Class In America

I stumbled onto a special feature from the New York Times about Class in America. It seemed like a good follow up to my post last week about Wealth Porn. I learned some interesting things by reading the articles and running some numbers in their tools. First, based on the How Class Works calculator I rank in the 74th percentile of Americans. My education and salary both push me high up the scale while my net worth brings me down a good bit. If I put my parents on the same scale, they both have masters degrees and make upper middle class salaries; they are at the 90th percentile. I think with enough time I will catch up to them, but I think it is unlikely for me to surpass the level of my parents. I started near the top and I have followed in my parents foot steps.

Another graphic shows income mobility in America from 1988 to 1998. It clearly demonstrates that a number of people from the very bottom are able to rise to the very top of the scale. It also shows that those in the middle and lower middle ranges have an equal probability to end up in any of the income categories with about half improving their standing. However, this does not mean that everyone has an equal likelihood to end up at the top. Only about half of those in the lowest group are able to move up the scale. Those who had the early advantage of starting in the top bracket continue to populate about half of the of the top bracket 10 years later. Thus, it is equally likely for someone at the top to fall as it it for someone at the bottom to move up. That seems to me like the American Dream is alive and well.

Some of what I read was encouraging. Some of it made me think. I recommend everyone take a minute to read some of the content and explore the tools. Comments about class in America and class mobility are welcomed.

I have been featured in the following carnivals lately that I would like to share with you:

• Carnival of Personal Finance hosted by The Financial Blogger
• Carnival of Homeowners hosted by Homeowners Insurance Lowdown
• Festival of Frugality hosted by Mighty Bargain Hunter

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Blog Roundup - Adfecto's Sick Edition

I've been sick all week. It started with some sniffles on Sunday and by Tuesday morning I couldn't get myself out of bed. I spent two days of sick leave from work (Tuesday and Wednesday) but today I had to drag myself into the office. I don't really feel up to writing anything new and original but I have spent a good deal of time reading my long list of favorite blogs (while drinking gallons of hot tea).

Here are some of the posts that caught my interest the most:

J.D. at Get Rich Slowly wrote about The Value of a College Education. I completely agree with his thoughts. When I sat down to write a post about my money decisions, I immediately knew that my educational choices were far and away my best. I got a BA in Computer Engineering and then took a job with an employer that paid for me to get a MS in Software Engineering. To get here it is/was a lot of hard work, long nights, and Red Bull but it has paid off. This path is really only for those who enjoyed taking apart electronics when they were kids, begged for Legos and erector sets for Christmas, and would rather learn C++ than Spanish. My total bill for education was near $100k but 2.5 years out of school I’ve made back every penny.

Free Money Finance added a helpful post about How I Paid Off My Mortgage. I can only imagine what it would be like to be totally debt free. The debate of paying off a mortgage early versus investing is explicitly left out of the discussion, but reading the post made me question my current plan to hold a mortgage up until right before I retire. Right now it seems like it would be nearly impossible to have the type of house I want, with enough room for a family, in the right neighborhood, and so on for an amount I could pay in cash.

Lastly, Plonkee Monkey wrote a great set of posts about Planning for Retirement: Buy-to-Let vs Pensions. This analysis (for those in the American market) compares the overall retirement income produced from rental property compared with investing in stocks and bonds. While the numbers and assumptions differ from what I estimate for my local market, the conclusion ends up being the same. Rental real estate is a valid way to invest your money and CAN beat the stock market. However, it is not for me! Renting out homes and apartments requires a high initial investment, high risk, poor diversification, and worst of all... a LOT of work. I've mulled over the decision to become a landlord dozens of times and every time I decide that the payoff just isn't worth it. You should still check out the articles yourself and see if it could work for you.

Now I am going to drink one last mug of tea and get to bed. Hopefully I will shake this germ and be back to my old self soon.

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My Money Decisions: The Good, The Bad, and The Ugly

Like everyone else in our consumer culture, I have made financial decisions that make me cringe. My bad decisions have helped me pile up a sizable amount of consumer debt. My good decisions have put me on a path to become wealthy. Today I'll share some of the highlights of my financial past that have brought me to where I am today.

Here are some of The Good decisions I have made:

• Education - I always worked hard in school and kept a high GPA. This led to me get into engineering school at several colleges (some prestigious and some not as much), and it allowed me to choose a school that fit my budget (State U). I worked even harder in college to graduate with better than a 3.5 GPA in Computer Engineering. That performance gave me a number of competitive employment options, but I selected the one that paid for my entire Masters Degree and permitted me to take courses by teleconference during my work hours. While job paid only 75% of what my peers got, it covered grad school expenses and that more than made up for the lower pay. Again I excelled and earned a 3.9 GPA in my graduate studies. Now, after proving myself on the job and in the classroom my salary has nearly doubled from what it was when I was hired (and is significantly higher than any of my old classmates).
• Entrepreneurship - I started my first business when I was 11 years old. I ran a neighborhood recycling service to collect the paper, glass, and plastic from my subscribers and take them to the county recycling center each Tuesday. We did not have curb-side pickup of recyclables. I saw an opportunity that my upper middle class neighbors needed to have filled and made it work for me. I charged $100 per year to subscribe or I would bill my clients $10 per month. My dad made sure I learned to use a computer (back in 1994) to make fliers in Word Perfect, invoices in a spreadsheet, and budgets in Quicken. When I wanted to travel to Europe on a school trip at 15, I paid my own way from the earnings of my business. I spent my money to buy for myself the things other parents gave to their kids, and I learned what it means to earn a dollar (with guidance and help from my parents).
• Work - I got my first real job when my business no longer was viable because sanitation department sponsored curb-side recycling made my business model obsolete. The first job I took was washing dishes at a little hole in the wall restaurant where some of my friends worked. I hated it. I learned after only six weeks working there that working hard is not nearly as rewarding as working smart. After talking to my dad about this, he suggested I find something I love and work in that industry. We came up with a plan for me to take an internship at a computer repair shop. I pitched my services free of charge to every shop in town in exchange for them teaching me how to fix computers. After a number of rejections I finally found a shop that would take me. My conditions were that I would work for three months free of charge, and if I met expectations I would be hired as a full computer tech. I learned quickly and was soon building new systems and diagnosing botched Windows 98 installations. I was hired on at $10 per hour at age 17. I've worked in the computer industry making at least that much per hour ever since.
• Investing - I got my first taste of investing in middle school when, on a whim, I joined the Stock Market Club. I was a nerd who was a member of the math team, the science quiz bowl team, the chess team, and the band. Stock market club seemed fun and exciting to me (plus my other friends were talking about joining too). We each managed a hypothetical $10k portfolio and checked it each day using the news paper. I selected three stocks for my portfolio: Disney, Dollar General, and Maytag. I picked Disney because I had just gone to Disney World for the first time and Dad said the place, "took all your money and convinced you it was your idea." I picked Dollar General because they had just opened a new store in my town and it was a bargain at only $1 a share. I picked Maytag because that's the company my dad worked for at the time and it seemed safe. I hit the jackpot when Dollar General doubled during our semester long competition, and I easily won. I never forgot the fun and money making power of the stock market. Today my approach is a little more rational, using my 401(k) and Roth IRA to buy index funds in diversified asset classes.

Here are some of The Bad decisions I have made:

• Consumer Debt - Gradually over the last six years I have built up a sizable pile of consumer debt. Frequently it is for unplanned expenses like dental bills, car repairs, and sporadic taxes. These types of expenses should have been paid by my emergency fund which at the time I had yet to set up. I also used debt to buy home furnishings, a flat panel TV, and a car. Thankfully these things were generally financed at below market interest rates (often 0%) and will outlast the length of the loan, but they still have added up to a significant amount hanging over my head.
  
• Bad Business Venture (MLM) - My wife and I tried a Multi-Level Marketing (aka pyramid scheme) home business. We tried unsuccessfully to sell beauty products and health supplements. I let my normally cynical business sense be swayed by the Mercedes and gorgeous home that our "up line" (my wife's aunt) bought with the business. I wrote a business plan and tried to do everything right, but what I missed was that the target demographic for the products is wealthy, vain older women, and I was a young, overweight man and my wife is introverted and shy. We had trouble finding clients in our sphere of influence and had terrible sales results when we did manage to get a captive audience. The $2,000 in 'initial' inventory is sitting in a closet while I pay off the loan the hard way.

Here are some The Ugly decisions I have made:

• Weight Gain - I have been overweight my whole life. It has varied from just being a slightly chunky kid to being flat-out-fat at the end of high school. I have never enjoyed team sports much because I'm not very good at them, and I always caught flack from the jock types at school. I also hate running more than about anything else in the world. M7y lifestyle is sedentary because working as a computer engineer (and now blogger) means I sit in front of a computer terminal about 90% of my waking hours. During the last two years of college I took up racquetball and managed to loose a LOT of weight and reach a BMI within the 'normal' category. I was at my target weight and felt great. All of that progress was lost two years ago when I tore my ACL while I playing and needed knee surgery . Since then I have sat on my butt making excuses while I've gain a ton of weight back. I can feel it sapping my energy away. Being overweight is terrible for my pocketbook in a number of ways and poor health later in life may my limit my ability to enjoy the wealth I am working so hard to build now. This is my worst personal finance decision that I intend to fix ASAP.

Check out these other great personal finance blogs that have also recently posted about their Best and Worst Personal Finance Decisions.

6 Financial Lessons - Don't Learn The Hard Way - from Gather Little by Little

My Least Bad and Least Good Financial Decisions - from Plonkee Money

My Best and Worst Financial Decisions - from Moolanomy

Best and Worst Financial Decisions: From the Trenches - from I've Paid for this Twice Already

My Best and Worst Financial Decisions: They Might Surprise You - from Being Frugal

My Best and Worst Financial Decisions - from ChristianPF

My Best and Worst Financial Decisions - from The Dough Roller

One good financial decision and a whole lotta bad - from DebtFREE Revolution

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It's The Big Things Stupid!

One of the biggest misconceptions that I read all the time related to personal finance is that the little choices we make about money are the key to fixing our financial ills. Every time I turn around someone tells me the reason I am broke is that I buy my coffee every morning and have a couple cans of soda every day; that the little things sink our financial boat. I don't buy it. I think the reason most people are broke is that they don't do the BIG things right. Think about it, what has more effect on your overall financial health, your car buying habits or your coffee habits?

Buying a car is a Big Thing in our financial lives. When a person finances a $40k car for 60 months at 8% (or even higher) interest the monthly payments are over $800 a month not even including the insurance, maintenance, or taxes. Sadly I have a neighbor that lives up the street who has $200k worth of cars parked in front of his $180k house for himself, his wife, and his 3 driving age children. You could drink 6 designer coffees every day to catch up with what is wasted for each of his 5 cars. You could buy a house 5 miles closer to the city center and install a full roof of solar panels. Or you could continue to throw you money away for the speeding tickets that a V-8 turbo charged engine brings you. The same consequences are true for buying a house or leasing an apartment which exceeds the needs of its occupants. The picture gets even worse when you consider boats, ATVs, jet skis, or other pricey toys bought to keep up with the Joneses.

Another Big Thing that will ultimately sink your financial ship that so few people consider the free money that comes from a 401(k), IRA, or Roth IRA plan. According to this paper by the Social Security Administration the 401(k) participation rate was 67% and the Traditional IRA participation rate was only 8% (Roth IRAs were not included in the analysis). The choice to skip using these vehicles to contribute to your quest for instant gratification is the loosing end of a million dollar choice. That choice has consequences which far outweigh whether or not you uses coupons when buying your OJ at the local grocery store. It has even been shown that the amount contributed and the particular investments selected within these retirement accounts is not nearly as important as simply contributing NOW.

The final Big Thing that I think too many people get wrong is they miss the opportunities that education presents. A good paying middle class job for the high school graduate is a thing of the past. According to this Census Bureau paper investing in a college degree is another million dollar decision that people fail to make. Public and private assistance for college is available for nearly everyone in some form or fashion. Federal Tax incentives such as the Lifetime Learning Credit and Hope Credit apply to everyone who has earned income and wants to attend higher education.

I don't abdicate completely forgetting the little things, but I think if you make good choices about the Big Things you will end up doing better than most. So far I feel like I've gotten most of the big things right, but screwed up plenty of smaller things. Despite these mistakes which might amount to a few hundred dollars here and a couple thousands dollars there, I know that buying a house I can afford, striving to pay cash for my reliable (not luxurious) transportation, investing as much as I can stand (and then a little more till it feels tight), and taking lifetime learning to heart I build my wealth and bring prosperity.

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