financial subculture. I enumerated a handful of commendable methods and aims of its adherents, including living simply and below one’s means, saving, and investing reasonably instead of pursuing quirky or suspect get-rich-quick schemes. But I have a couple of problems with FIRE.

Money magazine, which ran a feature on the movement this month, pointed out that many of its followers are young, mostly millennials, the majority of whom have never weathered a real recession or bear market during their adult years, or at least during their investing years. They are probably getting giddy over the heights to which they’re riding with the stock market soaring. Hopefully they are sticking to the advice to invest simply and are not chasing too-risky investments. But even if they stay in low-cost stock index funds, what goes up must come down. The stock market will come back down eventually, account balances will fall, and it may become harder to live on the proceeds of investments without touching the principle amount.

That, in fact, is what I perceive to be the fundamental weakness of FIRE. Vicki Robin, who wrote the FIRE “textbook”, Your Money or Your Life, says the magic moment for “FIRE walkers” comes when they can live on what their investments earn (interest, dividends, growth in value). At that point they can fulfill the “retire early” part of the dream because then they are financially secure.

But are they? If companies start reducing or skipping dividend payments, income drops. Ditto if interest rates take a dive during a recession or corporations—or even municipalities—start failing and default on their bonds, a supposedly safer investment for retirees that generates regular income. If a retiree has to dip into principle to meet his income needs, there is that much less principle to generate income the next year, meaning he will have to withdraw more.

There is nothing wrong with drawing down principle. I expect to do that most years during my retirement because I doubt stock growth will outpace my spending, especially in the down-market years I expect after I retire. But then, I am not retiring early. The 3% to 4% annual savings withdrawal rate (regularly adjusted for inflation) that is recommended by many retirement planners has been shown to be a pretty safe way to make savings last 30 years or more.

But what if a FIRE walker retired at 35? Touching the principle amount becomes a risky proposition for him. He needs his savings to last beyond age 65, maybe to age 95 or older. Can investment earnings and principle keep pace with market fluctuations and inflation for sixty years? Yeah, inflation is another stranger to millennials. The earnings that investments brought the investor this year to cover expenses might not be enough in five years. FIRE, as a practical philosophy of investing/saving/living, has not been thoroughly tested by the whole range of market conditions over a long period of time.

I would point out, too, that some of the strongest proponents of FIRE are not themselves good examples of how FIRE can work long-term. These folks, in their forties and fifties and long after they supposedly retired, are out there promoting the philosophy and telling how they did it at seminars that cost hundreds of dollars to attend. These FIRE teachers, then, are not really retired early at all, but are making money off the people who do want to retire early.

Finally, I am not comfortable with the notion of early retirement—not in the sense of retiring in one’s thirties, or even forties. Being healthy and having loads of free time usually adds up to spending more money, whether for hobbies, traveling, eating out….whatever. It would take a great deal of discipline to hold that in check for several decades. Even more fundamentally, though, I think people can too easily lose their direction and purpose in retirement. Employment, for all its hassles and stress, does tend to give us direction, meaning, and goals to which to work. It also provides a social outlet of sorts. These are things that actually contribute to a longer and healthier life, assuming the employment is not dangerous or dangerously stressful. Can a 40-year-old retiree maintain anything other than a hedonistic purpose in life? If he can retire and devote his life to a higher purpose than himself, that is commendable and, in my opinion, the only good reason to retire early.

I am not a FIRE walker. I want to enjoy now the things I like—in moderation. So living on an extreme budget for the purpose of retiring early does not appeal to me. I save, I give, but I also spend, and not always grudgingly and for just the essentials of life. I will retire—not early but hopefully while healthy enough to enjoy the time and be able to devote some energy to higher causes.

Choose wisely, and be careful what you wish for.

Until next time,

Roger

“I know the best thing we can do is to always enjoy life, because God’s gift to us is the happiness we get from our food and drink and from the work we do.” Proverbs 3:12, 13 CEV

Friday, September 7, 2018

FIRE is Spreading. Is that Good?

According to Money magazine, the 1992 best-selling book, Your Money or Your Life, has found a new and enthusiastic readership among millennials. That age cohort comprises the heart of a movement known now as FIRE, for “financial independence, retire early”.

I have to admit, that is an appealing concept. Who doesn’t want to be free of money worries or of being dependent on a job that brings no joy or fulfillment just to be able to pay the bills? And retire early while you’re still young enough and healthy enough to enjoy the free time—what could be wrong with that?

There is plenty right with FIRE. Adherents make a habit of evaluating potential purchases in terms of “real cost”, i.e. not just dollars and cents but the amount of time or life energy it took to earn those dollars and cents. I’ve done that—still do sometimes. Early in my career it was an exercise in anxiety and stress as I counted up the bills against the time I had to work to earn the money to pay them. Lots of people complain of running out of money before the month is over. Imagine running out of time each month. It was frightening. But for someone in a reasonably secure financial state this technique can be an excellent way to stop impulse buying and encourage wise shopping.

FIRE also encourages simple living. The goal is to live on less and invest the savings. So the more diehard FIRE fans scorn eating out, grow their own vegetables, hunt for their own food, repair their own cars (if they even own one), and re-use everything they can. If this sounds to you like a hippie community (forgive me if the term sounds derogatory or anachronistic), you would not be far from the truth. But we should not stereotype “FIRE walkers”, as some call them. As with any group of human beings brought together under a common cause, there is wide diversity in motivation and technique. Not all of them eat homegrown garden salad in their own kitchen every night by candlelight. They will go to a nice restaurant; take consulting jobs; drive a car every day. You may be well acquainted with a FIRE walker and not even know it.

What about the “retire early” part? Vicki Robin, author of Your Money or Your Life, outlines a nine-step process to achieve this goal. It is not a get-rich scheme. It is to live on less and save until you reach the so-called crossover point at which your investments generate enough income to sustain that simple lifestyle without having to touch the principle amount. This offers the opportunity to retire early. To her credit, she does not recommend high-risk investments or unproven financial strategies to get to that point. Low-cost mutual funds and exchange-traded funds (ETF’s) along with simple real estate strategies are her favorite vehicles for saving/investing. As I said, there’s lots to like about FIRE.

Is FIRE for you? Don’t get fired up too quickly. Think about the pitfalls, and in my next post I’ll share what I don’t like about this movement.

Until then,

Roger

“Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes?” Matthew 6:25 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Monday, September 3, 2018

Another Government Program Too Good to be True

After writing in my last post what a bad idea it is for seniors to go into debt to pay for a child’s or grandchild’s education, I’m going to go a step farther and encourage even the student to shun student loans, or at least minimize what is borrowed to fund college attendance.

Being awash in debt, even for a good cause like obtaining higher education, saddles the borrower with years of payments, with no guarantee of a high-paying job to meet the payments and still maintain even a modest lifestyle. Countless students fell into this debt trap in the early 2000’s and then found themselves graduating into the beginning of one of the nation’s worst recessions where they were unable to find decent-paying jobs. I believe it’s happening again. We’ve been riding high for over nine years in the recovery from the last recession. Students (and not just students) are mortgaging their future with the debt they are incurring.

But the truth is, it doesn’t take a recession to do the students in. The labyrinth that is the federal student loan program is enough to do that. I’ve read or heard stories in the last month on CNBC, Mother Jones magazine, and NPR about students who graduate with relatively modest loan balances but by accepting loan forbearance offers to get them through a financially lean time end up owing much more than was actually borrowed. The plans that cap monthly payments at a certain percentage of the borrower’s income are no better. One former student, now age 61, had borrowed $55,000. Several times he went into a period of forbearance. The accruing interest was tacked onto the loan, and today he owes $300,000. This may be an extraordinary case, but only in degree. Similar stories abound.

The Public Service Loan Forgiveness program is no better, and might even be worse. It holds out the carrot for borrowers that go into government or non-profit public service jobs of having their balances forgiven after ten years of payments. But the rules for the program, the many exceptions and “gotcha” fine print that can disqualify someone from participating—even after making years of payments—have brought financial disappointment and grief to many others.

What’s the lesson here? Besides eschewing debt, students and their parents need to be wary of government programs and fast-talking college financial aid officers. The latter clearly have an incentive to paint a rosier picture of the repayment period to get you to borrow and enroll in their school. But even upon graduating, they may continue to do you financial harm by encouraging wrong decisions. You see, schools can lose their ability to participate in federal aid programs if too many of their graduates default on their loans within the first three years of repayment. But a student in forbearance during that period of time cannot be counted against the school’s record. This incentivizes the school to recommend that route over wiser courses of action. In the end, the borrower will owe much more and likely find repayment harder; but by then his misery will not be the school’s problem.

And the design of the student loan program? Like so many government plans, it sounds good on paper and maybe even came with lofty aims by the originators. But it is still, in the end, a government program. It is nearly impossible to navigate it safely these days except by the most savvy (and fortunate) of borrowers. And this cannot be blamed on one political party over another, one administration over another, or even one Department of Education secretary more than another. This is a mess decades in the making. Steer clear of it if you are approaching college years, for yourself or a loved one.

Until next time,

Roger

“When that servant went out, he found one of his fellow servants who owed him a hundred silver coins. He grabbed him and began to choke him. ‘Pay back what you owe me!’ he demanded. His fellow servant fell to his knees and begged him, ‘Be patient with me, and I will pay it back.’ But he refused. Instead, he went off and had the man thrown into prison until he could pay the debt.” Matthew 18:28-30 NIV®*

Sunday, August 19, 2018

Should I Borrow for Junior's College Education?

Given what I’ve written in this space about the growing problem of student loan debt (see the most recent post by clicking here), is it any surprise that the fastest growing age-demographic to be affected by the crisis is…people over age 60?

You read that correctly. The Consumer Financial Protection Bureau (CFPB) reported that statistic recently. Even more disconcerting: nearly 40% of student loan borrowers over age 65 are in default on those loans.

This is most often not a matter of grandparents going back to college in their golden years to fulfill a life dream, although about one-third of indebted seniors fit that profile. No, it is more often seniors co-signing for student loans or taking out loans in their own name (e.g. PLUS loans) for children or grandchildren and getting blindsided when the balances creep up, they don’t read the fine print, or the child/grandchild fails to pay his share or assist at all in paying back the money, and the seniors are left with tens of thousands of dollars to pay back just when their income is likely to be falling due to retirement.

What parent/grandparent worthy of the name doesn’t want to help his offspring? I endorse and applaud that natural human tendency to support our own. But should we as seniors assume an unsustainable financial burden in the process? Sacrifice is commendable; but it should not mean foregoing basic necessities or plunging oneself into poverty-level living to fund a loved one’s education. The average student loan debt balance for older Americans is $40,096. If they default on it, their Social Security benefits—so often the only reliable income a retiree has—can be garnished, further deepening the financial pit.

So what can a loving parent/grandparent do when confronted with a request to loan money or co-sign a student’s loan? Let me offer these suggestions.

Plan and know your financial situation in retirement. This means making an honest assessment of your likely income and expenses in your golden years. Don’t make a wild guess; run some numbers; think through what expenses will increase and which will decrease, and what new expenses will pop up; get an estimate from the Social Security Administration as to what you may expect in benefits; enlist the aid of a financial planner to see what annual income your retirement savings will generate, or simply take about 3% to 4% of your balance and use that as your annual income stream from that source. Unless you know your full financial picture (as far as it can be knowable) you cannot know if you can afford to loan, give, or borrow money to a student in the family.

Once you know your financial picture, do not loan or borrow more than you can afford to lose. Outwardly, treat money you loan as though you expect it to be repaid—even set up a payment plan and insist it be followed—and that if you co-sign a loan make it clear you don’t want to be making the payments in your old age. Just assume from the start that you will not be repaid or that you will be responsible for paying the loan. If it turns out otherwise, take a vacation with the money.

Sit down with the student to assess his choice of college, his financial picture, and his expectations. And share some of the facts and ideas in the previous post I cited above. He needs to have skin in the game. This is also an opportunity to judge how serious he is about the whole educational endeavor. Do not assume that an irresponsible teenager will suddenly become a responsible young adult by attending college. Do not throw money down that pit.

If you are in a position to help financially, make the assistance contingent on some agreed-upon performance measures. Good grades, holding a part-time job, getting a summer job, no extravagant spring-break trips….there’s a lot of latitude here.

I wish you and your student the best.

Until next time,

Roger

“It is a dangerous thing to guarantee payment for someone’s debts. Don’t do it!” Proverbs 11:15 CEV

Monday, August 13, 2018

Bring Back the Layaway

One of the rare good—maybe even quaint—features of the last recession was the return of the layaway. This is the practice of putting a down payment on an item and adding perhaps a $1 or $2 fee to have the store hold it while you make periodic payments until the full price is paid and you take possession of the item. Before the explosive distribution of credit cards in the mid 1970’s onward, layaways were a popular means of purchasing goods for which you did not have the full purchase price. Essentially, it was like making a purchase with a credit card, except with plastic the purchaser takes immediate possession of the item and pays interest to the credit card company as he stretches out the time period over which he pays for the item.

Our parents and grandparents were quite familiar with layaway purchases. It was a popular way in the weeks leading up to Christmas to buy holiday gifts. My father certainly made use of it. I did, too, in my younger years, though the practice was fading by then as the appeal of immediate gratification (for a price) via credit cards caught on.

But alas, layaways grew rarer again as the economy improved. And now, in another alternative to buying via credit cards, several companies (many are start-up businesses) have teamed with online retailers to offer “payment plans” for larger purchases, from fashion apparel to vacations. It amounts to taking out a loan, with the buyer having to make periodic payments and in many instances paying fees and interest. But like a credit card purchase, the buyer takes immediate possession of the item (or at least has it shipped right away). That is the appeal. And that is the shame.

Layaways were a throwback to (in my opinion) a better time, an era when people were generally more financially responsible, were willing to defer gratification instead of going into debt. These payment plans present a new set of dangers to consumers.

First, consumers will purchase more since they have more options to pay for their goods. Retailers explicitly acknowledge this is a tool to combat “abandoned shopping carts”, the phenomenon of online shoppers getting to the end of their transaction and then being scared into not actually buying when they see the final tally and wonder how they will pay for it.

Second, for a person who shops online frequently, he may quickly find himself with multiple “loans” from several companies for which he must make bi-weekly or monthly payments. The financial strain can sneak up on the careless.

Finally, the fees and sometimes even interest rates up to 30% can trap the consumer in a cycle of debt. There is no credit card limit to restrain him, only the discretion of the lenders. And I haven’t heard of any of these companies offering reward points or airline miles as you might get as a consolation prize when using a credit card.

Convenience and immediate gratification often come with a hefty price tag. Retailers are happy to accommodate your desires. It’s their business to keep you satisfied. But they are also in business to make money. Don’t give them any more of yours than absolutely necessary. Your business is to stay financially stable and secure.

Until next time,

Roger

“Hope deferred makes the heart sick, but a longing fulfilled is a tree of life.” Proverbs 13:12 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Tuesday, July 31, 2018

Student Debt is a Marriage Killer

The news for student borrowers just keeps getting worse. The total student loan debt in the

U.S.

stands at a record $1.5 trillion. The average individual outstanding balance is $34,144. The percentage of borrowers with debt over $50,000 has tripled over the last decade.

Now CNBC reports that one in eight divorces nationally is caused by student loans.

That is an alarming statistic, but I don’t find it particularly surprising. I’ve written in this space before about the growth of student debt, the role of money in relationships (and their demise), how couples don’t talk to each other about money before or even after marriage, and how money is always cited in surveys as the leading cause of stress. Why would we think that young borrowers could elude those pitfalls? If anything, the stress is multiplied for them.

Young couples are less experienced generally in handling money. While we might romanticize the early years of a marriage, that time is often spent in a delicate give-and-take as the parties learn about each other and establish the ground rules, boundaries, and personal and shared territory that will define their lives together. It’s also when the pair is most likely to be idealistic as they imagine their future together.

Now factor in about $70,000 in student loans, tight budgets as they adjust to the realities of living outside the safe environs of a parent’s home, potentially being blindsided by their mate’s debt, and the very real possibility that they will have to delay fulfilling some of their dreams—whether that’s a new home, a new car, or even children—and the stress level climbs dramatically. As it turns out, it’s enough to lead to a split and was cited as the main reason for their divorce by 13% of 800 adults surveyed by the Student Loan Hero group.

It would require a book to elaborate on all the ideas to avoid and/or handle high student debt. But I will share just a few thoughts.

Avoidance: Hold down a part-time job during the school year and work summers to pay your way through college. While it may not be enough to avoid borrowing altogether, it means less will have to be borrowed. Also, consider attending a community college for two years. Given what I see going on at college campuses around the country and what passes for higher learning these days, you might actually do better for yourself at the community college level and be guaranteed admittance (based on having decent grades) to a participating university for the second half of your college education.

Share: It makes no sense to hide your financial situation from your spouse-to-be. Marriage is a team effort, and both parties need to know the whole picture to work effectively together. It’s only fair and makes for more realistic planning and less disappointment and heartache. Make finances a regular topic of discussion (not argument).

Budget: Or more euphemistically, have a spending plan. Having a solid first job after college and regularly bringing home a check that’s more than you’ve ever made before can blind you to the need to plan how to disburse and save that money. Don’t let it. And craft a plan to pay off the debt ahead of schedule. Set goals and work mightily to achieve them.

Pre-nup: Okay, this was CNBC’s idea, not mine. I’m not even sure I endorse it. But in order to prepare for the possibility that the love of your life really just needs you to help him pay off his debts, have a prenuptial agreement that ensures that should the marriage end in divorce you are repaid for any money you contributed to paying off loans he brought to the marriage. Just be sure you broach this idea with tact and love.

Until next time,

Roger

“Will not your creditors suddenly arise? Will they not wake up and make you tremble? Then you will become their prey.” Habakkuk 2:7 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®