CNN Money is running a series a short stories from those who are struggling financially. In total there are 26 articles that cover a diverse mix of Americans. The common theme is that broad swaths of our population have been hit by hard economic times. However, all of these stories remind me how important it is to recognize the difference between a collection of anecdotes about individuals economic hardship and statistically important analysis of the whole economy.
After reading through all of the anecdotes, the most common hardships are job loss, health problems, and single parent households. What struck me is that even in good economic times these problems are very real and likely to hurt the prosperity of ANY household. As it turns out, unemployment is still at solid levels historically speaking, less than 5%. A net loss of 63,000 jobs in February may significantly impact individual families, but it has almost no effect on the broader economy. The past nine months of the credit crunch have not made it any harder to be a single parent or any more likely for health to prevent someone for working.
There also seems to be a big difference in the outcomes for those who have prepared themselves and those who are oblivious to the basics of personal finance. Simply having an emergency fund and a college degree can insulate most people from the threat of unemployment. Those who have a degree are less than half as likely as the general population to become unemployed and with a graduate degree or beyond it is less than a 2% chance of becoming unemployed. Finally, if you have little or no debt, there is almost no risk of having significant hardship during a downturn. Even part time work can put food on your table as long as you don't have debt payments getting in the way.
Another observation I have made recently is that the media, in all of its forms, is fixated on the bad news rather than the reality of the situation. By reporting on the misfortune of a tiny subset of the population, it skews our confidence in both the system and our own prospects. We empathize with those who are struggling and worry that we may be next. By reporting the monthly job data with a headline of 63,000 Jobs Lost in February rather than Unemployment Remains Virtually Unchanged at Historic Lows a reporter gets more attention but also puts a huge spin on the "news." While the spin may sell more papers and drum up more readers, it is not a good basis for making financial decisions.
Another observation I made is that not everyone on the series was actually struggling. One profile is about a middle class family with a self employed bread winner. They bought a house they could afford with a 30 year fixed mortgage and have taken personal responsibility for their financial future. Future tax increases are their biggest financial worry. Another profile covers a couple who are nearing retirement. They have saved diligently and lived a life within their means. Their biggest financial concern is not about today, but rather the impact of loose fiscal policy and Wall Street shenanigans which may eat into their buying power. These people are responsible with their money and are in a position to prosper in the future. Their worries about politics and economic policy are ones that I share, but because of their good financial choices they are far ahead of the game. Even in tough times they are likely to have a roof over their heads and food on the table. It is simply a question of whether they will live "the dream" or "just get by." That is a good problem to have.
The point of this post is to point out that there are reasons that some people are struggling and others are not, and very little of it has to do with what is found in newspaper headlines. Rather than worrying about national or global economic conditions we should instead focus on the things we can control: living within our means and making good life choices. If we do that individually then there is little need for pessimism or doubt about the future.
Tuesday, March 25, 2008
Anecdotes from the Downturn
Friday, March 21, 2008
March Money Madness
The pinnacle of the college basketball season is upon us, and like many people I have found myself checking stats and picking brackets. In years past I have put some cash into various betting pools and wagers. This year I have decided to enter only for fun but I now regret that decision. Why? Paying with nothing on the line isn't very much fun at all.
It is my theory, and I'm not psychologist, that the small bets I've made in the past give me a personal stake in the outcome of the games. If I don't care who wins I don't enjoy watching as much. Who cares if Butler or South Alabama win in the first round? I do because I've got $5 on Butler. Why did I bet on them? Because I have a cousin that went there. Does that make logical or mathematical sense, of course not. It does however make March Madness more fun.
Next question: How much should I spend to add to my b-ball enjoyment these next few weeks? If history is a determination, I normally enter a couple $5 pools, maybe one $20 pool and then I'd be willing to take a few $10 side bets too. All told I have never put more than a couple hundred bucks, but usually it is around $50. I'd say it is enough to make it interesting but not enough to make me go broke. However, partially because of my new attempt at financial responsibility and partially because of fewer opportunities this year the total is ZERO. I think the right number is somewhere in between, so more than $0 but less than $100.
Next year I will try to enter one "high dollar" $20 pool to get the endorphins pumping and that's it. $20 is less than my wife and I spend on a quick dinner out, but it will magnify my overall enjoyment of March Madness several times over. I will now have a reason to root during Drake vs. Western Kentucky and West Virgina vs. Arizona. I will celebrate each bucket a little more and bemoan every missed call just that much louder. Over three weeks of basketball I'll have hours of enjoyment from a very small "investment" in betting pool.
Who knows, if I win, I might even be able to pay down some a bit more of my bad debt. Comments and suggestions welcome. Boo Carolina!
Wednesday, March 19, 2008
How High is Inflation Really?
If we stop at the gas station to fill up the tank it is obvious that prices have done nothing but go up, up, up these days. What is even more worrying is that it isn't only fuel costs that have skyrocketed. Two years ago it would cost about $100 for a trip to the grocery store. This would provide all of the staples for two weeks. In a month, the total bill would be about $250. Lately I am budgeting $300 a month and finding that I consistently go over budget. It isn't a scientific measure by any means but it feels to me like my buying power has dropped by as much as 25% in two years. How is that possible?
The official figures for the Producer Price Index, which measures the cost of goods at the wholesale level, rose 0.3% in February and 1.0% in January as reported by Forbes. Year over year inflation clocked in at a 6.4% rate. This trend seems to be accelerating to an annual rate in the neighborhood of 7.8% for 2008 based on the most recent readings. Of course, the policy makers and talking heads bring up that "core" inflation increased at a 2.4% rate year over year. Core inflation my @$$. The core inflation rate excludes the cost of food and energy, and be honest, that is completely idiotic. Exactly what matters to the average person is the cost of FOOD and ENERGY.
Now, what do these inflation numbers mean to you? It means that if you haven't gotten a 6.4% raise in the last 12 months that you are loosing ground, going backwards, in the earnings game. Are you in line for a 7.8% raise in 2008? If not you should start planning now for how you will cut your spending and reduce fixed expenses. The money won't go as far as it once did and something has got to go. I feel fortunate, in that it is very likely I will get a raise during 2008 that will be somewhere around 4-5%, but my plan to increase my Roth IRA savings by half that amount (2.5%) may be sidelined in the effort to keep up with rapidly rising prices. If that is happening to me, I know it is happening to many people all around the country. We will be the lucky ones; I don't even want to think about how tough it would be to face this inflation on a fixed income.
Another important note is that I have heard a great deal of chatter and online commentary that inflation numbers (which already appear elevated) from the Labor Department are still understating inflation. I am not prepared or qualified to debate the issue of exactly what the rate may be, but obviously it could be a scary time we do indeed return to double digit inflation as some have suggested. The bottom line is that inflation has reared its ugly head and if it is 5%, 10%, or 15% it will play a big part in the economic story of the next several years.
Now I want to point out that the media and the government are often wrong about these things as much as they are right. There is also a component of self fulfilling prophesy whereby the more we talk about high inflation the more it happens. I don't want to be a Chicken Little and add more fuel to the fire so here is my advice, "prepare for the worst but hope for the best."
Monday, March 10, 2008
House Lust
This weekend we had some great weather, and so we spent a few hours yesterday afternoon gawking at the pretty houses. I nearly went into architecture, and even though I did not choose it as my career, I still draw floor plans and elevations as a hobby. There are dozens of open houses all over the area and if something really gets our attention we will stop and take a look.
Yesterday we drove through several neighborhoods where prices ranged from $280-500k. Of course in those price ranges we found a lot to like about the houses. One in particular really stood out and I immediately started running the numbers in my head. Could I ever afford it?
In our area basic housing will run around $80 per square foot. That will get you a house that is a little older (built in the 50's and 60's) and may need some touch ups but is in generally good shape. For $100 per square foot (the range for our house), you can get a mint condition house with some moderate upgrades. In the $115-125 per square foot price point you will find upgrades like granite counter tops, well manicured lawns, and real wood floors.
Our next house would ideally have four bedrooms and an office. In the perfect world there would be a basement or bonus room that would serve as the playroom for the (still hypothetical) kids. We can probably meet our bare minimum requirements for $280k but once we pile on a few items from our wish list it is more realistically a $350,000+ price tag. However, we don't plan to buy a house or move until our family has grown and will need more space.
Thus, cruising for a house is in some ways similar to going to the mall "just to look," but the key difference is that thankfully it isn't possible to simply plunk down the Visa and make an impulse purchase. There have been a few times that if it were that easy I may have been smitten enough to reach for my wallet.
I really enjoy these casual browsing sessions. It is great to learn more about the latest trends and get ideas for our own home. These dream homes also give me motivation to do more outside my day job to move toward achieving the dream. However, it can be frustrating to when I realize that it would take a massive windfall to make the "ideal house" fit our budget. I recommend spending an inexpensive afternoon taking stock of the local housing options but be sure to leave the pen at home. It isn't inexpensive recreation if you go off and buy a house!
Monday, February 11, 2008
Rural Living Headaches
When I bought a house back in May '07 I didn't really think of the location as rural. I am only 8 miles from work and 2 miles from the nearest convenience store. It takes about 10 minutes to get to the main commercial district with a Wal Mart, Target, Best Buy and all the usual big box stores. The same 10 minute drive can put you at the door of at least 30 eateries which cover most of the major world cuisines and every chain restaurant in the book. Our neighborhood is just outside the city limits so we are blessed with slightly lower property taxes, but still close civilization. However, I have found a few problems with our out of town location.
The first snag is that our water and sewer bill is higher than it is for city dwellers because we do not get these utilities from the municipal source. Instead we are a part of a community water coop. The rates are not exorbitant but they are about 40% higher, which makes for an extra $18 per month expense. I have also found that a monthly visit from the pest control service has been a necessary expense. In the city I never paid to have the exterminator on call, but just a little outside the city limits the regular visits from a large mouse, mole, snake, and bug population reminds us regularly of the not-too-distant history of our property as a cotton field. This amounts to an extra $35 per month bill that I failed to plan for when considering the costs of the new house.
The final, and most painful, added cost of our semi-rural dwelling is the complexity of digital services. Cable TV, internet, and telephone service are years behind what was available at all of my previous homes. The only phone service is old fashion land line from Ma Bell (at $40 per month with Caller ID and Call Waiting). The only television options come from the two satellite providers: DirectTV and EchoStar (Dish Network). We had been promised by the builder that the neighborhood would be wired for cable TV (with one provider available), but that has yet to materialize. I spent the first two months we lived in the new house making daily calls to the local cable installers to find out when service could be installed. Each day I got a different answer so I decided they did not truly want my business and picked the Dish ($81 per month including HD Service and Sports Package).
Next on the list is internet service. It is such a huge mess that could be its an entire post on its own. To make a long story short, AT&T does not offer DSL at the moment. The cable company will one day offer service, but for now it suffers from the same problem as cable TV service so all I get is the runaround. The satellite companies do not offer a very compelling product at the moment. Finally, a local company, sensing this market opening, offered a 900 mHz wireless solution.
I decided to give the local company a shot with wireless and was able to negotiate a reasonable price of $40 (plus tax) all inclusive. Normally there are high start up costs to buy equipment or an equipment rental fee for this type of product, but I worked my way up the chain and got them waived. After installing equipment in the attic and running a new piece of cable through the wall I was all set to surf the web.
Now I have telephone, TV, and internet from three different vendors; each sending me a monthly bill. If you add all of those costs up, I spend $165.00 each month for my technology needs. That is more than any of my other utilities (except natural gas during the winter). At my apartment I spent $99 a month for more channels, more bandwidth, and more features. Ugh.
Now, to make matters worse, since Dec 31 my internet connection has been down about 85% of the time. My wireless internet company had a series of equipment failures and network interruptions that has made it a complete crap shoot as to whether the internet would work or not. This is the reason I'd never go into the ISP business. Reliability is important for these services and so far my provider has gotten a failing grade. This month I've often had to scurry off to the library to try and manage my eBay auctions and post to Aspire 2 Wealth.
This poor quality of service has doubled my turn around time for shipping eBay items (which may result in the dreaded negative feedback) and forced me to cut back on my blogging too. Who knows, there may have even been a few loyal readers who got bored waiting for a new blog post and dropped me from their RSS feed. I can't imagine living, much less running a business, in the third world where I may or may not have electricity from day to day, and reliable internet connections are rare (if they exist at all). I didn't think I would have this type of experience only a stone throw away from the city limits. The whole thing has been maddening!
I'm sorry the posts have been less frequent lately, but in this case there is also a useful reminder about the consequences of rural services. Learn from my mistake and look into these types of things a little better than taking the word of a developer that, "of course the neighborhood will have cable and high speed" when you are in the market from a new home.
Please be sure to check out the archives and check out the rest of what Aspire 2 Wealth has to offer during this time of intermittent posting. Thanks for reading; wish me luck.
Thursday, February 7, 2008
Ninja Bill Part Duex
For the second time within a week I have been hit with a sizable unexpected expense. I picked up the term ninja bill from other bloggers, and it means any expense, for which you had not budgeted, that sneaks up on you. The first ninja bill of the week is some car repairs for my wife's Dodge Caliber (you can read more about it here: Dreaded Ninja Bill: Car Repair). My utility bills are my most recent unexpected expense.
I will start with a little history, my wife and I purchased our first home at then end of May, 2007. Since our purchase, we have had very little variation of our utility expenses. The water and sewer bill comes from the local coop, and it has been within a few cents of $45 every month. Our trash service, electricity, and natural gas are all provided by the city utility company. This bill has been was consistently around $150 for May-July and September-November. In August the bill peaked slightly at $180.
Base on my first six months of usage, I set up my budget for the gas, electric, and trash bill to be $180. That covered my peak usage during that time and if the bill turned out to be lower I would simply have a little cash left over at the end of the month. Starting in late November our gas furnace started running regularly. The bill for December jumped up to $210 with over half of that being the cost of natural gas to heat the house.
Now, I live in the South and had never expected it to cost more to heat my house in December than it would to cool it in August. It made sense to me that year round average temperatures run about 75. In the summer it is normally in the upper 90's and in the winter it is normally in the lower 50's. Yes it can drop down to freezing for a night or two but not very often; about as often as it jumps into the low 100's in August. The bills from my apartment jumped between $110 in the spring and fall and $150 in the summer and winter. There was very little difference between heating and cooling. Apparently heating with gas is much more expensive than cooling with electric A/C!
So to continue the story, yesterday I got my bill for January. I had to do a triple take because I could not believe what I saw. $324! That is almost double my baseline utility costs. The natural gas alone was 70% of the total cost. I really wish now that I had pushed for an electric heat pump in the new house. I also got a water and sewer bill for $54 which is a 20% jump from every other month we've lived in the house. In all, my utilities this month are $153 more than budgeted. Ouch.
Thankfully, I have the money to pay the bill. I've been selling unused items on eBay and it just so happens I have an extra $400 this month. I had planned to use it to accelerate paying off my credit cards, but in this case my debt snowball will have to wait. Now I realize that $324 is nothing compared to the bills all of you Yankees face each winter, so please don't get too mad at me for complaining. The real message of this post is to remind people to budget for realities like cold weather in winter (Duh!) and keep from getting smacked with a ninja bill like me. For the future when I get an nice low $150 utility bill I will make sure to bank the savings to keep me above water when I get a whopper like January.
Monday, February 4, 2008
Dreaded Ninja Bill - Car Repair
This past Friday I took my wife's car into the dealer for service. It had been acting up, and so I wanted to get the problem fixed before we take a few moderate distance road trips over the next few weeks. When you apply the break at highway speeds the steering wheel would shake and vibrate. At slow speeds I could detect uneven breaking. I have limited knowledge of cars, but I was pretty sure the brake rotors were warped.
This car has a short history of warped rotors. After only 7,000 miles of driving I had to take it in with virtually the same problem. It was covered by the warranty and I walked out the door free of charge. Now, at 27,000 miles the problem has returned. Because I have a 30,000 mile bumper-to-bumper, and based on how this was resolved last time, I was ready to have the problem fixed under warranty again. This time however, I learned that brakes are only warrantied for one year or 12,000 miles. I am going to owe $180 for new rotors, $90 for new brake pads, and $130 for labor. Hello ninja bill. I tried to argue that brake rotors should last longer than 7,000 or 20,000 miles (I've heard at least 30-50k miles depending on driving style and conditions). I'm not super happy about the $130 labor charge either. I can maybe understand paying for parts which need to be [prematurely] replaced due to wear and tear, but the labor should be covered for a vehicle that is under warranty as far as I'm concerned.
The service has not actually been completed yet because the dealer did not have the parts in stock. This strikes me as odd because brake rotors and pads are very basic components. The Caliber has also become a very common car on the roads these days; one would think Dodge would stock basic parts for their own cars. Anyway, the parts were ordered and I have an appointment for this coming Friday to have them installed.
As well as the dealership, I have been considering another options to get my car fixed. A friend has offered to help me do the installation myself, and I found after market brake rotors for $39.99 and break pads for $49.99 (set of 4) from a major auto parts supplier. This would obviously save a lot of money, but I don't know if the parts are equivalent quality to the official Dodge MOPAR brand parts. I have found mixed reviews of after market brake parts from a few Google searches. I am also a little uncertain about my abilities and the work required to install them myself. I have always justified paying a mechanic by saying, "people pay me $50/hour to fix their computers so I can afford to pay them $50/hour to fix my car." We each specialize in our own areas and pay for that level of expertise.
For now I have both the dealership and the auto parts store ordering the rotors and pads I will need. Sometime soon I need to make a decision about spending $400 to have the work done by a professional with name brand parts or do it myself with third party parts for $140 and an afternoon of my own labor. Decisions, decisions... Comments and suggestions welcomed.
On a completely different note, today the Carnival of Personal Finance #138 was posted over at I've Paid for this Twice Already. The carnival has a neat Superbowl theme that is a nice festive twist. My post Is Social Security a Rip Off? was included. Two articles that caught my attention and I highly recommend are Why Being Frugal Sucks, In The Long Run from Money Management and You and The Problem with the Economic Stimulus Package from Early Retirement Extreme. I am definitely in the camp of personal finance bloggers that see frugality as an exercise is self deprivation and frustration. If you put your 401(k) and Roth IRA on autopilot, buy a house you can afford, and drive cars that match your means there is nothing wrong with spending what is left without worrying about maximizing every cent. Spend your money, have fun, and know if you get the big money decisions right you will end up wealthy. Jacob's post about the economic stimulus package comes to the opposite conclusion as my article, $1,200 Out of Thin Air. His analysis of the situation is that borrowing (through federal deficit spending) to feed the spending itch of a debt addicted culture is a bad move. He has a good point and you should check out his article. My primary disagreement is that the money we are borrowing is at below market rates and we'll come out ahead by financing our domestic growth at such a low interest rate even if the spending is a symptom of a cultural spending addiction. I think that once the interest rates on the debt climb (and they will!) we will gradually and organically adapt to the higher rates by reducing consumption and increasing savings. I can't be sure who is right, only time will tell.
That's all for today. Check back again soon and be sure to subscribe to my RSS feed.
Wednesday, January 30, 2008
Income for Life - Part 1 - Bonds
I talk a lot on this site about the process of accumulating wealth, but today I will expand that focus to include a realistic picture of how much wealth is actually needed to create a steady income for life. There are a few commonly accepted ways to draw income from one's wealth and over the next few posts I will try to I will explain the most common methods. I will also try to address the most important risk factors to your nest egg. These risks turn a seemingly simple process into a mine field of problems that can snag even a well prepared retiree.
Bonds:
It is simple to look up the historical rate of return for bonds and say, "I will put all of money into bonds that pay X% interest and spend the interest each year." Based on data from the Federal Reserve from 1955 to 2007 government bonds averaged 5.735% return. Bonds are suppose to be a safe and stable source of income right? In fact if you look at the data the returns of bonds are actually are fairly choppy. The standard deviation (measure of volatility or predictability of returns) for the government bond data is 3.214. What this means is that in most years the returns from bonds will end up between 5.735% minus 3.214% (or 2.521%) and 5.735% plus 3.214% (or 8.949%). Around 1/3 of the time the returns will even fall outside this broad range (2.521-8.949%) to be very large (like 16.39% in 1981) or very small (like 1.13% in 2003). In other words, from year to year the returns of bonds can still be unpredictable, so you can not count on drawing the same amount year after year without significant risk of dipping into the balance and potentially running out of money.
Another important risk factor for drawing income from your wealth is inflation. Each year prices for all types of goods and services increase, which will cause income needs to increase over time to maintain the same purchasing power ($1.00 in 1987 would require $1.83 in 2007). That means in order to keep up with inflation, the size of your nest egg still must grow in retirement to keep up. Using the same time period as above from 1955 to 2007, inflation took away 1.8% per year of the average 5.725% return. That leaves us with at the most a 3.935% withdraw rate to generate income to account for inflation. There can be some years where the inflation rate even exceeds the return of government bonds. This would also require dipping into the balance to maintain a stable income.
To provide a truly guaranteed income from bonds that is protected from inflation there is a special product called a Treasury Inflation Protected Security (TIPS) that are issued by the Federal Government and pay interest at a rate that varies based on an index which tracks inflation called the Consumer Price Index. The bonds pay a fixed percentage of income historically from 2-3% above the CPI stated inflation rate. This approach will guarantee an income that keeps up with inflation and is fairly stable, but at a price of creating an income stream that is fairly small. A TIPS portfolio that pays a 2.5% premium over CPI the initial principle required for an annual income of $50,000 would be $2,000,000.
If you a person is able to accumulate $2,000,000 today and will need $50,000 income for life then they are all set. However, if you are like me and have decades until retirement (for me 38 years to be exact) then you have to also factor in the effect of inflation from now until then. I feel that the 1.8% average inflation presented before may be a little conservative, and I want a little wiggle room in my calculations, so instead I will use an inflation estimate of 3% for my calculations. This gives me an inflation factor of 3.07 (or a 307% increase in my income needs) at retirement as compared to now. Using these assumptions I calculate the following: ($50,000 * 3.07) / (2.5% TIPS premium) = $6.14 Million. That is a LOT of money to accumulate in my lifetime, but absolutely achievable! At an 8% annual return I would need to save about $1975 per month for 38 years which is roughly equal to taking maximum advantage of my 401(k) ($15,500 plus match) and Roth IRA ($5000).
Thursday, January 24, 2008
$1,200 Out of Thin Air
What would you do if $1,200 appeared in your bank account out of thin air? How about $600? If most American's answer this question honestly, we would admit that our money is spent on "things." Extra cash is rarely used to advance our financial situation. Windfalls trigger a psychological reaction in most people that makes them feel like the money is more expendable or somehow less important than regular earnings.
A windfall is currently in the works for most Americans. According to media reports legislation will soon be passed for an economic stimulus package that will provide a tax rebate $1,200 for married couples, $600 for single filers, and $300 for each child in the household. Filers which were exempt from federal taxes but had earned income of $3,000 or more will receive $300.
I am not a (trained) economist but here is my "back of the envelope" analysis of the efficacy of this proposal. For every rebate dollar that is spent, America would need to grow the economy that much, plus the interest rate from the treasury bonds that it issues to cover the national debt. If the goods bought by consumers with the rebate mirror that of the broad economy approximately 6.15% of the total funds will flow outside the United States via the trade imbalance ($800 Billion trade deficit / $13,000 Billion GDP). For a $150 Billion rebate plan, domestic spending would then amount to roughly $140 Billion. The the interest rate for the borrowed money is roughly approximated by the 30 year treasury rate, which as of today was 4.36%. The overall result is that in order to break even the domestic economy would need to sustain a 4.6% return on the $140 Billion spent on US goods over 30 years in order to break even.
I was highly skeptical when I first read of this plan for a number of reasons, but as it turns out creating the needed 4.6% return is historically very realistic. It would seem that borrowing money to increase consumer spending at current rates may in fact be a bargain. While it may not fix the immediate credit crunch, slumping real estate market, or a broad recession this plan can have some positive effects.
I know that I will be sure to make any windfall I receive a part of my total financial plan to pay down debt, save for retirement, and build my emergency fund. I will also take about 10% and guiltlessly buy myself a new toy or gadget. I mean hey, spending helps the economy right?
Wednesday, January 23, 2008
Diapers and 529 Plans - Scary Stuff
I've been reading a great series of posts from the members of the M-Network called Money Matters for All Ages. The posts go through the major life phases and for each provide financial advice and insight. I read the two posts related to being in your 20's, but I found that it did not really resonate with me. I think it may be that I "got out of the blocks" rather quickly in my life. Before turning 25 I was married, finished a masters degree, and bought a house. My income has surpassed the median household income for someone with an equivalent education, and I have a positive net worth. I've not done everything right (*credit card debt*), but my financial life seems very different than that of the average 24 year old.
When I read the two posts about being in your 30's they hit me like a ton of bricks. For reference (and a good read) they are The Chaotic Thirties and Personal Finance Advice for Your 30's. Immediately I saw strong similarities between myself and the two writers. Marriage and buying a home are game changing decisions that are wonderful improvements in your quality of life but can also be massive liabilities. Part of succeeding in your 30's (or 30-at-heart) is making sure to choose wisely. I would also add that success in both endeavors hinges on this bit of wisdom, "the love and elbow grease [that you put into them] will be returned 2-times over but neglect will ruin them." This advice was shared with me by someone much older and wiser than me (keep it in mind as Valentine's Day approaches).
I also feel the tide turning in my debt situation, and the train has started building steam in my savings. I am starting to think about what will be needed to make the next big leap in my career, into a management position. It all felt very familiar and easy to relate to when I read about these 30-somethings lives. However, one thing was completely alien to me and honestly made me start to worry.
Kids!
The idea of having children scares the crap out of me. Before you start thinking that I'm some kind of self-absorbed child-hater, I do want to have children. When I think about holidays or special occasions I see them as family activities. I can't imagine being in my 40's or 50's and not have a house full of family with which to gather. There are at least a dozen other reasons that I can think of that motivate me to have children, and my wife feels the same way. The only problem is I don't know how to fit it into the budget.
I feel that there are certain responsibilities that a parent has when they bring a child into this world. They are the things my parents did for me and my grandparents did for my parents. While I don't look down on people who make different choices about the type and amount of resources that are devoted to their children, I know that I will be disappointed in myself if I do not meet my own standards. The largest of these financial obligations I feel for my (potential) children are:
1. Their Own Bedroom in the Family Home
2. Reliable Transportation (eg late model used car at age 16)
3. Full Tuition, Fees, & Shelter for Undergraduate Studies
4. One Educational Trip Abroad
5. Fees and Equipment for Extra Circular Activities (sports, music lessons, scouts, ...)
6. Allowance Corresponding to Age & Household Contribution (chores)
In other words, I feel there is a financial obligation I have to my children in order for me to feel I have "done it right." The challenge is that none of this comes cheap. Right from the get-go there are cribs, changing tables, and tons of diapers. This, far more than retirement, seems like a nearly insurmountable expense. How will I manage to fund a 401(k), Roth IRA, sizable mortgage, AND a 529 plan?
To quote the blog Credit Withdrawl, "The transition from a Dual Income No Kids yuppie power couple, pulling down [relatively] huge amounts of money, to the Single Income, Two Children, Oppressive Mortgage," is about the only financial thing these days that gives me heartburn (pass the TUMS).
None of my concerns change the fact that compared to everything else I have accomplished in my life being a parent will be far more rewarding. I have resolved myself that when my wife is ready to start having children, I'll dive in head first and do the best damn job I can. I know that if I wait until my spreadsheets say that I've got my money situation just right it will never happen. It just scares me A LOT!
Any comments, suggestions, or hate mail is welcomed. Let me know what you think!
Saturday, January 19, 2008
$272 of Found Money
Last weekend I got off my butt and started the process of selling some unused clutter on eBay to create some "found money". It is one of my goals for 2008 to work hard to create extra cash to speed up the process of paying down my debt.
So far I have completed 10 auctions of inventory from my failed MLM business. I looked at other auctions to get a feel for how much money I might generate, and it turns out there is a fairly robust trade in this company's merchandise. This is in spite of a company-wide ban on online selling, through auction sites or otherwise. Because I no longer have any affiliation with the company I could care less about their unethical no-internet rules. Supposedly these rules are put in place to "protect the brand image" but I think it may actually be more about making sure the market does not get a chance to set prices. If a consultant does not know what the product is really worth they are more likely to buy inventory from which they will never recoup their investment (like what happens to most who start with the business).
Anyway, here are the results. I have received $272 for the 10 completed auctions. It seems useful to look at this in a few different ways. First, the retail price for the items I sold is $1,048. That means the average eBay bidder got a 74% discount off of retail price (good for them, bad for me). The second way to look at these sales is to determine how much money I lost in the transaction. According to my records, I paid $568.30 for these items. That means that I lost $296 by purchasing over priced merchandise and selling it for much less. The final way to look at these sales is that I now have $272 that I didn't have yesterday. This is what actually matters to me now. I have put in a little effort and now I've got $272 cold hard cash.
I have started a second batch of eBay sales that will finish off the last of my inventory. I don't expect these auctions to pull in quite as much money but it should be more than pocket change. Also on my For Sale list will be some old books, DVDs, and CDs. I've noticed lately that my wife and I have nearly killed our media buying habits which at one time were pretty substantial and now nearly non-existent.
The final important task is to load up the car and haul these items off to the nearest Kinko's or UPS Store to get them out of my life. This too is a benefit because I will have less crap in my house. All-in-all this has been a win-win-win situation. I recommend everyone clean out the closets and create a little Found Money.
Sunday, January 13, 2008
Getting Smart About "Found Money"
Sometimes extra money, for which we have no plan, finds its way into our pocket. I call this unexpected money "found money" because it appears out of nowhere. To qualify as found money, the cash can not be something that we can predict ahead of time or can not be counted on to pay bills. The money might be an inheritance, a gift, or unexpected bonus. Found money can also be created by holding a garage sale, taking on extra hours, or starting a new revenue stream.
One of my goals for 2008 is to create an average of $333 of found money per month. I got the process started today by posting my old inventory from my failed MLM business on eBay. I put up the first 10 auctions that I expect to bring in a couple hundred dollars. I have also earmarked some old computer equipment and used books for sale over the next few weeks too. Nearly everyone has stuff taking up room in closets and attics that they never use. Turn it into found money and remove clutter from you life at the same time.
Once you have created the new cash it is time to put it to use. There is always the temptation to use unexpected windfalls to splurge or reward yourself with luxuries. I know that I am often guilty of this myself. Each year at Christmas my wife and I receive a rather substantial amount of cash gifts (from $500-1000), and we tend to use it to buy toys, gadgets, or indulgences. How do you spend money in these situations?
I found this great post from Advanced Personal Finance that deals with how people spend their found money. For me, I would tend to blow money that was a gift and invest money gained from cashed-in stock options. I am not certain why it seems natural for me to spend the money differently, but I am no psychologist. I plan to keep this in mind with future windfalls and strive to spend ALL of the money more responsibly. My plan is to reward myself with about 10% of the windfall by spending it on something fun I wouldn't otherwise buy and invest or pay off debt with the rest. I will use this particular found money from my eBay sales entirely to pay down debt.
Making $333 per month outside my normal earnings will be a big stretch for me this year, but if I succeed it will have a huge impact on my financial situation. It would be a total of $4,000 knocked off my debt in only a year for a little extra effort. Let me know how you plan to create found money this year, and where you will allocate your extra cash by leaving a comment.
Saturday, January 12, 2008
Failed Business #1: MLM
Back in October of 2006 my wife-to-be and I got invited by her aunt to come have dinner. This aunt is fairly young at heart and we enjoy spending time with her. We were more than happy to drive 90 miles to meet up with her. My wife has another aunt who lives half way across the country from us and she was also in town to have dinner. As it turned out the reason for the invitation was that the two aunts were hosting a recruiting event for a multi-level marketing company (MLM).
I won't name the company for a couple reasons. First, these companies tend to have a fairly pro-active legal department, and the last thing I want to do is deal with that problem. Second, based on my experience it is certainly no worse than any other company in the MLM game so there is no reason to use the name. Finally, we do have family members that are involved and I no way want to hurt them or their business.
The way MLM companies work is that they sell their products through a network of independent consultants. These consultants market the brand and make sales which are either shipped directly to the customer or to the consultant (who then delivers the goods). Examples of MLM include Mary Kay, Amway, and Tupperware. Most people have come into contact with these brands either as a consultant or potential client.
One of the key concepts of MLM is that the company stresses that they can afford to compensate the consultants generously because they do not pay for advertising, retail space, or shipping. Compensation from these companies often hinges largely on a consultant's ability to recruit more consultants. This is reinforced by paying bonuses for recruitment and paying a recruiter a percentage of the sales from those they have recruited. In other words, when a person you recruited makes a sale (or sometimes another recruit) you get paid too. This sets up a 'network' where the work of those below you generates the vast majority of the money for a person at the top of the payment pyramid. While not a pyramid scheme per se it does resemble one. The FTC ruled this organization structure is not illegal however it can be ripe for problems.
Now back to my personal story. Dinner with our aunts was a recruitment dinner where we all listened to speakers while we ate our food. The aunt that drove hundreds of miles to "eat dinner" was the featured speaker. Long story short, her husband was involved in a series of businesses and for a time was fairly wealthy. His business interests soured, their family was forced to sell their house, and they lost nearly everything. The former stay at home wife then took up the MLM company in order to save her family. She worked hard and became fabulously successful with MLM. She just bought the house of a famous football coach (costing north of $600,000) and both her and her husband drive German luxury cars. She lives the high life and her husband has retired all because of this MLM company. Now she is here to offer the same opportunity to us (and the room full of 20 others).
I took the bait. I knew that I had the business acumen, and I had a grand plan to follow in my wife's aunt's footsteps. That night on the drive home we listened to the motivational CD presentation we were given, and that night I stayed up very late writing a full business plan. I determined that I had access to an untapped market for the products, I would approach dorms and residence halls on local college campuses and hold 'educational' programs which feature the products. I had been an Residence Assistant during college and I knew that RA's love to have outside speakers talk to their residents (which satisfies an RAs requirement to hold community activities for their students). I had figured out how to pass off my programs as educational and make a low-pressure sales pitch that would not get me booted off campus.
Fast forward 18 months. I have a closet full of unsold inventory and no residual cash rolling in. I collected a total of about $1,200 in revenue and invested about $3,500 in the business. I have over $2,000 in credit card debt left from having a go at MLM.
First of all, I'm a pretty decent sales man. My conversion rate for sales prospects was over 50% which I've been told is pretty good. I also had a business plan and attacked it with at least 20 hours of effort a week. I set up sales sessions and worked the phones. I was able to get my program approved by the local college. It would seem that all would be going fine. Why did I fail?
I did not recruit. I failed to recognize that the real money maker is to recruit new prospects, get them to buy their first shipment of product ($700-1400), and then move on. I also needed to find a few like minded people to work under me and do the same. I recruited a grand total of three people to the organization. I lost a bundle. Both aunts talked big about the potential profits, but when I shared my business plan neither let me know that I was barking up the wrong tree. It is too time intensive and difficult to spend your days selling widgets one at a time for $50 with a 15% margin when you can talk to a room full of 20 people who will buy $700 worth of product. Even a sales presentation to a dozen house wives that may spend $20 each doesn't work out to more than minimum wage. A couple of them may join and build your network but they must be willing to recruit like a fiend too.
I could switch to pumping the recruitment aspect of the business and do what has made my aunts so much money. I can't bring myself to try and bilk other people out of their hard earned money. I know that the success rate is terrible and that only a tiny minority that spend their $700 to get started will ever see more than a fraction of their money back. I am not willing to take advantage of people's natural enthusiasm and hope in order to lead them into an almost certain money loosing venture. Less than 10 percent of those that sign up will break even with the business.
That is my MLM story and an explanation for a portion of my evil credit card debt. Those of you with experience (either good or bad) with MLM I'd like to hear your stories. Please feel free to leave a comment.
P.S. My wife and I still get along just fine with the two aunts who introduced us to MLM. I know that it isn't their fault that I entered into a failed business model. Family is much more important than that amount of money, which is of course another reason the business isn't for me.
Monday, December 31, 2007
My 2008 Financial Goals
On the final day of 2007 it is time to post my goals for the New Year. Unlike a "New Years Resolution" which is more hope than substance, I will follow my Millionaire Rule #1 and establish GOALS. Here we go:
Save, Save, Save - in 2008 I will save 8% of my gross pay in my 401(k). It will also be matched with 5% more from my employer. I will also save $100 bi-weekly into my Roth IRA. In the middle of the year I will get a raise (odd July to July pay system) which will be used to increase my Roth IRA savings to the annual rate of $5500 per year (or $211 bi-weekly). Finally, I will save $50 bi-weekly into my online savings account as an emergency fund.
Pay Down Debt - in 2008 I will pay $600 per month toward my credit card debt (while not spending any additional money). This will allow me to pay off Card #1 which has ~$2,000 at 19% interest and make significant headway against my ~$5600 at 5.9% fixed. I will continue making minimum payments on my 0% interest furniture loan and 6.5% interest car note. Total principle repayment will be $10,000 to reduce my total debt to less than $14,000 (from ~$24,000). As a stretch goal, I will aspire to use 'found money' and extra windfalls to reduce my debt below $10,000 by the end of the year.
Continue Education - in 2008 I will continue my education by completing the online certification from my employer for my Level 2 education requirements. My wife will complete at least 18 hours toward her BA degree.
Grown Net Worth - in 2008 I will double my net worth to approximately $48,000.
Grow Aspire 2 Wealth - in 2008 I will continue to foster my blog to the best of my ability and meet the (separate) goals I outline for its performance.
Create "Found Money" - in 2008 I will sell unused items, take paid overtime, or otherwise generate at least $333 per month of extra revenue outside my primary profession.
Be sure to subscribe to my RSS and check back with me through out the year while I chart my progress on these goals. Let all make 2008 a great (and financially sound) year!
Wednesday, December 26, 2007
My Holiday Recap
Christmas has come and gone till next year. It was an INSANE time here and I'm sure it was the same for most others too. We drove about 1000 miles and spent time with nearly all of our family. We also got some really nice gifts, and the gifts we gave seemed to be well received.
We got a nice mix of books, ornaments for the tree, and clothes. I was totally surprised when my parents gave me a 16 Gig iPod Touch. It was something I would never have bought myself so it made it that much cooler to get one. My wife got a Kitchen Aide mixer that she had been drooling over for months. We also got a fairly significant sum of cash that will refill the coffers and allow my wife to buy a bunch of new clothes that she needs (for a new work wardrobe).
Of all the things we did during our Holiday, I think we had the most fun playing an assortment of board games with our family. My wife and I picked up a couple new games that ended up being big hits. Crainium