Category Archives: money

my one money advice (MOMA)

Pinyo over at Moolanomy has started a meme that appears to be making the rounds of the PF blogosphere. He asks “If you coud give one advice, tip, or story related to money, what would you share?” I’ve been tagged by Goldnsilver at My Financial Blog to answer, so here goes:“Resist consumerism”

The American corporate capitalist economy has brought the people of America to dizzying heights of personal wealth. Even some of the “poorest” people in America own cars, televisions and have access to an amazing array of foodstuffs and consumer electronics. I think one of the first battles that anyone has to fight on the road to financial freedom is resisting the nonstop assault of advertising and ‘stuff envy’ that can wipe out your checking account.

The iPhone and the plasma TV. $200 Nike sneakers. Gigantic SUVs for people living in urban areas. Houses with two rooms for each member of the family. Rosemary Thyme Luxury Handsoap. You could go on and on, but they are all unnecessary luxuries. Most of the people in the world would be happy to have A phone, sneaker, a car, a house, soap. In the West we are being bombarded with commercials teaching us to envy those who have slightly more than us. Fashion teaches us that clothes are worthless after a season. All of this behavior is the enemy of frugality, and the cause of debt and a lack of financial freedom.

I have tried to start resisting consumerism. I wanted an iPhone, but I am sticking with my 3-year-old free Samsung phone. I wanted a new car badly a few years ago. I am certainly no saint - I fall prey to consumerism all the time. I bought a Moleskine notebook when a $0.69 pocket spiral would have done. I buy new clothes for work, and I like my DVD rentals. But every time you resist the urge to purchase something you don’t really need to be happy - which is pretty much everything above your basic needs - you are bringing yourself one step closer to financial freedrom which is, I think, the goal of most of us who float around in the pf blogosphere. Not to mention you’re helping the environment - reduce, reuse, recycle.

So that’s my MOMA. I’ll head north of the border and tag Four Pillars and look forward to the Canadian take on it.

6 ways to retire poor

Inspired by this clever little piece on “Six Ways to Waste Money Now” from Bankrate.com via MSN, here are my six tips on how to retire poor:

Don’t set up any automatic investments. Even though dozens of financial experts have recommended it, automatic investments are for suckers. You know when to invest – when you have a little bit of spare money at the end of the month! Pay yourself first? I say pay Best Buy or Nintendo or the Cheesecake Factory first!

Use your retirement accounts for loans to buy a house. That money is just sitting there, waiting to be used. There is no sense in worrying about your retirement now – all of that money is just going to sit in there and grow tax free, quietly. Why let it sit there when it could be helping you get a 10% downpayment on a 6 bedroom house for your family of 3? You’ll put the loan back, just as soon as you get out from under those first few mortgage payments, definitely!

Count on becoming a millionaire from cashing in on your home equity. Despite recent events, there is absolutely no reason to think that your $250,000 house in a cookie-cutter suburb won’t be worth $3,000,000 in 15 years. That is the American Dream, right? To live your whole life in a huge house, sell and realize an enormous gain and then buy a brand-new condo right on the beach! It’s foolproof – even though your house has gone up 10,000% in value those condos will still cost what they do today, right? Or you can use your home equity loan to get money to play the stock market and…

Day trade! Just because Jim Cramer, who studies stocks for a living and has access to better analysis and tools than you ever will, can’t beat the market, doesn’t mean you can’t! I don’t remember exactly but I’m pretty sure most of the Fortune 500 Richest Americans are day traders. That’s the way to wealth – well, that and doubling down. Texas Hold ‘Em and hot tips from CNBC – that’s how Warren Buffet did it!

Avoid networking at all costs. Your career is going to progress just fine if you put your nose to the grindstone and properly prepare your TPS cover sheets. Each time you quit a job it is a grand opportunity to moon the boss. That guy you met who works at a place you’d like to work? Lose his email – forget his name the next time you see him. People love that. You will make enough in raises each year to beat inflation, almost! That’s the way to wealth, my friend. Slow and steady wins the race. If you stay with one company long enough, they’ll definitely take care of you when you retire.

Abuse your health. By the time us Gen-Xers retire, surely America will have a cheap, low-cost universal health care system in place. Everyone’s promising one – politicians wouldn’t be making empty promises, would they? So have another helping of fries and wash it down with a Coke. By 2035 they’ll be able to transplant a baboon heart into you at CVS.

Hope those tips helped!

COBRA eligibility – is it ironclad?

If you have ever considered striking out on your own, or worried about being laid off or anticipated more than one month between jobs, you’ve probably heard of (and counted on) the availability of COBRA health insurance. What you may not know is that you are not guaranteed coverage due to a few loopholes, despite what your employer may tell you.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers the right to stay on their employers’ health plan for a limited period of time after a job loss, voluntary or involuntary. COBRA also allows workers to continue their coverage after a reduction in hours makes them ineligible and several other circumstances. COBRA is no bargain. The worker can be required to pay up to 102% of the employers’ cost. A worker might only be paying 10% of their premium right now, so once the employer is not picking up the other 90% the costs can skyrocket.

COBRA generally applies to companies with 20 or more employees. Many people count on COBRA to continue their coverage for a “gap period” between jobs or to give them affordable health coverage when they are leaving an employer and starting their own business. A COBRA plan may not be the most inexpensive plan, but the simple fact is that a big corporation can negotiate a better deal than a single individual can with a health-care insurer.

Fortune magazine had an interesting story involving COBRA . Cerberus Capital Management is a private investment firm, deeply connected throughout the business and political worlds (former Vice-President Dan Quayle is a spokesman; former Treasury Secretary John Snow is chairman). They own dozens of businesses. One of them is (was) Aegis Mortgage, a Houston-based mortgage lender. For the details of the acquisition and Cerberus’ (mis)management of the company, read the article, but the key point was this: when Cerberus decided to shut down the company, they notified the majority of the employees that they would be laid off within 60 days of August 6 th . Cerberus also notified the employees that health benefits would cease August 10 th . The layoffs then came August 13 th (much less than 60 days later) and the reason for the termination of health benefits before the termination of employment became brutally clear: you are only eligible for COBRA if your company has an active benefit plan . By terminating their plan before terminating the employees, Aegis – and Cerberus – avoided having to offer COBRA.

If the employee has to pay the full cost, why would Aegis/Cerberus care? Aegis would still have needed to pay some costs – administrative, for example. Aegis, despite being owned by one of the largest private investment firms in the world, claimed they didn’t have enough money to pay for any single tiny part of their former employees’ health care benefits. Hundreds of employees were suddenly and brutally cut off from even having expensive ‘gap coverage’ before they could find a new job.

If this behavior is not shocking to you, you should probably stop reading. A company may have a good reason not to offer benefits. The umbrella consulting firm I work for offers benefits but I pay a huge chunk (more than 50%) of the premiums. I don’t mind since otherwise they would simply take a larger cut out of my hourly rate, but as with many Americans I would count on my COBRA eligibility at first if I decided to go completely freelance. I never realized that there was a possibility I might not be able to count on COBRA.

Eligibility for COBRA is another one of the “emergency” financial planning items most employees take for granted. You assume that your company will not steal your 401(k) – but my sister-in-law is having trouble getting hers out after being laid off. You assume that you will be paid accumulated time-off when you leave a job – but I was once loopholed out of 2 weeks’ vacation time after a disagreement over which day of the month I officially gave notice.

The point is that if you work for a company experiencing financial difficulty, or you anticipate getting laid off, make sure you know your rights and your options regarding COBRA. This story made me go out and start pricing private insurance. One of my projects for 2008 is to try to find a high-deductible health plan and self-insure my family for the deductible; that health insurance would never be tied to a specific employer and I could simply opt-out. I know that is not a perfect choice but I think having portable health insurance would be preferable to the increasing shenanigans of corporations as they try to avoid paying health benefits. Terribly expensive, but less so than the cost of being uninsured.

a question regarding the cost of higher education

Lora sent an email and asked the following question:

“My younger sister is approaching the time to apply to college. She is mainly thinking of applying to Ivy League schools. She is doing extremely well in school but our family is not rich. I have tried to talk her out of it but so far peer pressure (she attends a very competitive high school) is stronger than her family’s opinion. I say that she should consider those schools only if she gets scholarships and even then I am not sure.

How else can I explain to her that it is not really worth taking out student loans for private colleges?”

First of all, I’m not sure I would say that taking out a student loan to attend a private college is NEVER worth it. If the private school has a particular speciality not commonly offered at most universities, it might be worth it. Maybe your sister has a strong desire to study Sanskrit or nanotechnology. In those cases, attending a public university might not provide the program she needs to pursue her goals. Also, people who move about in the world of politics or diplomacy or international affairs are often graduates of the Ivy League. If she wants to be in the highly-connected world of politics, attending an Ivy League or other big-time private school is probably more useful than attending State U. (However, if she is more interested in state politics, the opposite might be true. I attended a large Southern state university, and in that state I can assure you a degree from State U was a LOT more helpful than a degree from any of the Ivys would have been.)

Having said that, I am a HUGE proponent of public education and public colleges in particular. I was accepted to an Ivy League school (Harvard) and declined in favor of attending a state university. Why? I had little interest in what Harvard could offer me. I was able to attend a state school with massive scholarships that not only allowed me to graduate debt-free, but even leave college having made a PROFIT. I was heavily involved in activites beyond academics; I played a varsity sport, I was active in a fraternity, I was involved in a dozen different clubs and organizations and I even had time to work doing something I love (teaching middle school). I was in an honors program, which meant my freshman English literature course had eight students and was taught by a full professor in a roundtable setting, something you would never see in many big private school’s English lit 101 course (I know from friends who attended Ivies).

From the first day on campus, I was a big fish in a big pond and I grew tremendously from the experience. The first day I started I was one of a dozen students invited to dinner with the school president. At an Ivy I have no doubt I would have done alright, but I would have been one overachiever among many, and I would have graduated much poorer. That to me is the key. From day one in my working life I have been debt-free. I work side-by-side with people who attended expensive private schools who are STILL laboring to get out of debt.

Your sister needs first to understand her goals. If her goal is to attend an Ivy League and go on from there to be an investment banker, a $160,000 loan will probably be relatively easy to pay off if she does well in the business world (that’s a big IF, though). If her goal is to attend an Ivy League school and major in Art History, she may find that debt crippling. My father attended a very prestigious school in Boston and was still paying his student loans off when I was a teenager. So if her goals are fame, fortune and caviar dreams, then she can risk it all on an expensive school. If her goals are happiness and success and doing what she loves regardless of the compensation, starting life out heavily in debt could cripple her chances of doing that.

So to answer your question, maybe you should ask your sister what she would like to do when she graduates. Go to salary.com and find out what a person makes in that profession. Calculate the cost of a student loan. Take the salary and then back out taxes and the loan, and ask her if she’s prepared to live off of that for 10-15 years until the loan is paid off. Ask her if she’s prepared to live with the financial choices she makes now for decades to come, or if she wants to graduate debt-free and that much closer to financial freedom. Ask her if the field she studies has famous professors, and if so where do they teach? Many of the best professors in America teach at public universities.

And finally, be prepared to let her make her own decisions…and her own mistakes or successes. That’s part of the lifelong learning process just as surely as History 101 is.

market correction madness!

With all of the major indices – the Dow, the S&P 500, NASDAQ – off 10 percent from their 2007 highs, we are by definition in the midst of a market correction. Individual companies continue to announce frightening news stories:

  • Countrywide: Tapping their line of credit for more than $11 billion to meet their cash demands rattled the markets badly yesterday, causing another 250 point drop before a late-session rally (probably as investors “bought bargains”).
  • Bear Stearns: Two of their hedge funds filed for bankruptcy and now the almost-inevitable lawsuits are underway. The firm will survive but the damage to their reputation and the market will be fierce.
  • American Home Mortgage: This excellent article highlights the fall of AHM from real-estate boom darling to real-estate bust collapse even as analysts proclaimed it a buy.
  • BNP Paribas: the French bank froze the accounts of investors in three of their funds with exposure to the US subprime market. If there’s one thing that terrifies me on a regular basis about the market, it’s the idea that my brokerage firm could suddenly freeze my account. Your stock market investments are not FDIC insured, after all. They have a lot more latitude to forestall withdrawals than banks do.

There are many more disturbing stories out there, but the overall indication is clear: rational or not, the massive run-up in the market is over at least in the short term. What does this mean for the average investor, which includes most of us? Nothing.

Readers of this blog probably hold a conservative investment portfolio. My own portfolio is based around my key philosophy of being relaxed about my finances: I try not to tinker with my investments, other than rebalancing my overall holdings once or twice a year. I go by a 30/30/30/10 formula not unlike many other personal finance bloggers’ advice. I have two big pools: my IRA and brokerage accounts, and my 401(k). My wife has a similar setup but no 401(k) since she is not employed. Her portfolio is slightly more aggressive but follows the same general pattern. My IRA and brokerage accounts are comprised of 30% each of:

  • US domestic stock index funds (primarily VFINX and VGTSX).
  • Overseas index funds: VPACX, VEURX.
  • Bond funds such as VBLTX and VBMFX.

The remaining 10% is in “other” types of investments, primarily Real Estate Investment Trusts or REITs, a way of investing in real estate without buying it outright yourself. In the future, I would like to expand the “other” portion to include actual physical real estate I buy myself, or even foreign currencies (through Everbank – thanks Digerati Life).

My 401(k) is similarly split between domestic and international stock funds so that my overall portfolio, including my 401(k), IRAs and brokerage accounts are split 30/30/30/10. My 401(k) grows each month as I contribute. These contributions are the major reason for rebalancing, as well as my annual January IRA contributions. I am no longer adding to my brokerage account, since my wife and I made a strategic decision to put our spare cash into an HSBC high-yield savings account rather than investing it. We will not put any money further into the market other than our tax-advantaged retirement savings accounts.

The result of this strategy is that, broadly speaking, only 30% of my investment portfolio is exposed to the current downturn. While the market was flying, my bond holdings were doing poorly. Now that the market is tanking, the bond funds are on the upswing. The international funds are more difficult to predict, since sometimes they are affected by the US market and sometimes they act independently. In general, though, US-specific problems like the subprime meltdown simply will not deeply affect overseas markets, unless worldwide panic takes hold.

The other important thing to do in a downturn, I believe, is to turn your “investing brain” off. If you believe it is a great time to buy, go ahead, but don’t panic and sell. If you are broadly invested in index funds, you should be in it for the long haul and disregard short-term drops (or short-term peaks, for that matter). If you have individual stocks, you should have bought them after long and careful study that brought you to a strong conviction about the company’s future, not after listening to your buddy Al’s stock tips. Either way, if you are properly relaxed about your investments, you should disregard the bears and bulls. Buy at regular intervals – this is what a monthly investment in a 401(k) is great for – and over time dollar cost averaging will work in your favor.

So keep tuned to the latest news, but try not to react in a panic. Trust your allocations and look for opportunities. Understand that irrational exuberance caused most of these problems, just like the dot-com boom. And remember the next time you think about investing in a specific firm that even “smart guys” at places like Bear Stearns are never the smartest guys in the room.

think before you leap (on the treadmill)

I made a terrible mistake a couple of years ago when my wife was pregnant. You may think of all of the romantic comedies you have seen – Nine Months springs to mind – but it did not involve a mad dash to the hospital with my best friend Tom Arnold. No, I bought a treadmill.

I bought the treadmill with the best of intentions. At the time, our young community’s clubhouse and gym were not yet completed. My wife was pregnant over the winter, so it was terribly cold and icy outside. We had limited space and didn’t want to spend a huge amount of money on a gym or an elliptical machine, so I decided to buy a treadmill. The idea was for Bubelah to use it throughout her pregnancy for some mild walking. She had already quit work by that point, so the cold weather likely meant very little daily exercise. I enjoyed running and pictured myself jogging away on sub-zero mornings. We bought the treadmill online, picked it up at our local Sears, and set it up in our basement.

Here are a few tips for you if you ever find yourself in a similar situation – namely, buying home exercise equipment.

  • Put it somewhere you will feel comfortable using it. We have kept the treadmill in the garage and in our sub-first-floor room which is not quite a basement but only had one window to the outside and connects to our garage. These places get very, very cold in the winter. We have a big TV down there, but because of the configuration of the room and the size of the TV stand, it’s hard to see the TV from the treadmill. It’s not fun to be on a treadmill in a cold room without a TV you can see clearly.
  • Don’t spend a lot of money on exercise equipment, but spend enough to get what you want. My wife wanted an elliptical machine. I wanted to be able to jog. Elliptical machines are substantially more expensive than treadmills, so we ended up getting the treadmill. I wish now we had spent a little more for an elliptical machine. It would have been used.
  • Remember that any big item you bring into your house will be hard to get rid of. I have tried to sell our giant old Sony TV and treadmill several times – ads posted around the neighborhood, eBay, craigslist – with no success. People usually don’t want huge items even if the price is very good. They are hard to transport and especially in the New York area it’s difficult to fit big items into small apartments where most people live. I will probably just offer it for free to anyone who wants it, but I don’t anticipate any takers at this point considering we have a beautiful brand new community gym 1000 yards away, which leads us to…
  • Never buy exercise equipment if there is a gym nearby. Our gym/clubhouse for our community was not finished when we bought the treadmill but it was completed the next summer. At the same time, a beautiful riverside walkway perfect for jogging was completed, as well, making jogging indoors a much more boring affair. I knew this was coming but thought that surely the benefit of having the treadmill in the house would persuade us to use it more often. I was wrong. I now have absolutely no desire to get on the treadmill, and its presence actually makes me less inclined to exercise.
  • Do not ever try to browbeat your spouse into making a big purchase that is “needed.” Bubelah told me more than once that she hated treadmills, but I kept insisting we needed one. We did, because of her pregnancy and the time of year it happened, but the treadmill never got used much and therefore it’s a sore point every time either of us walk by it. In the end I will probably solve the problem by pushing it out to the dump, even though I cringe at the thought of creating that massive heavy hunk of junk in a landfill somewhere.

In general, home exercise equipment is never a good purchase unless you have no better options. The types of treadmills and other aerobic machines that are available really need to be high-end to be effective. The $500 treadmill we bought is OK for a slow walk but struggles at a fast run or even a brisk jog. The gigantic $2000 treadmills in gyms are bigger, sturdier and better. A gym membership is cancelable. A giant treadmill in your house is not. The depreciation on a treadmill is almost immediate, as well. I am sure that a one-year old used treadmill generally sells for less than one-quarter of a brand new one, since you can never be sure whether it was being jogged upon by a 400-pound person or not.

Think carefully before buying any home exercise equipment. A pair of 10-pound weights can be put under the bed, but a treadmill or one of those Bowflex machines are hard to hide behind the door.

flying on the cheap (for the airlines, not for you)

I have not flown Northwest Airlines in a while, although I once flew them frequently. I was taken aback on my recent flight to notice that they are now charging for snacks. Charging for every single last type of service is the model used by Ryanair, an Irish airline. The traditional airlines - Continental, Northwest, United, etc. - have had a series of bad years which do not appear likely to improve in the near term future. I think the future model will be to pay for food, drinks, even water and blankets on airplanes. Ryanair already goes so far as to charge you for having luggage. Soon I could imagine charges for that free cup of coffee, or even a charge to board the plane first. Imagine if this pricing scheme was applied to other aspects of life:

  • You can sit on the subway if you have a gold Metrocard.
  • You can drive between 55 and 65 with a gold E-Z Pass or between 65 and 75 with a platinum E-Z Pass.
  • You can take the elevator for $1 or the stairs for free.
  • Taking the moving sidewalk at the airport cost a quarter.
  • Airlines charge you $1 per hour for reading lights.
  • An elevator might not open if you don’t pay first.
  • An airline might charge you for water - or even to use the bathroom on the plane.

Before you think any of those ideas are too far-fetched, consider this: the New York subway system will soon allow you to tap a credit card on the turnstile to let you through. In Japan, you can wave your cell phone near items you want to buy and pay for them that way:

Sony, working with NTT DoCoMo, has been spearheading the mobile phone wallet technology, commonly known as ‘FeliCa‘. This technology makes use of a RFID chip inside the handset that can communicate with reading devices when the phone is placed near them. Though the technology is relatively new, there are many locations such as convenience stores which allow users to pay for goods using their phones; some vending machines even accept phone payments. Users must ‘charge up’ their accounts with credits before they can pay using their phones. The growing popularity of the system is compelling other manufacturers to make compatible phones.

So imagine if it becomes possible to wave your cell phone at any item with a bar code and pay for it that way. It makes the current credit card situation look positively benign. You will have your “waving card” in your hand all day to pay for the slightest small item or service, and keeping track of it will be impossible. Your daily life might end up being dozens of small transactions. I think ultimately Americans will pay more for things we accept for granted if we think we’re getting a “bargain.” If I can get a “free flight” as Ryanair often offers, I head off to the airport gloating about my frugality, only to find it’s $3.50 to check luggage, $19.95 to bring my bag onboard with me, $11.95 to use my laptop in flight and $2.99 per minute in the bathroom. By the time I get to my destination, I’ve spent $212 and it’s no cheaper than a “traditional” airline. Restaurants and bars hook people in with cheap appetizers in order to get them to buy expensive entrees and drinks. Credit card companies offer low initial rates to encourage running up debt.

This scenario was what I thought about as I paid for a $5 snack since my 17-month old son, my wife and I were all hungry and I hadn’t had the foresight to buy snacks for a 6:30 am flight. I got a cheaper ticket by flying Northwest but all of these services I’ve taken for granted in the past will be disappearing year by year. When you book a cruise, you book a more-or-less all-inclusive ticket. I think this will lead to an overall inflation in expenses and one more headache for the American consumer.

berry spoons

If you have never seen the movie “Intolerable Cruelty” by the Cohen Brothers and starring George Clooney and Catherine Zeta-Jones, you are missing some clever dialogue (but before you rush out and rent it, an ultimately dull and conventional movie). There is an exchange between the massively successful lawyer played by Clooney and his right-hand man as they discuss a wedding gift for a client of theirs:

Wrigley: What do you think?
Massey (Clooney): What are they, ladles?
Wrigley: Berry spoons.
Massey: Spoons?
Wrigley:Berry spoons. Everybody has spoons.
Massey: And nobody needs berry spoons.
Wrigley: Everybody eats berries.
Massey: Who are you, Pollyanna? Where’d you see ’em at? A Martha Stewart catalog right next to the silver napkin rings? Stadium seat ass-warmers?

I look with some real regret at some of the specialty cooking items I’ve bought over the years. If you are talking about a place in your house to review for frugality, most American kitchens would be a good place to start. Some useless items I own and some alternatives:

  • A mortar and pestle versus a spoon and a bowl
  • White wine glasses, red wine glasses, port glasses, margarita glasses, martini glasses, shot glasses versus 8 ounce tumblers.
  • Dip serving bowls in fancy designs versus plain bowls.
  • Three different can openers versus one can opener.
  • An olive spoon versus a regular spoon plus a colander.
  • Eighteen different pots and pans versus one expensive pan, one large pot and one small pot.
  • Three sets of salt and pepper shakers versus one set.

Bubelah would be quick to tell you that most of these were pre-marriage wastes of money and she would be right. I loved to buy specialty drinking gear, for example – coffee cups for coffee, taller glasses for champagne or white wine, fuller glasses for reds (must let them breathe!) and martini glasses because you don’t see James Bond sipping from a tumbler. I also went through a gourmet cooking phase when I had to buy idiotic accessories like mortars and pestles – used approximately four times in five years. I might argue it was simply a hobby with expensive tools, but I know the truth – it was a waste.

All of this clutter contributes to a bad sense of organization in the kitchen, a waste of money and I think ultimately drives a nagging desire to get a bigger kitchen (and a bigger house). One of the moments that stopped me wanting any more gadgets in the kitchen was the movie “Out of Africa” with Robert Redford and Meryl Streep. In one scene out in the savannah or veldt or whatever it’s called, Redford drinks his morning coffee out of a tin cup. Later that same day, he rinses it out and uses it to drink wine in the evening. Same cup. I thought that was an excellent way to think about kitchen gadgets, or any other gadgets. We could probably buy about 8 tin coffee cups (in case we have guests) and ditch all of our other glasses.

Of course, you want some beauty in your life and you do not want to have a pleasant meal on tin plates and cups. If you were seriously frugal, maybe, but then again we could put up paper blinds instead of curtains and use old newspaper for toilet paper, too. There is a limit. It has reminded me each time I have a flinch walking by a clever no-stick spatula at Williams Sonoma that I already have a spatula made of 10,000 year plastic. It is not going anywhere. I do not need another berry spoon.

I own a house, so I am wealthy!

Why would so many Americans think they are so wealthy?  Looking at a New York Times study of class in America, one particular statistic stood out to me: 

First of all, setting the question of realism aside, it’s an amazing statistic that almost half (45%) of Americans think they will be wealthy in their lifetimes.  Here are a list of reasons why you might think you will be wealthy when actually you won’t.

I can buy practically anything I want to, already!  Having a credit card with a $30,000 credit limit doesn’t actually mean you have $30,000.  Just because the price of flat-screen TVs is dropping does not mean that you must buy one.  The content of your cable channels is still the same junk, they’ll just look better. 
 

My house is already the size of Versailles!  Just because you used an ARM to buy a five-bedroom six-bathroom house with a three-car garage for you, your wife and your dog Mimzy in anticipation of having 1.3 kids does not make you Louis XIV. 
 

My house is already worth more than Buckingham Palace!  Just because you go to zillow.com or talk to your real estate broker and hear that your house is worth 50% more than you paid for it two years ago does not mean you have cash in hand or that you could actually sell it for that much.
 

My retirement accounts are full of investments returning 14% annually!  After you net out fees and expenses and account for the inevitable higher taxes when you withdraw (because the bill will come due for the Baby Boomers) you’re looking at 3% per year, and inflation ate that up.
 

The United States’ economic power is everlasting and all-powerful!  While the US economy remains the engine that drives the world forward, imbalances in our trade accounts, a weak dollar and an increasingly robust European economy are going to start to take their toll in the next 25 years.  If you are relying on that S&P 500 index fund to return 10% per year forever, you may be disappointed.
 

I know that I often take the view that managing life and career and personal finance are battles.  I think of them as zero-sum games, and they are not; sometimes we can all win.  But if you have the mindset that 50% of the population could become wealthy in their lifetime, then something is wrong with my definition of wealthy. 

down the drain

Every once in a while you read a transformative piece of writing. Maybe you read “Your Money or Your Life” or “Getting Things Done”, or Harry Potter. Sometimes reading these pieces of writing changes your thought process, and sometimes it changes your actions. For me, “Rich Dad, Poor Dad” started a fundamental shift in my approach to finances. The Atkins Diet made me rethink food. “Natural Cures THEY Don’t Want You to Know About” made me consider the quality of the food I eat. So what am I leading up to today?

  • If I told you that in the world today 3,000 children die from an easily preventable condition – one that would take less than pennies a day to remedy – would you be outraged?
  • If I told you that a healthy, pleasant habit of yours requires 37,800 18-wheelers to drive cross-country every week to enable your habit and creates more than 20,000 tons of plastic waste per week, would you consider changing your habit?
  • If I told you that I would give you $500 each year for nothing, would you take it?

Think about those things. Changing this one harmless habit would save you money, reduce pollution and save lives, and all that would be required is a tiny shift in your approach.

I’m talking about drinking tap water instead of bottled water.

I read Bottled Water – A River of Money at MSN and I cannot recommend it highly enough. The article was filled with enough disturbing facts to make me read it twice, and here are some of the highlights from the article.

  • Across the world, 1 billion people have no reliable source of drinking water and 3,000 children a day die from diseases caught from tainted water. Think about it this way: one out of six people in the world have no dependable, safe drinking water
  • About 1 billion bottles of water a week are moved around in ships, trains and trucks in the United States alone. That is a weekly convoy equivalent to 37,800 18-wheelers delivering water. Water weighs 8 1/3 pounds a gallon. It is so heavy you can’t fill an 18-wheeler with bottled water — you have to leave empty space.
  • Americans drink more bottled water than milk, coffee or beer. Only carbonated soft drinks, at 52.9 gallons annually, are more popular than bottled water.
  • If you bought and drank a bottle of Evian, you could refill that bottle once a day for 10 years, five months and 21 days with San Francisco tap water before that water would cost $1.35.
  • Pellegrino bottles, for example, are washed and rinsed with mineral water before being filled with sparkling Pellegrino. It takes 2 liters of water to prepare the bottle for the liter that’s sold.
  • Americans pitch 38 billion water bottles a year into landfills.

I made a few rough calculations and suddenly realized that if I ever buy bottled water again and there’s a fountain nearby, I am a fool. Bottled water wrecks the environment, wastes money and enriches no-one but giant multinational corporations like Coca-Cola or Pepsi or Nestle.

When you read things like this or the New York Times’ similar editorial, I imagine they either deeply affect you or seem irrelevant. Obviously people like me read about global warming but do not stop driving cars. Maybe you’ll read the article and then drink a bottle of Fiji water anyway. But I realized that this is one habit I will end today. Of course, there will be times when bottled water is convenient and necessary. But I intend to buy some sort of aluminum or never-disposable plastic bottle and fill up with filtered water when available, tap water when not and bottled water only when there’s truly no other choice. By doing this I will save money, help the environment and continue a healthy habit of drinking water instead of soda – at no cost to myself.

Credit cards don’t cause debt, people do

I have used credit cards my whole life. I have never carried a balance except by accident (when I did not receive a statement and forgot to ask why, for example). I think education at an early age is key to avoiding the mentality of thinking of credit as free money and instead thinking of it as currency.

My earliest education in credit cards came in high school, when my parents gave me two credit cards: one was a card for a gas company (I seem to remember it was Exxon) and the other was a vanilla Visa card. This was a long time before the days of cash back or rewards. The gas card was more or less worthless for anything except, obviously, buying gas. The Visa was generally for routine expenses that I might need.

You may already be wondering what kind of pampered rich kid gets two credit cards, paid for by his parents. I did not have a job in high school. My parents always told me that my job was studying. We were lucky enough, of course, that we did not need the income I could have provided, but we certainly were not rich, either. We were an average middle class family.

So rather than giving me cash, they gave me a credit card. Giving me a credit card resulted in two different things happening, one intended, one unintended. First, I learned that you could use a Visa to buy just about anything short of Cokes from a vending machine – at least not in the mid-80s. I learned to keep track of my spending and to be able to account for it. I am not sure my parents meant for it to happen this way, but one month I bought several albums (the 80s, people) on the card and my parents asked why that was necessary. Not having an answer, I agreed to pay for music on my own in the future. Since I had no job, that limited my purchases to gift money for the most part.

The second result was not intended but I think it has helped me a lot through the years. It taught me to view credit cards as currency – simply another way to pay for things. Credit cards just happened to be more convenient for me and I learned that you could use them just like cash, but like cash, credit cards were not a bottomless pit. At the end of the month, reckoning would come in the form of Mom and Dad. They were not offering me interest. They were offering me continued responsible use of the card, or no card.

I think this is different from many people’s first experience with a credit card. They get one in college and think that there is simply no way to pay more than the minimum – but hey, they will get a job once they are out of college and pay for it then. The trouble is that the psychological damage is done. I do not blame people for this thought process one bit. The credit card companies want you to think that way. Their existence depends on you thinking that way. They offer everyone cash back and insane rewards to spur you on to spend more than you are able to repay.

The simple fact, however, is that once you view a credit card as currency it is safe to use them. I try to use my Blue Cash® from American Express constantly. The rewards points are great, and Bubelah and I have used them for flights, hotels, rental cars and even gift certificates. I charge my morning coffee. I have learned to charge pocket change purchases without embarrassment, because with cash I get nothing. With a credit card, I get something back.

So if you have children who are approaching their teenage years, I would highly recommend giving them a low-threshold Visa to practice responsibility. If they have a job, have the statement sent directly to you, and do not tell them the minimum amount due. Tell them to pay the full amount. If they cannot pay, take the card away until your child pays it off through chores, a job, whatever. If your child does not have a job, tell them that they have a set amount they can spend on necessities each month – food, school supplies, maybe the odd meal away from home with friends. As soon as they go over the limit, yank the card.

I think if more people had this experience as teenagers, they might avoid trouble as adults. Most parents are simply afraid to expose their children to the credit card beast. The unfortunate result is that most people first experience credit cards when they are on their own, and they never learn responsible spending. That is good news for the credit card companies, but bad news for everyone else.

reverse mortgages

What do you do if you have a fully-paid off house when you retire but you don’t really want to live in it anymore? It may sound like an odd question, but this is more or less the situation that’s facing my parents. They are living with my brother and his family in order to be closer to their grandchildren (both his daughters and my son). At the same time, their fully-paid off home down south is such a minor cash drain that they have yet to sell it even after a couple of years living away from it.

They aren’t interested in selling it or renting it out. My father looked into renting, and even had some discussions with people who were looking, but that fizzled out after the money just didn’t justify the remote landlord headaches. They don’t want to sell since they do spend some time in the summer and at holidays there to visit friends. So what’s a good option? What about reverse mortgages?

Basically a reverse mortgage is just what it sounds like. You, in effect, become the lender and the bank becomes the home buyer. The bank pays you interest and principal and takes ownership of the home when the mortgage term finishes. There are a few rules:

  1. You must be at least 62 years old for a bank to consider you.
  2. You must live in the home
  3. You must have no mortgage, or a mortgage that you can easily pay off at closing (I am not sure exactly how that is measured, but effectively you must have very few mortgage payments left).
  4. With a few exceptions, your home must be a single-family dwelling. Condominiums may or may not be eligible; some multi-unit dwellings would be eligible but you would have to live in a unit.

If you qualify, the bank will pay you based on a schedule you determine. The older you are, the better terms you will get. The payments can be tenure (as long as you or your spouse inhabits the home), term (a set number of months) or line of credit (similar to a home equity loan, where you could withdraw money as you need it in any amount). The bank will not kick you out of the house even if you outlive the reverse mortgage, and if you die before the bank pays the entire amount, the bank will pay the balance to your estate – less fees, of course.
So why do banks offer this? Well, cynically, they want you to lock in a sales price and die before the bank pays you the entire amount of the reverse mortgage. Your inheritors will very definitely not get the house in any circumstance. The value of the reverse mortgage is going to be less than the value of the house were you to sell it – the bank is effectively going to net out some rent for allowing you to live there. The costs of a reverse mortgage are very high, although these costs can be ‘buried’ in the closing. The banks will definitely make money off a reverse mortgage. They are buying your home at a discount, locking in the price, and gambling that you will pass away quickly so they can resell it. If you live longer, they still win. How? Imagine being 90 years old with your reverse mortgage expended and needing to refinance a new traditional mortgage. In that situation, many older people would probably do whatever the bank told them to do.

So is it a good deal? I think there are a very limited set of circumstances where a couple would look into a reverse mortgage. My parents, despite being younger than 62, might have some good reasons to get one. They do not really want to sell the house, yet my brother and I are not interested in inheriting it 40 years from now. We like it well enough but we have the same reservations about remote landlording they do. They do not particularly need the money, although it would be nice to get some value out of the house. The only problem would be whether a bank would look at a one-month stay per year as “living in the house” or not.

I think a reverse mortgage, as with any product targeted to seniors, has to be taken with a grain of salt. The advantages of a reverse mortgage might be worth it for an elderly couple who have no children or do not intend to pass on their home, but they would need to be careful that the extra income did not interfere with Medicare or Social Security payments. As with a traditional mortgage, there are also many costs associated with closing the deal that can be far more expensive at the end, when all of the details are crushing in at once, than they appear to be at the beginning. The rising popularity of reverse mortgages and the continuing shift in the American view towards thinking of their homes as ATMs mean that whether or not you think this makes sense for your parents or yourselves, you will probably have one pitched to you at some point in the future. When you are older and maybe worried that you did not sock away quite enough in the 401(k), it may be a tempting offer, so you should at least understand what the banks are offering you.

~~~ooo~~~

Note: After I wrote this, I received an email from Craig that clarified a few points. For the sake of trying to present the best possible information I’ve included the relevant paragraphs from his email here:

When the last person on the deed leaves the house, the bank does not take the house. The amount due to the bank, is the balance due. This includes total draws plus interest/fees that have accrued. Any remaining equity will go to the borrowers or in the event of their death, the children or the heirs will receive the equity.

Lastly, the loan is a non recourse loan. The lender payback is limited to the collateral and the borrower is not personally liable for payment. The senior can never owe more than the value of the home. In the event the balance due ever exceeds the value of the home, the FHA mortgage insurance will take care of the difference. This means that the children/heirs will not inherit any debt. This is unique to the Reverse Mortgage Program. No other mortgage product offers this protection.

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