Tag: saving

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.

Consolidating accounts

stack of credit cards
Creative Commons License photo credit: kalleboo

One of the best financial moves I made had very little actual net worth impact, but significantly improved my quality of life. After Bubelah and I got married, we did a quick inventory of our bank accounts, credit cards and brokerage accounts. I don’t remember the exact numbers, but between us we had at least four bank accounts, 20+ credit cards and approximately 12 brokerage accounts (and I’m including company 401(k) plans, IRAs and so forth). I had three direct-investment stock plans where the stock was held by the company, too.

We decided to consolidate to two banks, two brokerages and effectively to four credit cards. Why? Here are our reasons:

Banking

We chose our bank for our business and personal checking for two reasons: they have a large number of physical locations in the New York City metropolitan area and their account fees were reasonable (basically free checking). I could not think of any particular reasons to go with another bank, simply because we saw their branches everywhere, and in particular several convenient to our home. The fees were fine, because as long as we maintain some reasonable minimums (approximately $500 per account) we don’t pay anything. We don’t receive interest but we try to keep a bare minimum in these accounts.

We chose an online bank for our emergency fund and other savings. We could just as easily have used ING or Citibank, but at the time we decided to open an account HSBC was offering the best rates. As we have extra money in the checking account we transfer it into our online savings account. HSBC (similar to other online high yield banks) has a structure friendly to people with frugal natures. The account pays a very respectable interest rate, and it takes some small effort to withdraw funds, meaning spur-of-the-moment withdrawals are unlikely. We understand that the money in this account is not returning what our stock accounts are, but this is the conservative, worst-case scenario money so we don’t mind have a stable rate of return in exchange for very low risk. You can learn more about HSBC’s savings account here. I highly recommend it.

Brokerages

We went with two separate brokerages for our accounts. We ended up going with two brokerages for several reasons:

  1. I started moving my brokerage and IRAs before Bubelah did. I started this process because I was unhappy with my brick-and-mortar brokerage’s high commissions and awful online experience. The broker I chose, Ameritrade (now TDAmeritrade) had much lower commissions ($7.95/trade) and a much more pleasant online interaction. I am not a day trader anymore, so the commissions were not a critical factor, but I don’t rely on a broker to make trades for me and so I felt little need for expensive ‘actual person’ trading. Bubelah chose another low-cost online broker with similar commissions.
  2. We had to keep separate IRAs so we thought it would be simpler to keep one brokerage account and several IRAs linked without a lot of confusion over which account belonged to whom.

Both of us had a vague fear of putting all our investment assets in one basket. While I have no reason whatsoever to worry about either of these firms, we didn’t want to be in a position where everything we hoped to use for retirement was held by one (virtual) company.

Credit cards

Our consolidation of cards was a mixed success. The easy part was the store cards. We canceled all of them. We kept one card as our ‘main’ card. We had to keep a debit card associated with our bank account, and I had a flexible spending account card through my work. Other than that, we kept three more credit cards, for different reasons.

  1. A card for business purposes. Bubelah runs an online business so we decided we should keep any purchases necessary for the business on a separate card. We have a separate checking account at our bank, too.
  2. A ‘legacy’ card for Bubelah, because of the points. She had been using the same card for years and had accumulated a large number of points/miles on the card, and wasn’t willing to lose them all. Plus, it was in her name alone and we decided it made sense for us each to have our “own” card which would not be a joint account.
  3. One card in my name only, for the same reason - I wanted something in my name only, because other than this card every single thing we own is joint.

The biggest benefit to the whole process is saving time and increasing awareness of spending. When you get one huge bill each month and know you have to pay it off in full, it makes you think twice before spending. We always pay the entire balance each month, so it’s almost like spending cash. However, you get spreadsheet downloads showing when/where/what you bought, and you get points which we have used to save thousands on hotels, flights and so on. We have put almost all of our spending on the card, including automatic charges (cell phones, utilities, etc.). I think it helps to see all of your spending in one place, and it greatly simplifies bill-paying at the end of the month. We only write 1 physical check each month. All of our other spending is through automatic bill payment on our bank or through our main card. Even the mortgage is automatically withdrawn.

If you haven’t already considered consolidating your accounts, consider this: it will take a tremendous amount of time to track down all of your information, move your accounts (particularly investment accounts) and close unneeded ones, but the time savings on the other end of this process are tremendous. Where once we spent hours flipping through paper bills for our dozen credit cards and trying to figure out which account to pay it out of, we now just automatically pay our one credit card and get two statements for our investments. We have a clearer picture of our spending by seeing it summarized in one credit card per month. I believe anyone could benefit from making their finances simpler and reducing the time spent on them.

Pay down debt or invest


There’s a debate you read often on personal finance blogs: if you have a large sum of money, should you use it to pay down debt or invest? The answer is usually dependent on the person’s risk tolerance, but I think it also depends on the nature of the debt.

Debt is a bad thing in most cases. Something you “own” like a house is actually not owned by you. The house is owned by a bank. The bank is just letting you use it. Why? Fail to pay for a month or two, depending on the mortgage terms, and the bank will take back the house. The bank can’t just take 1/360th of the house back for each month you miss, so they will repossess the whole thing and the law will be on their side. To me, this means the bank owns the house.

However, there are better kinds of debt; take a student loan. If you pay for your education with a loan, it can’t be taken away later. You will have that diploma and although you can have your credit rating wrecked or your wages garnisheed by failing to pay that debt, you’ll always have that education. That’s quite different from using debt to own things.

Now if you have credit card debt, pay it down before you spend a dime on almost anything else in your life except maybe health insurance. Any debt where you pay 18%+ in interest is bad debt.

In comparing debt to investing, no investment in anything, ever, is guaranteed. We could plunge into a 20-year depression in October of this year. Unlikely, but the US has a number of unfavorable situations that could cause this to happen, so it is not impossible. If that happens, all of my index funds and money markets won’t be worth much. Investing has no guaranteed rate of return, and in fact can have a negative rate of return quite easily. If you bought Enron stock, your net return was -100%. If you have a stock paying 2% dividends per year with a stagnant price per share, you are not doing as well as you could parking that money in a high-yield savings account.

However, if you can pay down debt you have a guaranteed rate of return. If I have a 5.6% mortgage (I do, lucky me), then every bit of principal paid early is a reduction in the amount of interest I’ll eventually owe. Once that payment’s in, that interest is gone. This makes wonderful sense for something you want to ‘own’, like a house. However, if you look at my student loan example, what’s the advantage of paying early? Nothing, really. I already fully “own” the asset (my knowledge and diploma).

To sum these examples up, what really matters is ownership. If you can pay down debt to own something, I think that will beat investing any day. Sure, the investment might return 11% per year for 15 years. However, it might not, and many, many students of the market have been burned trying to beat it – better students than I. So I think the goal is to look at whether paying down debt increases your “true” assets or just stifles your cash flow by hurrying up payments for something you already own.

So that’s my opinion in the debt vs. investing debate. It does depend on the individual, but I think I would rather be debt-free and investment-poor than highly leveraged with a huge portfolio. If that was a smart idea, people would be using their home equity loans to invest in the stock market, right?

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.

1 … 13 14 15