The Truth: What Obama and McCain won’t tell you about your money

October 7 99 Comments latest by Kelly

After watching the debate tonight, I figured I’d translate what both candidates were saying. Sorry I’m not as politically correct as them, but I hope this is informative.

Things will get a lot harder before they get better.
All the predictions about the recovery taking until “at least the end of the year” are horseshit. In truth, nobody knows, but it would be political suicide to admit that a recovery — whatever that means — will take a few more years. The truth is, nobody knows how long it will take. But if there’s one thing Americans love, it’s a leader pretending to know everything. And if there’s another, it’s that Americans love a quick fix…only to later complain about it not being done right.

Your questions about how “quickly” we can get out of this crisis are misguided.
Sometimes a forest needs to be cleaned out with fire before it can grow again. Again, an unpopular position. Since the government has virtually unlimited resources, it can certainly alleviate the pocketbook pain we’re feeling…but it will come back to bite us in the ass later.

Not all homeowners deserve to stay in their houses.
Renting is a perfectly reasonable alternative, but the idea of Americans “losing their houses” is politically untenable. Why? Because America perpetuates a mistaken culture of homeownership. Owning your own home is the kind of BS sacred cow that got us into this mess: Our parents tell us to buy a house. Our friends are impressed if we own a house in our twenties. The government literally encourages us to own a house by offering tax deductions. Homeownership is the American Dream!

The truth is, if you’re making the largest purchase of your life, you need more than a slogan — you need to take the responsibility to do some research. (And note that you can’t advocate for increased homeownership and also argue for Americans to keep their houses. By not reducing the prices, younger people cannot buy houses at these inflated prices.)

Yes, there was an exceptional amount of predatory lending.
For every blogger who argues loudly about personal responsibility, an angel dies and an Ogilvy executive lights a marshmallow in hell and eats a delicious snack. Wall Street and realtors are also to blame for this. But so are average Americans. It’s difficult to have a nuanced discussion about real estate on the campaign trail, so we resort to cartoonishly simplistic caricatures of things like Wall Street’s corruption. True — but also take a look in the mirror.

Homeowners are delusional about how much their houses are actually worth (see this, too).
As a wise commenter said, “I love the fact that it’s “acceptable/normal” for a home to increase its value by 100% during a five-year time frame, but it’s “unreasonable/impossible” for a home to decrease it’s value by 30-40% during a similar time frame.”

Taxes: Pandering to ordinary Americans instead of telling them to stop spending on stupid stuff
The reason Obama and McCain spent so much time talking about taxes is that most Americans are historically horrible at managing their spending. Since they make a fixed amount of money (revenue) and can control only one thing (costs), both politicans use tax breaks to pander to voters. Most people have never seriously thought about how to make more money. Fine. But what’s even more outrageous is Obama and McCain’s complete lack of honesty about what people really need to do to weather the economic crisis. Did you hear either one plainly say, “You’re going to need to buckle down and save more?” Of course not. You might as well walk into a Dave Ramsey seminar and argue that credit cards are a useful tool. It’s a suicidal suggestion. But it’s true.

Shut up about your money worries unless you’ve taken the time to read a book about how money really works
You need to read a couple of good books about money. Not read the screaming headlines of CNN.com. But a real book that explains how money works. If you don’t, do you really have the right to complain about how scared and nervous and worried you are about your money? (Note: If you want to get my favorite book recommendations, sign up for my free newsletter by Friday, 10/10/08. In fact, I’m giving away free personal-finance books in the upcoming weeks.)

Americans don’t know how to be frugal — yet
Things will get more expensive. Taxes will eventually go up. They have to. Costs of ordinary goods will go up. They always do. If you’re expecting it to get easier, you’re wrong. The key is to make more money and cut your costs. Sadly, Americans are poorly versed in being frugal. You think it makes sense to buy a new car every few years? You think it’s normal to eat out 5 times per week (lunch and dinner)? You feel good about yourself for ordering water when you go to a restaurant, but you blew $50,000 because you didn’t take the time to understand your mortgage? You’re not frugal. But a few more years of an economy like this and things just might change.

Sensible investors don’t change strategies very much — even in a market like today’s
With the market cratering hundreds of points every day — then climbing a similar amount the very next day — billions have been pulled out of the market. Yet long-term investors have the discipline to stay steady. Panicked spouses and overconfident investors think they know better by trying to time the market, but they’re wrong. In fact, here’s an excerpt from my upcoming book:

Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

Now, if only we could know the best investing days ahead of time.

Of course, we can’t. That’s why I continue to dollar-cost-average money into the market, slowly. Will it go down in the short-term? Almost certainly. But as my funds get cheaper and cheaper, I’ll pick up more and more shares. And eventually — over a 10, 20, or even 50-year time horizon, I’ll make a significant amount.

But encouraging people to continue investing during times like this wouldn’t be received well. More often than not, politicians need to seem to be doing something — ANYTHING!! — in order to keep you happy. Frankly, with a balanced portfolio, there’s really not much to change. But that’s not sexy enough to tell most people. (Plus, they have no idea what a balanced portfolio is.)

Sorry if I was too harsh. I’m usually not political, but I’m tired of the bullshit around our money. Every single one of us knows co-workers, family, or friends who are worried about their money. It’s time to get honest about what’s going on. (Want to read more? Check out my popular articles, personal-finance links, and my forum.)

More to come in future posts.

I’m trying something new: If you liked this, please digg this article.

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99 Comments latest by Kelly

The Money Diaries: The 37 year-old homeowner who makes 6 figures

October 5 29 Comments latest by S Patel

Here’s another post in the Money Diaries series, which is based off New York Magazine’s Sex Diaries. We’ve collected stories from real people about their spending habits over seven days, anonymized them, and posted them here.

* * *

DAY 1

8am: Grab some cereal and sit down to a quiet house and pay some bills. My bills are a combination of automated and hand entered electronic bill payments. The fixed monthly costs are automated, everything else is set up where I just have to fill in the amounts. The breakdown:

Income:

Paycheck direct deposit: $8000 plus $475 expense reimbursement. This is after maxed out 401(k), benefits, and a ridiculous amount of taxes are taken out.

Fixed Costs:
IRA Contribution: $400
Transfer to Property Tax savings account: $500
Truck payment: $600
Mortgage: $3,200 (My house and land isn’t as big as this payment suggests).

Variable Costs:
Property Taxes: : $1300
Quarterly water bill: $80
Quarterly sewer bill: $50
House phone/internet: $111
Wife cellphone: $54
My cellphone: $108
Annual homeowners insurance: $991
Pay the minimum on my credit card bill: $250. Total bill is $17,584 right now (This needs explanation, but I’ll get to it later. Wife and I pay for everything on the shared credit card. My card limit is something like $40k. This amount has been lingering for 5 months now).

DAY 2

8:30am: Rode the bike to work. Ponder new jerseys for the cool mornings. $60/jersey. Crazy, decide to look at the Bike Nashbar specials when they’re on clearance.
12pm: Starving by lunch time, but I have a lunch meeting.
1:30pm: Lunch meeting over, still hungry, buy a $2 chocolate pudding at the company cafe.
5:30pm: Ride home.
6:30pm: Wife went food shopping, $159 in food. And she got gas, $85.
8pm: Check the mail, see a $43,000 tax bill adjustment from last year via “automated review”. Wtf? Call my accountant.

DAY 3

9am: Drive to work because I’m late.
12pm: Buy $8 lunch at company cafe.
8pm: At night, shop online for $1000 in parts for my project car. Decide to wait till I have the time to install them.
The project car is a car someone gave me for free if I could tow it out of their backyard. So hey, “free car” but just needs some fixing. It really only needs $500 in parts to repair and be drive-able. But it would want $1500 in parts to be slightly upgraded and make for an enjoyable, performing ride.

DAY 4

9am: Drive to work.
12pm: Buy $8 lunch at company cafe.
6:30pm: Meet with a financial advisor trying to sell me on his services. He buys fancy dinner, $150. He says his fee is ‘only’ 1.5%. Tell him I’ll consider it, but I’m lying. My ETFs (Exchange Traded Funds) are doing fine in my IRA and 401k. 1.5%?! No wonder he drives a Maserati.

DAY 5

8:30am: Ride to work.
12pm: Buy $8 lunch at company cafe (feeling a trend?)
2pm: Later in the afternoon, still hungry. Buy a $2 chocolate pudding.
6:30pm: Family wants to go to Disneyland for vacation. Disneyland wants $4k for in-park hotel, park tickets, and flights. Jetblue wants $2100 for just-outside-park hotel, tickets, and flights. Make a note I should start a travel company that answers “When is the cheapest vacation possible for destination X?”
7:30pm: Spend an hour playing with dates and flight times to find a cheaper vacation on a bunch of websites. End up finding $2200 for in-park hotel, park tickets, and flights, but kid has standardized testing that week. Gah.
9pm: Accountant calls back. Says he sees IRS error and it should be at most under $5k in tax adjustments. I invested in a business a few years ago, which failed. I used some tax software to do the returns then, and now I’m continually harassed about what were legitimate business expenses, depreciation, etc. My accountant has saved my financial ass from the “tax software returns” a few times already. He’s worth his $250/hr rate.

DAY 6

5:30pm: Fill up truck with biodiesel. $100 for a full tank, which typically lasts 2 weeks if I ride the bike to work more than 2 days a week.
6:30pm: Wife doesn’t feel like cooking, suggests Japanese steak house. $70 dinner for the family.
10:30pm: Check the accounts after everyone else is in bed. As part of my 10b5-1 plan, I sell a fixed amount of options on the last Friday of the quarter. Look at the stock price, guesstimate the funds that should be wired to me Monday. Looks like $8500. Stupid markets (and me). Like everyone else, my company stock is down, way down. I was hoping to pay off mortgage with my options; now, maybe just the truck and put the rest in savings.

Last year, my options gave me $220k in extra income, so the credit card bill went up (clearly because you spend what you make). I figured the good markets would last for a bit longer, bought new toys, started a race car habit, paid off wife’s car, paid $20k/qtr in credit card bills, paid lots of taxes. Maybe the market will magically rebound and I’ll be a paper millionaire again.

What I should have done is stop racing cars last year and paid off my truck and mortgage by cashing my options out more aggressively. I have a fancy race car, trailer, and all the parts sitting in my garage, unused for all of 2008. Clearly my “faith in the markets” strategy didn’t work too well.

DAY 7

10am: Ponder buying a fancy Xbox Elite. Decide I lack the time to play games and the Gamecube is fine; besides, when was the last time I played it? Avoid spending $400+.
11am: Head to gun shop. Buy $300 in ammo. Ponder buying that target rifle I’ve been wanting. Store owner offers to knock it down to $700 from $800. Still too much for a toy; I tell him I’ll take it for $600 if no one else buys it in the next week.
2pm: After lunch, take kid to the saddlery to look at saddles, bridles, and clothing for riding lessons and competition. Mentally add up $3000 in stuff needed for first competition. Good thing it’s not until the spring.
4pm: Head to animal rescue league to look at horses and dogs. They have 2 real nice horses, which have to go together as a pair. Lots of dogs, none up for adoption yet. Need to find a stable to put the horses at, or need to move to a house with a barn and corrals.
7pm: Neither wife nor I feel like cooking, so we head out to eat at the Italian place we like, $110.

In sum: Monthly income received: $8,475, Expenses: $7,644 (including IRA and savings contributions), spending for the week: $552.

* * *

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29 Comments latest by S Patel

10 links to walk you through today’s financial crisis — and make you smarter than 99% of other people

September 29 56 Comments latest by Until Debt Do US Part

All right, guys. I’ve gotten lots of emails about what’s going on with the economy and bailout, so I thought I’d put together a list of the articles I’ve been reading over the last two weeks. I added my own commentary to them below, plus links to stuff I’ve written that agrees/disagrees with each of the articles. My guess: If you read these links, you’ll understand more about the economy than nearly anyone you meet on the street. (Especially some of the fools I’ve been hearing lately, who are convinced that the U.S. will (1) go bankrupt, (2) start owning every mortgage in the country, and (3) think the entire financial system will be “crashing,” whatever that means.)

1. Ignore the Sensationalist Media
Gawker pulls off one of the finest pieces of reporting on the bailout. When I wrote The Media is Atrociously Bad at Prediction and I’m Sick of It, I highlighted how various business media point make bold predictions, get it completely wrong, and are never held accountable.

In this case, Fortune highlighted AIG as one of “10 Stocks to Buy Now.” When they later apologized, they posted “The Best Stocks for 2008,” which, as Gawker points out, included…Merrill Lynch.

2. Hedge Fund Surprise?
This is like a tuna surprise, only worse: Hedge Funds Are Bracing for Investors to Cash Out. Many people haven’t heard about hedge funds’ redemption clauses, which basically means that fancy investors (e.g., universities, pension funds, and really wealthy people) will be able to withdraw their money today (Tuesday, 9/29/08). If that happens, nobody really knows what the repercussions could be…but they would probably be Very Bad. I’ve previously written about why hedge funds are overrated for investors.

3. We Have Short-Term Memories.
If you think history doesn’t repeat itself, you’re nuts. In fact, 10 years ago this month, Long Term Capital Management, a huge hedge fund, nearly caused a global financial collapse. Yet here we are — with the same words being thrown around. Does anyone really think investment bankers won’t make their same salaries at some point in the future? Or that we won’t gradually move back to huge executive compensation? Still, as I pointed out last week, none of that really matters to the individual investor. What matters is picking the right strategy and sticking to it.

4. What We Can Learn From Warren Buffett
Huge, long Warren Buffett interview. He is the man. Read this. It teaches you so much about long-term investing and admitting what you know — and don’t know. Note: I just ordered this new book on Warren Buffett.

5. Should You Buy More? Sell More? Something???!
“Should I withdraw money from my 401(k)?” After 10 people sent me this link, I knew I had to check it out. In the article, 24-year old Bodie Partsch worries about the economy and contemplates withdrawing money from his retirement account, saying, “I could have the money sitting in a jar on my kitchen counter. It’d be safer than in my 401(k),” he said. BAD MOVE! Here’s a quote from my upcoming book:

Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

Now, if only we could know the best investing days ahead of time.

But, of course, you can’t. Trying to time the market is for fools. So you keep investing carefully and methodically, while spending as consciously as possible.

I’ll also add this link from JLP: It looks like Market Turmoil is Scaring Off Young Investors, where he notes:

Isn’t it crazy how we do the exact opposite of what we should be doing? If the stock market was going up, up, UP, people would be jumping in left and right—essentially buying over-priced stocks. Now that the market is on a downswing, people are sitting on the sidelines.

6. Cool Data Visualizations of The Economy
The New York Times does extraordinary data visualizations to give you a fresh perspective on the news. Check out What Your Global Neighbors Are Buying and A Year of Heavy Losses. From the first one:

How people spend their discretionary income – the cash that goes to clothing, electronics, recreation, household goods, alcohol – depends a lot on where they live. People in Greece spend almost 13 times more money on clothing as they do on electronics. People living in Japan spend more on recreation than they do on clothing, electronics and household goods combined. Americans spend a lot of money on everything.

7. Q&A: What’s Actually Going On With the Bailout?
If you don’t understand exactly what’s going on, that’s because nobody does. But there are some excellent overviews of the financial situation floating around. I like this one by Suze Orman, where she tells people the following:

• What to do with $100,000 in debt and a $39k/year job.
• The huge mistake first-time homebuyers make. (Hint: A $1,500 rent is not the same as a $1,500 mortgage.)
• What to do when your mutual fund’s account value drops from $120,000 to $88,000.
• Should you stick with stock funds in this tumultuous environment?
• How to buy a car (I disagree with her on this one).

I also like this overview by NY Times Columnist David Leonhardt. If you like audio, check out this excellent program from This American Life. Finally, last week I linked to this excellent explanation of the market crisis on the Freakonomics blog.

8. What Gmail Has To Do With Your Money
I’ve been thinking about this post on a tech blog recently. It shows the early sketches/designs of Gmail, and what you realize from looking at them is that we only see the finished result — not the sausage-making in the back room. The same is true of rich people: We hear about people going on $50,000 honeymoons or driving brand-new Mercedes, but we don’t see the hard work behind it. This is an important concept that’s being more revealed with today’s economy: Many of the people who drove the expensive cars and bought the expensive houses couldn’t afford it. The people who were quietly accumulating wealth will do much better. Read more about this in one of my favorite personal-finance books, The Millionaire Next Door. (Btw, if you haven’t bought a couple good finance books recently — or anything that will help you turn your income into more money so you can hit your goals — please read this.)

9. Don’t Let Your Friends Be Morons
Don’t let your friends be idiots. If you read this site, chances are you understand that having 20, 30, or 40 years before you need your money gives you plenty of flexibility to invest for the long term, even with major or minor dips in the market. Yet with these terrifying headlines every day, it’s like people have become blind, yet highly literate zombies who wander aimlessly from one newspaper to another. Being dumb is not just focusing on the wrong things, it’s making poor financial decisions and then throwing up your hands and wondering why you don’t have enough money a few years later. If you own only one stock — especially if it’s your employer’s stock — then you are a fool. If you are going to buy a $1 million house with no research because you think it’s a good investment, you are a fool. If you don’t realize that your expensive, worthless mutual fund is costing you tens of thousands of dollars over your lifetime, you are a fool. Worry about the things you can control, not the headlines.

10. Get More Reading Material
Want more links? I keep my delicious bookmarks up to date every day, especially the section on finance.

I hope this helped. I’m thinking of doing a live video/webchat next week. What do you think? Would you attend?

(51 votes, average: 4.39 out of 5)

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56 Comments latest by Until Debt Do US Part

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