Category Archives: success

Guest Post: Education - a curse or a cushion?

The following is a guest post from AJC of 7million7years.com. He only recently started blogging but he’s already one of my favorite daily reads. If you’re the type who likes RSS, you can subscribe to his blog here.

school kid looking surprised

People often ask me what it takes to be an entrepreneur.

Probably the best book that I can refer you to is the E-Myth Revisited by Michael Gerber … it has changed many business owners’ lives (including my own).

In it, he shakes the myth of the entrepreneur being some sort of ‘knight on a white charger’ - you know the type, like Jack Taylor, the founder of Enterprise Rent-a-Car who was a navy pilot in WWII then went on to launch Enterprise in 1957, taking it to $78 million revenue (it’s now a $7 billion company!) before handing the reins to his son, Andy in 1980.

Here’s how Andy describes his father:

“My father was the true entrepreneurial risk taker. He was the guy flying airplanes off carriers. He did not see taking a $25,000 second mortgage to invest in a business as a huge risk, because he saw real risks being taken during World War II.“

There’s no doubt that adversity makes for better entrepreneurs … adversity gives you a ‘nothing to lose’ attitude.

Contrast that with the educated middle-to-upper-middle class …

… once you finish college and put in a few years learning the corporate ‘ropes’ it’s very hard to let go of the comfortable $50k - $150k that you are earning (and that your lifestyle has magically jumped up to meet … you know: cars, toys, vacations, etc.) to jump into a business that all the odds point to going broke.

You see, that education that we strive for, to lift us out of the middle-class, actually serves to keep us there.

After 6 years in the corporate world, I was bitten with the ‘entrepreneurial bug’ so badly, I was miserable every day that I was still at work after that little epiphany (I used to LOVE my job until then).

Yet, it still took me 4 years to leave …

If I was still working, no doubt I would be well on my way to saving $1 million or maybe even more by the time I retire at 65.

But, from where I now sit that seems WAY too little WAY too late …

Creative Commons License photo credit: Môsieur J., …selected by Steve

10 things to tell a graduating high school senior

young graduateOh, young mind, how we envy you! The world is your oyster, and who doesn’t like oysters? Here you are, venturing out into the world. Freedom, independence, adventure are all just around the corner! Mom’s not there to do the laundry anymore, but who cares! Nobody will yell at you when you sleep til 2pm on a Tuesday. Nobody will be waiting to make sure you do your homework instead of watching Sucker Free Countdown. Bliss.

Unfortunately, the boogeyman is out there too. You have to generate some income to pay for the things you took for granted in your home. Yes, of course, the luxuries of shoes, Wiis, ironically detached rock band t-shirts and overpriced notebook computers used primarily for Facebook, but also items you didn’t realize were so horribly expensive while Pops was paying for them - milk, cell phone bills, iTune downloads.

So here are 10 things to remember for the new graduate, about to head off to college.

  1. You need to hit the ground running. If you have scholarships and grants, great. You’re already ahead of 90% of the US student population who finance their education with loans. Don’t blow it - make keeping those scholarships and grants your #1 priority, even if it means giving up the Alpha Beta Delta Wednesday mid-afternoon Beer Bash.
  2. Please don’t think life is going to be easy majoring in Spanish (for example) and graduating with $50,000 in student loans. Go ahead and do it if you want to - there is something to be said for following your dreams - but I’d think strongly about making some good connections and giving some hard thought to how you’re going to use that Spanish degree, considering about 30% of the US speaks it better than you even after 4 years of study.
  3. Party, but not too hard. There is a fine line between making friends, enjoying life and gaining experiences, and lying in the toilet stall with your shirt covered in puke at 3 am in the morning.
  4. Spend a lot of time on the Internet learning useful skills - make a blog, set up an online store, learn website design, etc. Do not spend a lot of time playing vampire tag or sending movie messages on Facebook.
  5. Don’t play video games. I’m serious. I see this as an immediate and massive threat to your development rivaled only by television. Get out and interact with people - you will never have such free time and so many people ready and willing to sit around and just talk about anything you want! Trust me, you’ll have plenty of time to play video games when you are older.
  6. Join organizations. Hanging out with your friends in college is great. But join organizations that will force you to meet people you otherwise might not meet. Join intramural sports. Join interest clubs. Get out and participate. Don’t just hang with your friends in the dorm. And don’t stop joining even after you finish college. There are a lot of interesting ways to meet people that don’t involve a keyboard and an IM account.
  7. If a class looks interesting, take it. I was a mathematics major and most of my “extra” courses were Russian, German and linguistics courses. But at the same time I threw in courses on “leisure and pop culture” (about the groupies who follow the Dead, George Jones, Jimmy Buffet, etc.) and economics (because I find economics fascinating). Mix it up. You will find out what you love and hate, and that’s useful to know.
  8. Get a credit card now. I know that’s odd advice considering how much trouble people have, but get a credit card and start building a credit history. AND PAY THE WHOLE BALANCE EACH MONTH! I know many people who are in debt today will say “easier said than done,” but learn to pay the whole balance each month. I did. Friends of mine did. It can be done, just like quitting eating junk food. Now is the time to set your habits in regards to money. If you can’t pay off the full balance one month, freeze the card in a block of ice or cut it up. When you pay it off, lesson learned (right?), you can start using it again.
  9. Don’t buy any furniture or appliances that you can live without. You will have plenty of time to buy a blender when you have a home. As a college student, you need a bed, a chair, a desk, a microwave or a hot plate, and a fridge. Stop. Don’t buy anything else. Scavenge. Spend your money on decent food for your health, or to have extra money saved up. I scavenged bits and pieces of stereo equipment people put away for my stereo. I had an old black and white TV. I knew that all of the furniture was going to be abused beyond belief (I lived in a fraternity). Nothing I owned in college stayed with me past my first year as a working man, so I’m glad I didn’t spend anything on anything, practically.
  10. Live life to the fullest! Think about this: you are at the apex of human development. You are living in an age when change has become exponential rather than incremental. You have won the “birth lottery” by being born in the West in the late 20th century - by attending college you are amongst the best educated, most privileged and luckiest people to live on this planet in human history. DO NOT WASTE THIS TIME! Have fun, play hard, study hard, meet people, spend hours talking about life or love or hopes or politics or whatever you want. But most importantly, be aware that you are in a position that 6 billion people around the globe would die to be in. Seize that opportunity and squeeze it ’til you shake out every last drop.

Yay, graduates!

best financial move in college, part 2

Patrick, of Cash Money Life fame, has tagged me to give my best financial move in college. This “organically growing” meme was started by plonkee. The first part was posted yesterday.

Steve at the Hermitage in St Petersburg

Best Financial Move In College #2: Learning an “exotic” foreign language.

If you read this blog, you probably know that I’m a Russophile. I lived in Moscow for several years, I can read/write/speak Russian fairly comfortably and my wife is Russian. Key the computer geek theme music: I mentioned that I was a finalist in the International Science Fair: I wrote, in Basic on a Tandy Color Computer with a cassette-tape drive, a very primitive artificial intelligence program that reliably translated English into Russian, grammatically correct. I even had to develop the Cyrillic font. I did all of this after buying a Russian grammar book at a public library for $.10 and using it to set it up - I didn’t know Russian at all.

Anyway, after the ISF my interest in Russian waned. I always joke that my ancestry is German with a little German mixed in. Even though the Original Blap Ancestor ventured to the new world in the 16th century, my paternal ancestors clung to German ways and traditions and language. And I mean they clung. To the best of my knowledge, my dad was probably part of the first generation of Blaps to speak English at home rather than German. So in high school and college I had a strong motivation to take German, and I did.

But I always liked foreign languages. I took French and Latin as well and decided in my sophomore year that Japanese would be a good challenge. Keep in mind that this was the mid-80s: Japan appeared to be well on its way to becoming the dominant economic power of the 21st century. We know now, in retrospect, that Japan’s economy tripped and stumbled and has never really recovered, and China and India are now careening past it, but at the time it seemed that Japan might become an economic superpower at a minimum and THE economic superpower if everything fell right.

I decided to take Japanese. It was a new course at Hometown State - only one class was offered. So on registration day I woke up and strolled over to the registrar only to find that it had filled up in minutes and no slots were available. I was disappointed, but I still wanted to take a language. I thought Spanish might be useful, but boring (I didn’t care for French when I learned it - romance languages don’t appeal to me). I skipped through the catalog until I saw Russian and remembered my little project at the ISF four years earlier. And best of all, it was at 10 am so I could sleep late - back in college I had yet to discover the benefits of waking up early.

Russian was fantastic. The teacher was a guy straight out of PhD school, passionate about the subject and the culture. He invited his students to his home, showed us Russian movies, introduced us to actual Russians (quite the novelty in the Deep South in the 80s, let me tell you) and managed to get Russian food. I loved the intellectual challenge of the language - a different alphabet but more importantly a language completely removed from the European languages’ interrelationships.

So why was this a good financial move? I’ve already mentioned it in 8 steps to a six figure career, but here it is in a nutshell: it gives you instant credibility as a smart person (deserved or not). Employers and contacts and almost everyone I meet expresses shock that I can speak Russian, read it and write it. I don’t think it demonstrates much intelligence, personally. Language acquisition is more of an inborn skill, I think. But I do think that learning Russian demonstrated some intellectual curiosity and the fact that I stuck with it indicates some intellectual discipline. I have benefited hugely in my career from knowing Russian. It meant that I was plucked out of obscurity as a junior staff member of a Big 6 (now 4) accounting firm and hurled into the middle of the mid-90s Russian economic explosion. It opened up opportunities I would never have had as just another staff person.

But that’s not the biggest part of it. Without developing my Russian skills I wouldn’t have met, pursued and married my wife. Maybe if I had taken Japanese I would have lived in Japan, developed a fondness for all things Japanese. Hard to say. But I do know that the decision to learn Russian set in motion the life process that brought me to where I am today: with a wife who is focused on the same things I am, personally and financially. So that’s actually the single biggest reason why that was a great financial move.

So what was your best move?

best financial move in college, part 1

Patrick, of Cash Money Life fame, has tagged me to give my best financial move in college. This “organically growing” meme was started by plonkee. This will be a two-parter because I didn’t want a post that looked like a short novel…

ventress hall

I have what might be an “unallowed” answer, so I’ll give both of them. One of them had a huge impact, one of them had less of an impact, but both were important long-term decisions.

Best Financial Move in College #1: I attend a public university.

I will be as clear as possible about this: my choice of college has made more of an impact on my financial life than any other decision I have made. A little background: I was a good student in high school. I was class valedictorian, I had high scores on my SAT and ACT exams, I was a varsity athlete. I had received a full scholarship to attend school in Germany as an exchange student; I was an International Science Fair finalist; I had clubs and academic honors and extracurriculars out the yin-yang. I applied to a fairly wide spread of colleges, ranging from my hometown state university to small private liberal arts schools (one I really liked I’ll call Tiny Private) to well-known-very-good-but-not-Ivy schools (one of which I will call Regional Private) to the big grandaddy of them all, Harvard.

I got accepted to every one. I got scholarships to every one. I got tennis scholarships, academic scholarships, etc. etc. However, many people are surprised that anyone who was accepted to Harvard would turn it down. I did. I applied to Harvard on a whim, with no serious intention of attending even if I was accepted. I sent in the application on the deadline date. I started the application, handwritten, in black ink and when that pen died I finished in blue ink. I did it because one of my friends told me there was no way I could get in, and I took the bet. I had no intention of going there. I actually had my mind set on Regional Private - and received a full scholarship there, too.

But one school was ferocious in their recruitment - my hometown state university, which I’ll call Hometown State (for obvious reasons). They were relentless - they gave me not only a full scholarship but they swamped me with calls, meetings with academic deans, calls from alumni, even additional scholarships to cover the costs of books, fees, housing, and on and on. Part of this was due to my dad’s relationship with the university, but a lot of it was simply because I was well-known there already - friends of mine had parents who were professors or administrators or otherwise associated with the school.

I visited Regional Private School and detested the people I met, who were condescending and intellectually dead rocks. Harsh, I know, and maybe it was bad luck, but as a multi-generational legacy (I would have been a third-generation student there) but I couldn’t stand it on multiple visits, including a “new prospects weekend.” I toyed with attending a few other schools, including Tiny Private, but I decided the cool atmosphere didn’t make up for the fact that nobody had ever heard of them or that the academic and social programs were limited.

I decided to go to Hometown State. It was the best decision I ever made financially, for one reason: I actually made a profit attending school. After tuition, fees, books, fraternity dues, food, everything I made a profit. I got a bachelor’s degree and started day one of my postgraduate life with money in the bank and no debt. I think (although I don’t know) that even with full scholarships at Tiny Private or Regional Private or Harvard I would have had enormous expenses not covered by tuition scholarships. My parents would have covered many of those expenses, I’m sure, but I would still have struggled.

I have never regretted attending Hometown State for a minute. To this day I point to that as one of the best decisions I ever made. I loved college. I did well academically. I was again active in all sorts of things: club sports, varsity lacrosse, a fraternity where I was pledge trainer, social chairman and rush chairman at various times, and interest groups from a Russian-language club to political organizations. I did all of this without having one minute’s strain or stress or worry about how I could afford this, or how I was accumulating debt. And I have still done well in my career.

That is my “unfair” answer, since it wasn’t IN college. I’ll give my “fair” answer in my next post.

photo credit: me! an original photo!

 

are American kids stupid about personal finance?

American kids are stupid about financial matters. That’s what a Federal Reserve study says. From the Washington Post:

High school seniors, on average, answered correctly only 48.3 percent of questions about personal finance and economics, according to a nationwide survey released Wednesday by the Federal Reserve. That was even lower than the 52.4 percent in the previous survey in 2006 and marked the worst score out of the six surveys conducted so far.

You might read this article and think that high school seniors are idiots. The survey was sponsored by Jump$tart Coalition for Personal Financial Literacy and paid for by the Merrill Lynch Foundation (ironically, since it’s obvious that the related Merrill Lynch corporation has a little bit of trouble understanding finance themselves). But look at a few of the questions and the responses - some of the questions seemed a little bit politically loaded, if you ask me:

21. Matt has a good job on the production line of a factory in his home town. During the past year or two, the state in which Matt lives has been raising taxes on its businesses to the point where they are much higher than in neighboring states. What effect is this likely to have on Matt’s job?
14.4 a.) Higher business taxes will cause more businesses to move into Matt’s state, raising wages.
18.7 b.) Higher business taxes can’t have any effect on Matt’s job.
57.3 c.) Matt’s company may consider moving to a lower-tax state, threatening Matt’s job.*
9.7 d.) He is likely to get a large raise to offset the effect of higher taxes.

(My response? The company is going to relocate the factory to Mexico and thanks to NAFTA and the Federal tax code will rob the US treasury of the wage income taxes of its workers, corporate taxes that would be paid if they remained in the States, and deprive the US economy of wages that could be spent to stimulate the economy).

And some of the responses were actually encouraging:

28. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?
16.8 a.) Jessica, who pays at least the minimum amount each month and more, when she has the money.
17.1 b.) Vera, who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash
18.2 c.) Megan, who always pays off her credit card bill in full shortly after she receives it
48.0 d.) Erin, who only pays the minimum amount each month.*

I was surprised that 48% of high school seniors really get it - paying the minimum is begging for trouble.

And this one was also good news:

16. Rob and Mary are the same age. At age 25 Mary began saving $2,000 a year while Rob saved nothing. At age 50, Rob realized that he needed money for retirement and started saving $4,000 per year while Mary kept saving her $2,000. Now they are both 75 years old. Who has the most money in his or her retirement account?
24.8 a.) They would each have the same amount because they put away exactly the same
11.7 b.) Rob, because he saved more each year
12.5 c.) Mary, because she has put away more money
51.1 d.) Mary, because her money has grown for a longer time at compound interest.*

51% of high school students understand the value of compound interest? I think that’s quite encouraging. I am willing to bet that a similar proportion of the adult population understands it - meaning that some people get it early on, and some people never will. I am not sure that represents a failure of education. A significant proportion of Americans believe all sorts of things (that witches exist today, that (at least in 2003) Saddam Hussein was behind 9/11 or that evolution cannot be accepted). It doesn’t mean our education system is failing, it just means that some people can’t wrap their minds around simple facts. So rather than looking at this as a glass half-empty, I look at it as a snapshot of how things are when parents and governments don’t set a good example by living within their means. If almost 50% of kids understand that they need to pay more than the minimum on a credit card to get out of debt and will have more money if they start saving sooner, I think there’s still hope. For the other 50%, I’m not sure that a personal finance class in school is the answer - the answer may be getting their parents educated. And as far as teaching personal finance in school goes, I’m not sure I want a federal government that spends well beyond its means each and every single year teaching anybody about how to manage their money.


Can I tolerate my son’s religious education?

cross

My family lives in an urban environment with failing schools. The schools in our city were so bad that the state seized control of them a generation ago and has never let go. The state, amazingly enough, did nothing to improve the poor test scores and today the schools in our area struggle to meet No Child Left Behind requirements and are, frankly, awful.

The result of the poor public schools has been a massive flight of children to private schools - at least, those children whose parents can afford them. Most of the schools break down into two types: secular schools (Montessori or similar) or Catholic. No other private organizations has the community presence to set up any substantial schools (i.e. there are no Baptist or French or Jewish schools). Starting in high school the options become a little better - some of the public city high schools are good enough to compete with the private high schools.

But the problem remains that the schools at the pre-K to 8th grade level fall into one of these three categories: failing, unsafe public schools, dramatically expensive specialty schools and moderately expensive Catholic schools. When I say dramatic, I mean dramatic (feel like paying $1000+ per month for half-day kindergarten?) and moderate is only moderate by Northeastern standards ($600-$700 per month for a full day of day care).

I have posted a number of times on my opinions of the benefits of stay-at-home parents. But a few months ago Bubelah and I decided to send Little Buddy to a day care program for about 3 hours per day. We saw our neighbors’ kids who were a little older bored and lacking social stimulation with nannies and stay-at-home moms, and we decided he would benefit from the socialization that he could get from a short day at a day care facility. With Bubelah pregnant, it also gave her time to rest. After about three days of unhappiness and adjustment, he quickly adapted and now seems to love his teachers and the activities that are possible with other children, although he would still probably be happier at home.

We sent him to Catholic day care. Neither of us is Catholic, but this day care program met our requirements; other parents loved it, it was clean, safe, relatively nearby, and affordable for us. The secular schools generally wouldn’t even accept children who were less than three, so that wasn’t an option; even if they had been they were so expensive and so hard to get into they wouldn’t have been an option for us. The day care Little Buddy goes to is run by an order of nuns and although most of the teachers are not themselves nuns, they are Catholic and the school makes NO pretense at the religion-free environment I knew from public schools (which is ironic, since I went to schools in the Deep South - times have changed).

I am not particularly religious. I have been at both extremes; I was very religious in my evangelical Christian church in my 20s but a series of events drove me to militant atheism over the years. I have since returned to a fairly gentle agnosticism which I suspect is similiar to Unitarian/Universalism and I restrict my “exercise of religion” to an internal debate and discussion. I think anyone who wants to exercise their religious beliefs - or education - is more than free to do so in these United States. The free expression of religion has saved us from so many of the horrible conflicts that have wracked so many other countries throughout the years. Imagine Catholic Maryland fighting Protestant Virginia. I am happy to see everyone do their own thing and leave me the hell out of it.

Yet it has become very clear to me that my son - at the very early age of 2 - is picking up words and phrases and associations that are not in line with what I believe and most certainly not in line with what my wife believes. My son can already clearly identify, unprompted, aspects of the Catholic faith - which led him to proclaim to me once “Papa, look - baby Jesus!” And do not misunderstand me - I would be equally uneasy if he was identifying with Jewish or evangelical Christian or even atheistic thought. I don’t like the thought of any indoctrination at this age.

But what I really wonder is “will it matter?” My mother was raised in an solidly, uncompromisingly evangelical home, and she’s a “big holidays” churchgoer now, if that. I was intensely religious for many years in my 20s and now I am not; no one person or event changed my mind. Should I worry about the exposure to religion? Is it the overreaction of an overactive, liberal-slash-libertarian mind? I don’t believe anyone in the school is pushing religion at this age, but the symbols and the presence of the religious artifacts and songs and so on are certainly exercising some effect on my son’s mind.

Perhaps I should just let it go. The teachers are very kind, the school is pleasant, my son loves the arts and crafts and playtime with other kids. Bubelah has benefited from a rest in the mornings during her pregnancy. I don’t remember anything from age 2 myself; perhaps it’s pointless to worry. But in an era where television and computers and information are crushing our brains into perfect data-gathering machines from a young age, every small bit of data begins to appear relevant. He’ll keep going, but I’ll keep worrying.

(photo by peasap)

a clear and present danger: the humanities

The US government currently has a debt of over $9.2 trillion dollars. In every measure of economic growth the US lags behind Europe and the emerging economic superpowers of India and China. At the same time, over $90 billion dollars will be spent in 2008 on financial aid. At least some of that money will go to pay for financial aid to students of the humanities, some probably at very expensive private schools. The economic policy of the United States encourages students to study any subject they wish, with no view to the ultimate goal - a return to society on its investment in the education of its citizens.

The increasingly dire economic situation in the US means it is time for action. The economic crisis is due in large part to spending on a war that, whether you support it or not, has far outstripped even the most wildly pessimistic initial estimates of its cost. It is also due to a lack of financial education in our citizenry that led thousands if not millions of people to believe that buying a house with a million dollar mortgage on a salary of $80,000 per year was not only possible but advisable. Many of these people would have benefited from government-subsidized finance or accounting college educations.

The average salary for a college graduate with a degree in English is about $30,000. The average salary for a college graduate with a degree in engineering can start at $68,000. Who is more likely to pay off a $40,000 student loan? Of course it depends on the individual, but the simple fact is that there should be some effort on the part of the government to encourage people to use financial aid to obtain degrees that result in higher-paying jobs; an employee who is paid more contributes more to the coffers of our nation in terms of taxes, productivity and usefulness of their output. The engine of our corporate economy is driven by the technical professions. Poetry will not win the war in Iraq.

In addition, the government should eliminate all financial aid for people who take more than 4 years to obtain a degree. They are delaying their entry into the workforce and thereby delaying repayment of their aid. They drain resources and attention away from the more capable and efficient students.

For these two reasons, the government must redirect financial aid to students who make the choice to (a) graduate as quickly as possible and (b) study science or engineering or math with the goal of obtaining a job with the maximum possible salary.

To me it becomes a question of subsidizing those professions that will help the United States remain the technological and scientific leader of the world. Private schools that value the humanities can dip into their endowments to reduce tuition for people who want to study linguistics, but as a taxpayer I want to see our nation’s universities churning out graduates who will get high-paying jobs and share the burden of high taxes with me.

The sole purpose of a university’s financial aid programs should be to churn out better, higher-paid employees (or better soldiers or technological innovators). There is no room for the pursuit of “thinking” in our schools. Those days are done.

(note: I am being sarcastic - I don’t actually think this at all)

(photo inflicted by Boris from Vienna)

how to talk to your teenager about personal finance

If you have children or younger relatives - particularly teenagers - then this thought probably crossed your mind at one point: “if only they would do some of the things I wish I had done!” Maybe you always dreamed of visiting Mongolia or taking a year off after high school to backpack around Europe. Perhaps you hope your teenaged children will take the leaps you never took. The most important thing you can do is to give them the basic skills to succeed in life. One of the best ways to do this is to teach the teenagers in your life how to invest.

teenagers gloucester green oxford

Just as saving is a good subject for children to learn, investing is a great skill for teenagers. Sadly, investing is still not taught in most secondary schools, and many parents who are struggling to get out of debt may not have the background themselves to educate their children. Parents may be embarrassed to admit a lack of skills in this area, but just like “the talk” about sex or drugs, that embarrassment must be overcome for the teenager’s sake!

So what can you do? A few simple steps can be taken. None of them require a huge investment of time.

  1. Open a custodial account. A custodial account is opened in the name of an adult “for the benefit of” a minor as a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), depending on your state of residence. Taxes are not collected until the teenager has more than $850 in income, at which point it’s taxed at the child’s rate. Above $1700 it’s taxed at the parents’ rate (these are 2007 limits). However, consider that in order for your investment to generate $850 in income at an 11% rate of return the amount invested would need to be greater than $7700. Include them during tax season by obtaining student tax software online which will get them accustomed to filing their own taxes.
  2. Put some dollars in it. The amount is not particularly important. If you have the resources to give your child a lot of money to invest, do it. If you don’t have the resources, don’t worry - the purpose is to educate at an early age. Once they have their own money, they can invest it themselves. Your role is to start the fire, not to bring the logs.
  3. Contribute a certain amount in lieu of gifts. So much angst is created in our consumer-driven society by a corporate-imposed mandate to buy love through “stuff.” Your child is going to whine when you don’t buy them an Xbox and instead give them $300 to invest. Your job as a parent is to show them, both in word and action, that until they make their own money, it is your money to spend as you see fit. Toys will be forgotten.
  4. Sit down and explain the basics. You may not understand the basics of investing. Study. Read blogs, read some of the basic books on investing. You don’t need to understand option puts. You need to understand what a share is, why dividends are paid, what unrealized and realized gains and losses are. If you don’t understand these terms, study.
  5. Don’t just buy a “how to” book, though. If you buy a cookbook and follow its directions point-for-point, you can probably bake a cake. Teachers don’t just stand in front of a classroom reading directions from a textbook point-for-point, though, and great chefs do not rush back and forth to check whether to add flour or bacon grease to a chocolate cake. They understand their subject well enough to teach it themselves, not just by reading a book aloud. Do the same with investing - read about investing, not “how to” invest. Sit down with them. Make sure you read the books at the same time as they do. Work through the book with them - make it a question-and-answer exercise.
  6. Choose investments together; involve them. To illustrate this point, Bubelah and I made the mistake of steering her younger sister away from a “trendy” stock (AAPL) in favor of a “solid” one (INTL). Even though our reasoning was sound, the decision to buy a particular stock has to be the teenagers, not yours, or they will lose interest in investing. If you make the choices, it becomes another adult-driven enterprise that they have no “real” say in. If they want to invest in speculative risky investments that fail, let them! Losing money can be as much of a lesson as making money. Teenagers are young; they have time to recover from their losses.
  7. Go over it every month or quarter or year to review what went right and wrong. Make sure you sit down and look at “what ifs.” What if that dividend had been reinvested? What if the money had been put in a CD instead of stocks? Maybe it would have been better, maybe it would have been worse. Make sure they understand the parts that went wrong - it may be even more important than understanding what went right. Simplify the process by investing in some inexpensive personal finance software.
  8. If your teen makes some money, ask them to reinvest at least 10% of it, even it’s a single dollar. My own prejudice has always been that reinvesting is key to building wealth. Dividends and gains are not money for spending - not ever. Teach your teenager that just because they’ve received a dividend is no reason to spend it on “stuff.” Learn how to reinvest before ever even touching the money by using DRIPs (dividend reinvesting plans).
  9. Teach them not to touch principal. I find the concept of a house’s foundation is useful. Before you can build a castle, you have to lay down a foundation. You can’t pull chunks out of the foundation just because you’re running short of concrete to build a tower. The base of an investment portfolio has to be thought of always and forever as untouchable.
  10. Consider alternative ways of investing. Most of the examples I’ve given are equities, because that’s a low-barrier entry into investing. You can invest small amounts easily in the market. That doesn’t mean your teenager can’t learn about investing in real estate or businesses. The same lessons can come from successes and failures in those areas. If your teenager is more interested in building an online business with their investing money, let them. Help them decide, let them succeed or fail on their own, and help them review the results. Despite what the conventional wisdom of the retirement-planning industry may say, you can invest without putting money in the market.

Keep your teenagers engaged and interested, and you may even get excited about investing all over again. Remember that spending and saving habits are established in your early life. Small actions now can stoke the fire of determination to achieve financial success for a lifetime. You can provide the spark.

(Photo credit: kamshots)

is college worth it? (part 2)

princeton college in second life

Note: Fecundity took a look at the spreadsheet I used to calculate these numbers and found one formula error and a couple of simplifying assumptions that she refined (she built a more realistic tax calculation, for example). None of the changes affected the conclusion, and in fact it tilted things a bit further in Paul’s favor, so I decided to edit the original article to reflect her changes. Thanks Fecundity!

As I discussed earlier, I’ve been wondering about the difference in wealth between college graduates and skilled non-college graduates. I decided to do a comparison of the two career paths, and see what those big choices meant for someone later down the road. Specifically I wondered if I could answer a few questions:

  1. Can the late start in saving by the college graduate be overcome through higher salaries?
  2. Does the lower earning potential of a non-college graduate mean that the non-college graduate will be required to “work until they die”?
  3. Who will be able to quit the rat race first?

Fred attended college for four years, taking out student loans. Paul got a job at 18, straight out of high school. I wanted to see whether college was worth it, and whether attending college helped or hurt Fred’s chances of getting out of the “rat race,” and whether Paul was facing an unbelievable uphill climb to achieve the same goal.

I made a lot of assumptions. Both men work until age 65. Tax brackets as of 2006 are used (15% to 33%). Both invest in accounts returning 8% per year. Fred starts college at age 18, taking out $40K in loans ($10,000 per year). When he finishes college, he pays back 5% per year ($2000) . He puts aside 10% of his after-tax income for debt and investing. He pays the debt first. He invests the balance of the money. His salary starts at $27,000 and increases 4.5% per year over his life (average annual wage is $80,947).

Paul starts working at age 18. He invests 10% of his after tax income, and has no debt. His starting salary is $8.95 an hour and over his lifetime his average annual wage is $44,895 based on yearly increases of 3.5%.

Here’s what happens. Fred contributes less than 3% of his after-tax income to his investments until he’s 32 years old. He doesn’t invest more than Paul does until they are both 42 years old! His tax bracket jumps to 25% when he’s 26, and by the time he’s 25 he only has $2,000 saved, or approximately 6% of his annual pre-tax salary.

Paul, on the other hand, starts earning and investing when he’s 18. He doesn’t reach the 25% tax bracket until he’s 35 years old. However, at age 35 he has almost $75,000 saved, 231% of his annual earnings before tax.

Fred starts to catch up once his loans are paid off. His investing, starting when they are both 42, is now approaching 1.6 times more per year than Paul. However, by age 50 Paul has $328,000 saved; Fred still only has $164,000. However, since Paul had 4 times as much saved as Fred at age 35, this ratio of almost 2 to 1 is a huge improvement.

As we approach retirement age, Fred is living a pretty good life. His salary is in the mid-six figures at age 60 ($143,000). Paul is making half as much ($76,000). Fred is moving into the top tax bracket, and socking away more than $10,000 per year in savings. Paul is still saving about $500 per month and is just preparing to move into the 28% bracket.

At 65, Fred is making $180,000 per year. He has over $777,000 in savings (4.3 times his salary). His savings in retirement will generate $31,000 per year at 4%, the rule of thumb used for retirement withdrawals for a sustainable amount assuming a normal US life expectancy (78). This means that he will have to live off 24% of his last after-tax salary, plus whatever government benefits or pensions or capital gains from selling his house that he can obtain.

Paul, on the other hand, has more than a million saved ($1,189,000). He NEVER saved more than $600 per month in his whole life. His final salary was $90,000. He will have $47,600 per year (using the 4% rule) to live on; still only 67% of his after-tax salary, but much closer than Fred to a reasonable amount.

Amazingly, Paul only invested a total of $177,000 over his 48-year working life. Fred invested more: $231,000. Yet Paul’s final portfolio contained 7 times more cash than he invested; Fred’s was only 3.36 times as much as he invested.

Paul ends up with $412,000 more than Fred. Paul, at age 65, has a far better chance of surviving in comfort off his $1 million portfolio and a lifestyle presumably suitable for someone who makes less than $100,000 per year. Fred, on the other hand, will struggle to survive if he maintains a lifestyle built around a $180,000 per year salary with only $777,000 in the bank.

Now Fred, of course, may have bought a house in a metropolitan area when he was 40 and now can sell it for hundreds of thousands in profit; however, I’m willing to bet that unless he was highly disciplined he still has a mortgage, and the chances of making over $400,000 in profits on a home are small (not impossible - but small). Fred may also have had access to tax-advantaged plans and matching programs through company 401(k)s and so forth that Paul might not have had. Even if all of these scenarios play out perfectly for Fred, he barely catches Paul. Even if he DID have $1.3 million saved, it’s still only enough to guarantee 29% of his after-tax retirement income.

So what does this all mean? Should every 18-year old skip college and go straight into the workforce? The short answer: no. Assuming that you did start earning at 18, you would need to be a highly disciplined saver, and not everyone is. If Paul didn’t start saving until he was, say, 29, he has only $665,000 in savings at age 65. Those extra 10 years after high school - when he saved only $18,000 - made an almost half million dollar difference at the end of his working life. Ask yourself how many people at age 18 can save 10% of their salary. They exist, sure, but realistically very few people have that discipline.

What’s the solution, then? I think if you go to college, avoid student loan debt if you can. How? Don’t go to an expensive school if a less-expensive option is available. If Fred’s student loan for $40,000 disappears, he has $1.3 million when he retires. Still not enough, probably, but $650,000 more than he would have had. That debt makes a huge difference.

A second tip is start investing early. Very small amounts invested early in your life will grow significantly more than the same amount (or an even greater amount) invested later. If you managed to save a few hundred dollars in high school, that’s far more significant than thousands when you’re in your 40s. Think about that - a tiny bit of sacrifice early on will make you richer than a much larger sacrifice later in life, when you think you have “too many expenses.”

A third lesson: consumer debt will cripple your chances of accumulating substantial savings. I assumed both men were exceptionally disciplined and never incurred any debt other than student loans (in Fred’s case). If either one had spent that 10% per year on credit card debt instead of investing it, their future prospects for quitting work before death plummet to almost zero.

A final lesson: even small amounts make a huge difference. Think again about this statement: “He [Paul] NEVER saved more than $600 per month in his whole life.” Isn’t that amazing? Not one month in his life did he ever save more than the cost of an iPhone plus accessories, or much more than digital cable plus cell phone service. He didn’t save thousands per month, just $600. If that’s not enough, keep in mind that was the absolute maximum he ever saved in a month! On average, he only saved around $300 per month over his life!

Here were my original questions, and the answers I discovered:

  1. Can the late start in saving by the college graduate be overcome through higher salaries? Not really, unless the college graduate’s salary is significantly higher or the savings rate is substantially greater.
  2. Does the lower earning potential of a non-college graduate mean that the non-college graduate will be required to “work until they die”? Absolutely not - in fact, if the non-college graduate is a disciplined saver, the opposite is true.
  3. Who will be able to quit the rat race first? Based on my model, the non-college graduate - but the real indicator is who starts saving the highest percentage of their income earliest in their career.

Don’t take too much of this as gospel. This was an illustration only, and of course a million variables come into play about spending habits, debt, housing, career growth, investing choices and so on. The purpose of this exercise was to challenge my context, and hopefully yours too. Don’t always assume that just because the college presidents of America tell you that you need college that you do. I had a lot of good times in college, and I wouldn’t trade them for anything. But don’t kid yourself - colleges are businesses that want your tuition to fund their foundations and football teams and new buildings and conferences and so on. They want you to take out big loans, because they don’t care that you start your earning life saddled with debt as long as they get their tuition revenue.

The moral of the story is that you shouldn’t believe a thing just because everyone else says it’s true.

(photo by MarkWallace)

i’ve been accepted to imaginary college!

I have given some thought over the years to going back to school. Ah, to be back in the fraternity, drinking Schlitz, playing lacrosse and sleeping from 4 am to 2 pm. Oh, you thought I meant for the classes and the knowledge? Are you kidding me?

Seriously, though, I was tagged by Melissa at A Penny Closer to participate in a meme: to devise a list of 5-10 courses you would take to fix your life. I’m supposed to pick one of hers, as well, so that we can skip classes and copy each other’s notes. Just for the sake of being different I’ll attend 7 (imaginary) courses.

  1. Art of Persuasion 101 is the class I’d like to share with her. Why? Who doesn’t need this skill? Is there any way that’s NOT a useful skill to have? I can think of a million ways that could be useful, but in particular being able to persuade my son to eat his breakfast would be a HUGE benefit!
  2. Car Maintenance for Your Post-2000 Car 101: When I was younger, I managed to do a lot of car maintenance on my 1976 Mercury Comet without too much trouble. Nowadays I open up the hood and don’t see much that I can distinguish from the guts of my Toshiba computer. I’m nervous just adding wiper fluid. Hopefully this imaginary life-fixing college would have an imaginary community college campus where I could take a class like this one.
  3. Simplification 101: As much as I do try to simplify, there is always something new to complicate my life. I’d like to have a magic bullet - as much as I know there isn’t one - so why not take a course like this?
  4. Yoga 102: I have been to a yoga course, and I liked it. I like the idea, I like the fact that many pro athletes rely on it for conditioning, and I like the promised stress relieving benefits. Yet… I never do it. I need a class to convince me once and for all that I need to engage myself fully in yoga.
  5. Real Estate Appraisal/Inspection 101: OK, the real estate bubble burst. OK, this isn’t your typical college course. However, I can’t imagine any way, shape or form it wouldn’t be handy to have a good understanding of how to appraise and inspect and evaluate real estate. Even if you never invest in real estate, being able to help family and friends or even look at your own home would be a hugely useful skill.
  6. Environmental Studies 202: I’ve read a lot about the environment. One book in particular shook me terribly, but I sometimes feel that I could use a twofold course about the environment: 1, the detailed science around global warming, 2, a detailed examination of the environmental threats faced by urban dwellers and 3, how to protect your home. Fortunately most of this information is available through blogs and websites so I’ve got a lot of resources to fall back on.
  7. Getting Off the Grid 101: I get really worried sometimes that I’m “out there” too much…hence the semi-anonymous blogging. There may be too many people with too much information about me. I think a thorough course in how to “disappear” myself as much as possible would probably be handy later on in life. I may actually soon de-anonymize (is that a word) Brip Blap, so I probably have to be careful about this…

I suspect as I look at that list I may have been too narrow minded - these are hardly grand themes to fix my life, just tweaks. I just thought that something like “Perfect Retirement Planning” wouldn’t be as interesting to read. In any case, these courses would fix parts of my life.

And one more course for nothing more than my own enjoyment, Astronomy 103b “Just the Cool Stuff.” I love astronomy - discovering planets, dark matter, Voyager and Pioneer trivia, quasars, and on and on. I am really, really fascinated by the Pillars of Creation. Oddly enough, I never took a course in astronomy while at college and have never done more than show a layman’s fascination. I think in an alternate lifetime I was an astronomer, though, because I could read about this stuff for days. Nothing close to earth like the space shuttle or the space station, but the crazy far-off stuff just fascinates me. It won’t fix my life but it might make me happier… so that might be a fix, anyway.

Tags. Hmm. I tagged a bunch of people recently so maybe I’ll stretch past my normal blogroll and tag-ees and go to some blogs I haven’t mentioned much (or at all) before, but that I do read: Variable Interest and One Money Dummy Getting Smarter. And as always, tag yourself if you feel so inclined!

Recommended Reading

I will not pay for my children’s college education, part 2

Continued from Part 1. Many of the personal finance sites I read concentrate on a few key areas: reducing debt, making investments, emergency funds, saving for your children’s college education and saving for retirement. I agree that most of these are important topics, but I don’t believe that you should save for your children’s college education. This may come across as a shocking or neglectful thing for a parent to say, but I have my reasons.

College costs. A report, “Trends in College Pricing 2006” (warning, big PDF), noted that “[p]ublished tuition and fee charges at four-year private colleges average $22,218 in 2006-07. The $1,238 increase over 2005-06 represents an increase of 5.9 percent, or 2 percent after adjusting for inflation. The average total tuition, fee, room, and board charges at private four-year colleges and universities are $30,367.” The report goes on to note that this amount is usually reduced by student aid, but let’s assume you’re trying to pay for them to go to the best college possible (no Cornell for my baby, only Yale/Harvard/Stanford for her!)

If we consider that tuition, fees, etc. increase at the same rate going forward (no sure thing) then a private school tuition for four years will be $42,000 in today’s dollars by the time my son is in college, around the year 2024. If you consider inflation, that will be $80,000 or more. So you’ll need $80,000 in the bank for each child. Keep in mind that the starting point, $22,000 is the average for a four-year college, not for the very best colleges. Yale, for example, now costs $35,000 per year all in. In 2024 a Yale education might cost – get ready - $370,000 for a four-year degree by my very rough calculations. I won’t have that much saved, frankly.

Personally I am not convinced that there is a lot of value in a private school education that is not present in a state university education. There may even be an argument that not everyone needs a four-year degree, to be honest. I am prejudiced. I received a bachelor’s degree and a master’s degree from a state university, and I work alongside Ivy League grads every day. They don’t make any more money or have any more prestige due to their schooling than I do; the distinction between our backgrounds was flattened out back in the first 3 or 4 years of our careers. By year 15 nobody asks where you went to school unless you’re talking about sports.

Those Ivy grads I work with may not be the most successful Ivy alumni, though. If you want a career with the movers and shakers of the world, you need to go to a school where you’ll meet fellow future movers and shakers. For every Ronald Reagan attending Eureka College there are a thousand Bill Clintons/John Kerrys/George Bushes attending Yale, I’m sure. But don’t think that a state school means your ambitions will be cut short, and unless you have ambitions to be the next hedge fund manager or a U.S. Senator I’m not sure a private school is that much better. After you get that first job, no-one will much care if you went to State U. or Fancy Institute except on football weekends. Of course, if you want to major in some specialty that only exists at some private school, or you have some other reason for going (family ties, etc.) there’s nothing wrong with it, but I don’t plan on giving my children an extra $328,000 just for the heck of it.

Invest in early education. One of the main reasons I’ve been uncomfortable with 529s is the fact that you are tying up money for a college education. I know you can get it out, I know it can be used for your own education if your child decides to run off to Nepal, and so on – but what if you need money for education in the early years? We are considering a private pre-school and kindergarten for our son; first, for safety and quality reasons and second, for our own opinions on educational philosophies (we are very interested in Waldorf education, for example). We hope that money spent early on can provide some love of learning that will help earn scholarships later on. I won’t have an answer on whether this was a good idea or not until 18+ years in the future, but it makes sense to me.

Conclusion

I guess in the end this is more of a decision related to your personal values. My parents helped me a lot during college, but I provided the great majority of the money for the total costs of my undergraduate and graduate education came from scholarships and teaching jobs, including 100% of tuition. While my parents could have (and I am sure would have) scraped together the money for me to attend Harvard (yes, I was accepted there), I never felt a burning desire to attend and haven’t ever felt that I shortchanged myself.

My hope is that my son will appreciate the fact that I have enough confidence in him, even now, to know that he’ll be able to put himself through college with scholarships and hard work, and hopefully we will return the favor by making sure first that we are never a burden to him.

I should also point out that I do have a 529 for my son (set up by his grandparents), but it’s mainly a place for relatives to put gifts. I haven’t contributed anything to it myself to date. Please don’t beat me up too much in comments.

I will not pay for my children’s college education, part 1

Many of the personal finance sites I read concentrate on a few key areas: reducing debt, making investments, emergency funds, saving for your children’s college education and saving for retirement. I agree that most of these are important topics, but I don’t believe that you should save for your children’s college education. This may come across as a shocking or neglectful thing for a parent to say, but I have my reasons.

Save for your retirement and debt reduction first. Quite simply, there is a good chance that any 529 or savings plan you start today will not have a better return than debt reduction or your own retirement savings. You may argue that a 529 and a 401(k), for example, have a similar pre-tax benefit, but if your 401(k) has an employer match it’s going to come out ahead of a 529. Now, if you have an employer who will match 529 contributions, then it’s probably a good idea (and hold on to that job like grim death because I bet it offers very good benefits in general). But I doubt your 529 will return 15% if your IRA is returning 3%; most likely they’ll both be in the ballpark of the market in general, assuming you have similar funds in each.

Just remember that if you are a burden on your children when you retire, due to debt or lack of savings, much of the money you saved for their education may be lost. You may unconsciously think of putting money into your child’s education as a retirement plan (“my son the rich doctor will buy me a house in Arizona when I’m old!”) but that’s putting a huge amount of faith in a future unknown. What if your child decides instead to work as a doctor for “Medicin Sans Frontieres” or has eight children of their own (i.e. no money leftover)? Or, more brutally, decides that he or she want a vacation home in California and decide to leave Mother and Father in the one-bedroom in Funkytown? I hope that my son will spend his money on himself and his family rather than needing to help me out. I hope that if I really need help, he’ll be there, but more in the sense of physical or emotional or ‘administrative’ help when I’m too old to manage for myself. And it takes a lot of money to pay for the golden years.

Finally, I think it goes without saying that if you’re paying 18% on credit card debt but skimping on debt repayment to fund a 529, and your 529 returns are 10% per year (even considering the tax advantages) it’s probably better to pay the debt down first, then worry about your children’s education.

Student loans/scholarships. Quite simply, nobody is going to give you a loan or a gift to fund your retirement. On the other hand, student loans are easy to come by and scholarships, while not always easy to come by, are plentiful. I was no great athlete, but I received tennis scholarships. I also received a number of academic scholarships. Some were general, but others were award-related (National Merit Finalist scholarship, for example). If your child studies hard and participates in extracurriculars, they will receive scholarships. They may not receive scholarships to every school they want to attend, but I guarantee there will be a college willing to extend “free money” in the form of a scholarship to attract students with good grades or community leadership activities or athletic ability.

…to be continued…

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