Tag: income

Professions in the dump

If you aren’t familiar with the auditing profession you’ll have to bear with me here for a minute. A couple of days ago, in discussing a project, one of my co-workers offered to give a one-day crash course in auditing to some junior staff so that these non-auditors could help on a audit project. A few years ago that would have had me snarling, but now that I’m a more mellow consultant I let it slide. However, it drives home the point to me once again that my profession isn’t respected.

I am fairly sure no-one has ever asked my sister-in-law, a doctor, to give a one-day crash course in surgery – and then expected to be able to perform surgery on their own. That might be too extreme of an example, though, so I’ll try again: I don’t think I have ever heard anyone ask a carpenter to give a one-day crash course in carpentry and then expect that person to be able to build a chest of drawers. I could go on forever with my examples.

The point is that I am in a profession that – despite being one of the final bastions of defense against corporate misdeeds in America – is respected a little bit less than supermarket baggers. I wonder why, to be honest. I guess there’s a perception of auditors as the sneaky guys who try to catch out hard-working employees stealing a pen, or even as the ‘snitch’. What most people don’t realize is that without auditors there would be no defense against outright financial fraud until it exploded and destroyed the company overnight.

In Enron’s case, the auditors discovered something and then (you can argue this) failed to be sufficiently tough about fixing it. The result? That company disintegrated over a few months once it was discovered. The Worldcom situation was similar, but auditors caught it in time and the company managed to correct the errors, fire the guilty and will survive, albeit in a reduced form.

What other professions are unfairly treated as ‘easy’? Here are just a few, in my opinion – add your own in comments if I forgot anything.

  1. Teachers. It is not sufficient to stand up in front of a room and ask kids to memorize 3+ 4=7. There’s a lot of hard work that goes on behind the scenes to prepare lesson plans and make sure children are educated, not just drilled.
  2. Nurses. The movie “Meet the Parents” probably helped show how silly this was, but I’m sure a lot of people would still look down on a nurse as someone who didn’t manage to make it to being a doctor. But nurses (or home aides, or nursing home workers, or EMTs, etc.) all perform the tough, dirty, and emotional work of caring for patients. I can’t imagine it’s easy.
  3. Truckers. I know it must seem like an easy job to drive for a living, but I’m sure a truckers job is every bit as stressful and boring and difficult as my job sitting in front of a computer. Spending week after week driving a slow, nonresponsive small building on wheels with tiny cars whipping around you right and left would be tough. I hate a slow truck just like any other driver, but I shouldn’t. Without truckers, this country would grind to a complete stop, and I mean complete stop – or do you think those California oranges are going to be delivered to the door of your local supermarket by train?
  4. Police officers. I have made donut jokes more times than I can count, but I am sure that any person who is willing to protect other people at the risk of their own life as a job doesn’t get sufficient respect. If you asked me to sacrifice myself to save my son, that’s an easy question – I would do it without hesitation. But a police officer can be put in a position to sacrifice themselves for a random stranger. That’s devotion.
  5. Stay-at-home moms. Bubelah stays home. It’s a tough job, for sure. Long hours, no weekends, occasional frights and often a heavy helping of monotony. Before you think I sound like I’m piling on my son, pick up a copy of “I Am A Bunny”…and read it 13 times in a row. Out loud, with sound effects. Every day. For a year. But actually that’s not my point; stay-at-home moms get less respect than almost any other ‘profession’ for the same reason I just put quotes around ‘profession’. No-one thinks it’s a job. If you take your child to a daycare center, you pay them. So a stay-at-home mom is actually performing a role that in other circumstances people are paid for. A stay-at-home mom will get no respect. People will say “boy, it must be nice to stay home all day” or “when are you going to get a real job” without realizing how demeaning that is. This country has glorified the two-income family who can afford a plasma TV and two brand-new SUVs in the driveway. While pretending to honor sacrifice and family, too often we do neither.

So I guess I’ll just toil along doing my job that I could apparently train someone in one day to take over, and dream of the day I can get some respect!

You are not Jack Nicholson

There’s an excellent dialogue going on over at Million Dollar Journey that includes a few comments from yours truly. The gist of the comments I’ve been following (and there are two different comment ‘streams’ going on, so you have to read through them) is that there’s a disconnect between competence and promotion in many organizations. I take the position that who you know is far more important than what you know, a position held by Gates VP.

I should start off by saying I dislike the position I’m defending. I wish that every promotion in every company was always based on the simple question “who can do this job best?” It’s not. Often the question is “who stood up for me in that political battle over who got the corner office” or “who hangs out after work and has a beer with the boss” or, even worse, “who is male?” This is awful – but I think it’s still true, and it’s going to take many more years to break that pattern.

I have been having an earnest disagreement with a colleague at work over the past couple of days. We had a large meeting, including 40-50 people from several departments, to determine a course of action for a big corporation-wide problem. The meeting was ‘facilitated’ by one of the groups, meaning someone stood up front and assigned responsibilities and due dates for various tasks. In breakout conversations afterwards, I took the position (as did other consultants present) that this exercise was ridiculous. Assignments were given and responsibilities assigned before a goal was defined or basic information was discovered. Most of this was brushed off with earnest declarations that “at least we’re getting something done!” by employees of the corporation.

I wish I could say that pure technical competence is always going to win out. I would be happy to hear that people who read this could say “my workplace is like that!” I can speak mostly just to my experience, and my second-hand knowledge of my family’s, friends’ and colleagues’ experiences. For all of them, their workplace promotions and treatment have been driven by a combination of accident, personal preferences and irrational behavior, with a tiny mix of technical competence thrown in.

As far as competence goes, there may be people out there who are The Only. Jack Nicholson, for example, is more or less the only guy who can put Jack Nicholson in a movie. You can’t outsource to India, or hire 30-year-old Jack Nicholson. You can hire someone similar but not the same. If he doesn’t show up, you don’t have Jack Nicholson. You, however, are not The Only. Whatever you do, I guarantee you that somewhere out there, a person exists who can do your job as well as you can for less money. They may not be interested – maybe they are working for someone else, or prefer to live in a different city, or they just never heard of your job. But you are not irreplaceable.

I use that point to show that competence can’t be the driving factor. Often bosses may not be interested in replacing you because it’s too much of a hassle to fill out the “no cause lay off” paperwork with Human Resources, or it means they’d actually have to break in a new person. But if the opportunity to replace you with someone who could do your work just as well as you presented itself – with no effort on your bosses’ part - and they would take the job for less money, why wouldn’t your boss replace you?

I will tell you the only reason why, and it’s not a good reason. Maybe there’s a boss who likes having the guys around. He likes football and blonde jokes, and he’s surrounded himself with guys who at least act like they do, too. Now maybe there’s a recent MIT graduate or foreign-born professional or woman who could do one of his guy’s jobs, but this boss inwardly cringes a bit at the prospect of having to watch himself. He likes that crutch of talking about the Giants as an excuse for real teambuilding. So he will keep on his guys.

You could have the same scenario play out different ways. Bosses who like single people because they don’t have commitments like kids pulling them away from a single-minded devotion to work. Other bosses may like pretty women, or people who curse, or Christians, or quiet people or Ivy League grads. The preference doesn’t have to be negative, at all, but it’s a preference, and if you don’t meet that requirement you’re going to have to work harder to make up for it.

So while I think the old boys network as a clear, obvious component of the corporation may be fading, I don’t think it’s realistic to assume that corporations always reward the best, smartest workers. I can look around my workplace right now and see plenty of smart people who are working for less-smart people. I have seen plenty of people smarter than me stuck levels below me, and plenty of people stupider than me well above me in the corporate hierarchy. Every time, the reason has been the preferences of the boss or the group-think of the management team leading a department or just a herd mentality. You shouldn’t ever just rely on your brains to succeed, because if you do you’ll be smart John Kerry watching dumb George Bush take the oath of office. Successful, but a step behind.

how a ‘regular person’ can make passive income


Wikipedia has a rather tortured entry on passive income. The entry begins by categorizing all income as either earned (wages), portfolio (income from market instruments such as shares) and passive (income from rental properties, royalties, etc.). I think a clearer definition might be to define all income as either earned or passive. Earned income is income arising from a continuing exchange of labor or time for money. Passive income is income arising from an exchange of money for the same unit of labor or time. That’s a confusing way of saying earned income is when you must continue the activity to keep getting money, and passive income is when you do the activity once and then keep getting money. So if I work for wages, I have to show up 8 hours a day to get paid 8 hours’ worth of wages. That is earned income. If I have passive income, I show up and do some work for 8 hours and then get paid that day, and the next day for the prior days’ work, and so on.

My definitions are fairly vague but the general idea is that earned income requires continuing work and passive doesn’t. If you buy a house, fix it up and rent it out, theoretically it could earn rent for the lifetime of the house, making it passive income. If you buy a house, fix it up and sell it, you are earning money for the time spent buying, fixing and reselling, so it’s earned income.

So why doesn’t everyone just forget earned income? Earned income is much easier to come by, for starters. I sell my time at a very specific rate to clients to perform consulting services, and in doing this I’m only doing the same thing 200 million other Americans do. If they have an 8 month project, they pay me my rate times 8 hours a day times 5 days a week times 4 weeks per month times 8 months. They don’t pay me any more after that. However, if I wrote a blog post, and someone comes to my page via a search engine and I get an ‘impression’ from Google Adsense, then the initial hour spent writing that post could potentially generate income for 8 months if people keep visiting the page. But it is hard to imagine that I could ever get to the point where the one hour spent writing a post might equal one hour spent doling out my consulting wisdom, earned through 15 years of experience and a master’s degree. That would be the goal, though.

I do have a fair amount of passive income which I have purchased with my earned income: stocks and mutual funds. Once I buy a stock, the dividends continue to come even though the earned income used to purchase that investment was capped out. If I worked enough hours to earn $100, then bought one share of a stock that earned me $1 per year in dividends, that passive income would (in theory) truly start after 100 years. Up until then it was just a deferral of my earned income in a sense.

I have given a good deal of thought as to what a ‘normal’ person like me, a wage earner, can do for passive income. I only come up with a few areas that are realistic:

  1. Owning dividend-paying stocks, interest-bearing cash accounts or other market-related investments.
  2. Owning and renting property.
  3. Creating original content (writing, art, music, etc.) and selling it.

The first two present the problem that you need at least some earned income to ‘kick off’ the passive income stream. You have to buy a stock or a house. Sure, there’s leverage, but still, some sort of earned income has to be there to initiate things. The third item is where the possibilities are.

This blog is original content. It may not be good original content, but it’s definitely my own work. Selling an original MP3 would be, too. If I can create good enough content, people will want to read/listen/acquire it, and they will pay for it, either passively through advertising or directly by paying me for it.

The goal, therefore, is probably to work on increasing your creativity, which is free of cost but can generate income. Of course the time spent in generating creative thoughts has to be retroactively paid for once the income comes in, but at some point - like the stock example above - you reach a break even point and move into true passive income territory. Once you have reached that point, the need for earned income decreases and you can stop selling your time for money.

This is nothing new to readers of Kiyosaki or Steve Pavlina or Lazy Man and Money or dozens of other blogs, who have covered the same ground in more depth and precision than I. But I think the challenge for many people is how exactly to recognize passive income generators. Owning and renting property and stocks is far and away the easiest way, but still require an initial payment of earned income (and again, many people would argue you can borrow money to generate that, but no-one will lend you money if you don’t have some sort of earned income ‘background’). Creative content, however, does not require an intitial payment of earned income, but a retroactive payment once it is created. So I continue to try to think of things to create, so I can generate more passive income and quit selling so much of my time (a limited commodity) to other people rather than using it myself.

IQ and wealth

I read an interesting article, “A high IQ is no financial guarantee”, on MSN Money today. There were a couple of key takeaways I got from the article, but you should read it before continuing. The author, Karen Aho, points out that you can’t draw any broad conclusions from the study… but I will! The study focused on baby boomers, since they can, for the most part, be looked at retrospectively in terms of savings and income.

My key takeaways:

  1. Saving money has nothing to do with IQ: “[people] with average and low IQs were just as good at saving money as those with high IQs.”

  2. Earning money does have something to do with IQ: “subjects earned an average of $234 to $616 more per year for each added IQ point, meaning someone with an IQ of 120 (top 10%) made $4,680 to $12,320 more than those crowded in the middle of the bell curve with an IQ of about 100.”

  3. Earning money has nothing to do with saving money: While those with above-average IQs were three times more likely to have a high income as those with below-average IQs, they were only 1.2 times more likely to have a high net worth.

  4. Nobody is really good at saving money: No IQ group had built up "a significant financial cushion." The median baby boomer’s wealth equaled 18.6 months of income, while the highest-scoring group, those with an IQ of 125 or above, had little more than two years of income saved.

  5. Money is not the only measurement of wealth: The colleagues of the study’s author, university professors, told him “We are incredibly ‘wealthy.’ We don’t work many hours, and we get to work on whatever projects we want [despite lower salaries and net worth]."

So to address each point:

Saving money has nothing to do with IQ

People are often confused about what IQ really means. From Wikipedia: An intelligence quotient or IQ is a score derived from one of several different standardized tests attempting to measure intelligence. IQ tests are used as predictors of educational achievement. Note that these tests are used as predictors of educational achievement. They do not, for example, test discipline, or creative ability or personality. Someone who has a low IQ but is highly disciplined, for example, might be a better student of engineering or mathematics than someone with a high IQ who doesn’t focus. Someone who has a great knack for spotting real estate deals though intuition might not have done well in biology class.

Saving money is more about temperament than educational intelligence. Since our education here in the US pays absolutely no attention to financial education, a high IQ might even work against financial education. People with high IQs might continue their education longer, deferring their entrance into the real world where they have to learn about managing their finances. I didn’t get my first real job until I finished my graduate degree at 24. People I know who didn’t go on to college had already been in the workplace for six years, dealing with all that entails.

Earning money does have something to do with IQ

Study after study shows that you can earn more money with a college education, which you are more likely to obtain if you have a higher IQ. Corporations and other large employers will tend to pay more to a college graduate, meaning earning potential is higher if your IQ is higher. I am not sure this is such a great thing. Are you better off working at a fixed salary as a manager for The Corporation with 5% raises over the course of your life, or being this guy who didn’t manage to graduate from college, but had a clever idea about selling software?

Earning money has nothing to do with saving money

I earn a lot of money. I spend a lot of money. Because I live in the most expensive part of America, my above-average salary gets swept away pretty quickly by my way-above-average-costs. I don’t spend unnecessarily, although as with everyone I could cut back in certain areas. But my ability to save is a function of my efforts to cut back on expenses where I can, not due to the fact that I make a huge salary. I maxed out my 401(k) deductions (which is a set amount, not a percentage of earnings) 15 years ago when I was living in a much cheaper city, making about 1/5th of what I make today. So I saved just as much when I was earning much less. That has more to do with my interest in saving than it does with my earning ability, because as a percentage of my overall income my savings rate is drastically lower than it was – my savings rate has declined as my income has increased.

Nobody is really good at saving money

This goes without saying, almost. The US has a terrible personal savings rate. I think the statistics bear out that although certain individuals are better than others, as a whole our nation is not good at saving money, regardless of one’s social status, intelligence, hair color or favorite TV show.

Money is not the only measurement of wealth

I don’t think this point can be repeated enough. There are other measurements. Is someone who works 100 hour weeks his whole life until he drops dead of a heart attack at 60 truly wealthy? Is a painter who loves to paint but can’t afford the newest iPhone really poor? These are philosophical questions, of course. But a person who has a pension guaranteed for life is in many ways wealthier than a person who has all of their savings for retirement in the stock market. The pension, of course, can go bust, but assuming it doesn’t I’d rather have a small guaranteed payment rather than a wildly fluctuating amount. Peace of mind is priceless, isn’t it?

It’s a good article. I don’t think there’s anything surprising there – street smarts have trumped book smarts plenty of times throughout American history – but it’s interesting to see those study results in one place. There’s hope for all of us!

aging gently

As I spent some time in an assisted living facility last week I thought about aging and money. Here are the two most important concepts I came away with:

  1. At the end of your life, money and things are not important. Having friends and family and a rich store of memories will be more important than whether you ever owned a boat. This is the Hallmark Card thought that people bring up when talking about old age and death.
  2. That having been said, the end of your life is a lot nicer if you have some money. I’m not talking about nicer in the sense of having HBO. I’m talking about having a nurse who’s going to change your bedpan when you ring the bell rather than being in an institution where they let you sit in your own crap for three hours because they are understaffed.

I really cringe from time to time thinking about how much money I am hoarding for some far-off "retirement". Unless my savings rate and return rate spike up dramatically in the next 10 years I’ll still work until my mid-60s regardless of what I do now. And of course I could get hit by the mythical bus any day, rendering much of my planning for my sunset years irrelevant (except of course in that these savings would help out my family, but I have life insurance for that and frankly even with savings and insurance Bubelah would have to go back to work). So the ugly little thought creeps into my mind that maybe I should be enjoying this money today. Not buying the latest plasma TV, necessarily, but spending it on a fancy private education for my son, or on illuminating vacations (pyramids, Great Wall, safaris) or on a beach home in Florida. With the amount of money my wife and I save it wouldn’t be an insignificant amount of extra money if we stopped saving tomorrow. That extra money would alter our lifestyle.

However, I think about what I saw last week and realized that if you don’t have lots and lots of money, things can go south quickly. I saw a very nice assisted living complex, filled with relatively happy looking seniors. There was a very pleasant restaurant-style cafeteria, activities and a very pleasant physical complex with bright halls, cheery rooms and clean surroundings. All of this comes at a price; my best understanding was that it runs more than $5000 a month in an area of the country where that is no small amount. To put that in perspective, to generate $5000 per month in net income would require a nest egg of $1,300,000 earning 6% interest (no sure thing unless you want lots of risk). “That’s not so bad”, you think. That means $5000 for basic care. No drug co-payments, no hospital stays, no extra assistant care - all of that is extra. “That’s fine, Medicare will cover that,” you say. I hope you are right, after all of your “fun” 60s and 70s and giving gifts to the grandkids and traveling to Spain and whatnot, just for a place to live. $1,300,000 in the bank when you are 80, for the sake of argument.

All of that might not even be that terrible except:

  1. One or both of us might live far longer due to advances in medicine. Already people are living longer and longer due to artificial hearts, drugs, surgery, you name it. If I live to be 105, or 20 years past what I expect, won’t I run out of money? What happens when I’m 97 and the bank account is tapped out? I hope my son or other potential future children could help, but I may need care past what they could easily provide at home. What then? What if something even more ridiculous happens in the next 20 years (a cure for cancer, for example) and people start living to 120? 130?
  2. One or both of us might have health issues, draining our savings. This might be as simple as needing additional nursing care for non-life-threatening conditions, or as awful as a long lingering illness.

So let’s assume that $2 million (a random large number) would last for 30 years after I reach 65 (remember, 20-25 years for me and 30-35 for Bubelah). How is it even remotely possible to think of saving for 40 years, 50 years of quality living? Is it possible? I sometimes doubt it, particularly considering costs may dip at first when we’re in our 60s and in decent health (assuming we don’t take that super-luxury cruise to Europe), but will probably spike back up again as health problems mount. Could you ever start drawing down on principal to boost your monthly income? Even if you don’t, the principal will rot away with inflation. 40 or 50 years is a long time to hope for $1,300,000+ to carry you. You would have to draw the principle down and hope that the month you drew out the last $18,000 (inflation, remember?) was the month you died.

I don’t know what the answer is. Maybe the answer is spend it while you’re young and hope that this country does something about elder care before you get there yourself…

things I learned from my grandparents about money, part 1

Most of my relatives have some very different ideas about money, and by relatives I am including the wide range from my wife to my parents to my in-laws, etc. I realized a long time ago that it is very easy to pick out the flaws in other people’s philosophies or actions while failing to recognize them in your own thoughts and actions. However, I still find it a fairly useful exercise to try and determine where people make good decisions and bad decisions. Even more important is trying to understand the ‘why’ behind those decisions.

My mother’s parents (my grandparents), for instance, have always been very frugal. They were both raised on farms in the 20s and 30s and suffered through the Depression. My grandfather left home to join the Army pre-World War II, serving in the horse cavalry (hard to believe the US still had a horse cavalry less than 70 years ago, isn’t it?)
Here are some of their views towards money that I think are interesting, both good and bad, and my take on them.

  • Investing, a good habit. My grandfather was an early fervent believer in investing. Coming from a rural background and suffering through the Great Depression you might expect him to be very wary of investing, but he was quite the opposite. He invested heavily in the market, and on a schoolteacher’s salary did very well over the years. He did this although he had a state pension and could have chosen to spend that money. From him I learned a very conservative study-buy-and-hold approach. Although I didn’t know it at the time I learned it from him, his approach was basically the same as Warren Buffet’s. While it didn’t make my grandfather a billionaire, it did make him a huge ‘extra’ retirement fund on top of his pension and my grandmother’s.
  • Never selling, ultimately a bad habit. My grandfather maintained an almost emotional attachment to some of his stocks and held them year after year, even in times of declining prices, shrinking dividends and their own advancing age and deteriorating health. They saved these stocks thinking they could pass them on, but as they have moved into more and more expensive housing (nursing homes are much more expensive than regular apartments, obviously) it has become obvious that all of that money will be gone soon, regardless. Had they moved it into a savings account paying 5% ten years ago they could have been earning steady income.
  • Never really spending, good and bad. Although they amassed such a gigantic fortune (relatively speaking) on retirement my grandparents never really spent much. They constantly talked of wanting to pass it on to my mother (an only child) and my brother and myself. They never traveled, although my grandfather dreamed of returning to see a peaceful Germany. They did ‘live large’ in some senses - they ate out almost ever day, they bought new cars for cash every few years while they could still drive and they were almost insanely generous to my parents and my brother and myself. They gave us stocks, cash and other gifts for years. However, it is hard for me to look back on their 20+ years of retirement and think that they never really did much after retiring. I know that part of that is my perception, since I love overseas travel, but I am not sure retirement was meant for watching TV and eating out. That’s a judgment each person has to make individually, I guess. But when my mom was younger and living at home they were very frugal, and even late in life my grandfather’s frugality could be amazing. A heavy, heavy smoker for his entire adult life, he quit cold turkey one day because he thought cigarette prices had finally gotten to high - and hasn’t smoked in 15+ years now. He never worried about the health aspect as far as I know, but paying $3 for a pack of cigarettes instead of $2 was apparently one dollar too much.
  • Avoiding debt, extremely good. My parents and grandparents gave me one gift that I realize is invaluable after I read many personal finance blogs: the fear of debt. I have been convinced since an early age that going into debt is practically a mortal sin, a stain on your character, a flaw. While I think it may have been overstated a bit, this philosophy has made me somewhat unique in a sense: I have never carried a balance on a credit card, EVER. I have had only two debts in my life: a car loan one time and a mortgage on my current house. Other than that, I have never bought anything I couldn’t pay for with my existing funds. So debt has never been a headache for me, which is a great gift.
  • Charity begins at home, mixed. I know this may run counter to many people’s beliefs, but another closely held belief of my grandparents was to take care of themselves and their own before others. This philosophy meant that there was no ‘automatic giving’ to charity until everyone in the family was taken care of. They gave (and still give) to their church every week, but I am sure without ever having seen it put to the test that had I been in need for some reason they would have given that money to me, instead. I know this is a somewhat selfish approach, but I think it’s right. Give when you are able. I do not subscribe to the Christian teaching that I should give ALL I own to the poor, and apparently from the number of Mercedes I see in church parking lots I’m not alone in rejecting that teaching. It doesn’t mean you can’t give to charity - I certainly give to several children’s charities - but take care of your family first.

Those points are really just highlights. The important lesson to remember is that anything your family or your friends teach you about finance is valuable. Sometimes you may learn by avoiding their mistakes, sometimes you may learn by taking their advice to heart - but it’s all learning. From my maternal grandparents, I learned to save and to avoid debt but also that sometimes you need to spend money, too, because there ARE things and experiences in life worth the money. The truly important thing was never the money, it was the security the money bought, and being able to give back to their family, that mattered to them.

why I will not live in the northeast forever

A constant topic of conversation I have with my wife Bubelah is where we want - or should - live. We live in a suburb of New York City (the only major city growing in the northeast). Our cost of living is horrific. We have a three-bedroom townhouse that cost just shy of half a million dollars in 2004, pre-boom. Our house would go for almost $600,000 today. I think this topic goes well with an ongoing debate at The Simple Dollar.

When we bought the house, we received an abatement. For those of you not familiar with New Jersey’s blood, er, property tax, municipal governments often give a break to new construction for a set number of years. The way it works is that our house is taxed at the same rate as any other house in our municipality, but the assessed value is reduced by a set percentage. So a house, having been assessed as being worth $400,000, will be taxed as if it had been assessed as $300,000. This tax treatment will continue for another 4 years.

However, once it ends, our property tax will leap upwards. How much depends on the rate at the time and the new assessment. This situation wouldn’t be so bad if not for the fact that we already pay almost $700 per month in property taxes, plus over $200 in association fees (road upkeep, lawn upkeep, snow shoveling, etc. - not a bad deal, actually).

In five years, therefore, we might be paying approximately $1200 per month in taxes and fees. This is before our mortgage of almost $2000 per month. This means that simply to keep the house my after-tax income must be $3200 just to pay for the house. Before paying the utilities, for food, for diapers, for anything else - $3200 after tax or the first $50,000 of my gross income per year goes to housing costs. If we ever paid off the mortgage, we’d still have $1200+ per month to pay for all eternity.

All of this might not be so bad if it wasn’t for the fact that the property tax goes to service municipal debt, a failing school system, broken roads and awful municipal services. We have only two municipal parks in a city of a half million, potholes litter the roads, and large areas of the city aren’t safe after dark. We have concluded that the public schools are not an option for Little Buddy.

My point is that we must really, really, really love living near New York to put up with all of that, right? There are other considerations - Bubelah’s extended family all live in New York, my parents are nearby, and we desperately hope for a continued gentrification of our city (and it is happening in fits and starts). But are we crazy?

follow the Poor Dad sometimes

If you spend any time on personal finance sites, you’ll hear about Rich Dad, Poor Dad. Personally, I would credit it with a tremendous amount of influence on my life since I read it in late 2003. This book changed the way I think about money, about priorities and even about life in general. I plan to review it in the near future.An important distinction, however, is that not all of this change was good. One of the main tenants of Rich Dad is ‘maximizing cash flow’, or attempting to push expenditures as far into the future as possible. A very common way of maximizing cash flow would be to take a balloon mortgage, for example, where payments are low or interest-only for several years then escalate.

At the height of the housing boom we bought our current house. Fervently embracing the concept of maximizing our cash flow, we attempted to get an interest-only monthly floating rate mortgage, which would (at the time) have resulted in sub-$1000 per month payments on our half-million dollar home. After 5 years, the payments would shoot up, but we were convinced we could easily refinance or move or somehow avoid that situation.

Fortunately for us, the neighborhood we were moving into did not meet the lender’s criteria for “aggressive” mortgages. It was too new, and there was not enough payment history for the neighborhood for them to measure the risk of default. Our mortgage application was rejected, and we proceeded to obtain a 30 year mortgage at 5.6%. This meant our payments were almost double what we had hoped, and we were not happy.

Three and a half years after being turned down for the adjustable rate mortgage, we still have regular payments. With the increase in interest rates we would be paying almost the same amount on the ARM that we are paying on our traditional mortgage, but it would all be interest. The balloon payment would be looming, and our cash flow would be no better than it is now.

So in retrospect we were saved from ourselves. Despite the fact that we think we are fairly savvy people about finance (she has a degree in finance and I have an advanced degree in accounting) we lucked out by being turned down for the ARM. I doubt we would have done much with the ‘maximized cash flow’ since our first thought would probably have been to invest in more real estate, again using ARMs. Doing so would have compounded our error, and now we would be facing a mounting avalanche of debt.

I think the moral I take away from this is that even when you follow a particular philosophy or guru, you should always consider a worst-case scenario. Sure, the traditional mortgage has cut into my income and made it difficult to consider vacations and larger purchases. That pales in comparison to the ARM worst-case scenario: being forced out of the house.

As a postscript, I still think that Rich Dad, Poor Dad is a critical read for anyone who lives in America. Kiyosaki makes excellent points about working for income versus investing, and made clear to me for the first time that what I wanted to be able to buy was time, not things. Financial freedom is the goal, although I had never heard it put so plainly. So please don’t read this as an indictment of his book. I highly recommend it, but as with anything else in this life you have to be cautious and conservative when dealing with your home, your family or your health. Without these three things all of the cash in the world will be useless.

Other reading:

Rich Dad, Poor Dad:  What the Rich Teach Their Kids About Money-That the Poor and Middle Class Do Not!

teaching risk tolerance

Random thoughts on investing

I have a lot of thoughts on money, which in my case center not so much around how to spend it as how to save it. I rely heavily on my own prejudices, which are heavily influenced by my cynicism as an auditor who sees crooked finance and operations people every day at big multinational oligarchic companies. And I was heavily influenced by Rich Dad, Poor Dad (although some of my earlier infatuation with Kiyosaki has lessened as I thought more about his advice – more on that later).

Saying there is nothing urgent about saving money for the future is, to put it mildly, famous last words. Better to deal with things when you can do it in a calm and relaxed manner rather than needing to scramble when you’re 65.

…

I am a believer in the US market primarily because there is no real alternative for a corporate employee who has to put most of his savings in a tax-advantaged 401(k) that only really allows cash (money market-type holdings), bond funds and mutual funds as investments.

I have held individual stocks for most of my investing life, but no more. Why? Here’s an example. I was holding Wal-Mart stock. I got it when it was selling at 6. It split 4 or 5 times, went up to 50, and then stagnated for years, paying an awful 3% in dividends which were reinvested.

I took a look at Cigna, a major holding of my very elderly grandparents, recently. I personally think it is utterly crazy for retirees in their eighties to have so much money in a single stock. Cigna right now has a .04/share yield, which considering the $163/share price is effectively $0 yield per year: therefore they are losing 5.25% on 100,000 per year, or 5250. So if there was a capital gains tax hit of 15%, it would take 3 years to get in the black (and that’s simplified since I’m not considering taxes on interest). From a risk perspective, I think an insured money market would be far safer and significantly more liquid. The instant liquidity of cash principal may be important soon, and if they were forced to sell Cigna when it WASN’T selling at near its 52-week high, they could take a huge (imaginary, since it never really existed as a “gain”, only on paper) loss. Cash will not go down (except via inflation, blah blah blah, but that can be effectively hedged with a TIP or a money market, since inflation is not running at 17% – yet). CDs, barring some economic meltdown, are safe and insured.

However, it will take 3-4 years to be in “profit” mode selling off a huge stock holding like that, so it might not be worth it from that perspective. But in the long run at 5-6% in a CD/online savings account they could squeeze out another $5000 or so of cash a year.

The general fragility of the US economic system is a big bugaboo for Bubelah (my wife, at least what I’ll call her on this blog) and me. We have spent some time trying to figure out how to legally open a Euro bank account to start shifting our money out of the US. People put a great deal of reliance, for example, on the Chinese not calling their 500 billion in loans to the US. And I got really spooked by our stock-concentrated savings a couple of years ago - actually maybe a year and a half ago - watching a documentary about Enron. They were issuing “buy” recommendations on that while unbeknownst to the analysts, regulators, etc. Jeff Skilling was dancing around drunk telling his staff to make up fake invoices inflating sales. Is any other company out there as bad as Enron? Beats me. Could be. Maybe not. Maybe so. Probably so, in fact – human nature being what it is there’s always a guy out there who thinks he can game the system.

My thinking with finances has therefore been that rather than trying to think I can outsmart the thieves, the traders, the investment banks with their Crays making 8.2 million trades per second, better to plow everything into high-return cash and mutual funds that mimic the market, and then forget about it. If the US crashes, we’re in a bad spot, but if 5 of the Fortune 500 turned into Enrons tomorrow it would only be 1% of our portfolio. If someone holds a half dozen stocks, it’s 15% of theirs.

It’s tricky. Obviously I’m not retired and living off my investment income in Bermuda so it’s not like I know it all.

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