Who is John Galt?
That’s the first line in Ayn Rand’s classic novel Atlas Shrugged. As the book unfolds it turns out that John Galt was an engineer/inventor who simply got tired of picking up the slack for the rest of the world. He walked off the job one day never to return. Throughout the course of the book captains of industry mysteriously disappear only to turn up at the end of the book in a hidden valley where the producers of the world have created their own secret society where they don’t have a bunch of moochers dragging them down.
A bit far fetched I’ll admit. That could never happen today because the liberals would undoubtedly track them down and find a way to tax them into oblivion. However, the basic premise of the book is interesting:
If you get enough people who are non-producers depending on the producers of the world the sheer weight of those non-producers will overwhelm the producers causing them to finally just give up and eventually bring us to a grinding halt.
Again, perhaps a bit extreme… or is it? In today’s economic turmoil we have many who continue to propagate the politics of class warfare -- e.g. the “haves” vs. the “have nots”. I personally believe this is due in part to jealousy, but also due to just plain ignorance.
Many liberal and so-called “moderate” politicians on both sides of the aisle in congress know now that all they have to do is screech “no tax cuts for the rich” and their constituents will pile on.
I think a worthy question is - Who are the “rich” and how did they get that way? Some are entertainers, athletes and trust fund babies to be sure, but the reality is that the “rich” by and large got that way by being productive members of society. They are the small business owners, the captains of industry, the inventors, scientists, physicians, etc. In short, they are the ones who provide jobs in a time when we really need jobs.
Of course the counter to this is “the rich are greedy, dishonest, etc”. I don’t disagree that there are those. However, I submit to you that the vast majority of the “rich” are people just like you and me who have families, hopes and dreams, etc. They agonize at the thought of having to lay off employees, they contribute to charities, they try to be fair and give back to the society that provided them the opportunities that got them where they are today.
You may recall the old story of the goose who laid the golden egg. The farmer reasoned that, rather than wait for the goose to lay one golden egg every day, he should be able to simply slice open that goose and pull out all the eggs at once! He soon found out that when he sliced open the goose, not only were there no eggs to be had, but now the goose was dead and could no longer produce.
Just something to think about the next time you hear people rail against “the rich” and “corporate tax cuts” -- where do you think these jobs we need so desperately will come from?
Thursday, December 17, 2009
Friday, November 27, 2009
Taxing the Rich to Help the Poor – The Morality of the Robin Hood Syndrome
We all know the story of Robin Hood. He was the guy who roamed the Sherwood Forest with his band of merry men robbing from the rich and giving it to the poor. In fiction this makes a good story, but in practice there are some serious moral implications with this story as it is interpreted today. The reason this is relevant is that there is a growing attitude in America that I like to call the “Robin Hood Syndrome”. Indeed, much discussion is taking place within our government and even by rank and file citizens about taxing the rich to pay for war, healthcare, etc. Other than the obvious impact of being a slippery slope I see several problems with this.
1. The thing that people fail to realize about the Robin Hood story is that the true meaning of the story has been perverted. Think about the story – Robin Hood’s arch nemesis was the Sheriff of Nottingham, a government official. The story takes place where the form of government was not a representative republic based on capitalism, but on feudalism which, by definition, means that the “rich” were actually the government of that day.
2. Karl Marx, the author of The Communist Manifesto and generally regarded as the father of communism is credited with the quote: “From each according to his need, to each according to his ability.” This is the premise for wealth redistribution which is a foundational concept of communism. Communism has been proven time after time to be an epic failure. In stark contrast, over the past couple of centuries, capitalism has made the United States the greatest country in the world in just about any measurable way.
3. Regardless of how one feels about “the rich”, it is both illegal and immoral to compel disproportionate payment from those who earn/have more. A study conducted by the IRS in 2004 indicates that the top 25% of earners in this country pay fully 85% of the taxes whereas the bottom 50% of earners only pay 3% of the taxes! Even more amazing is that these figures are for a period after the dreaded Bush “tax cuts for the rich”.
4. Another thing that is frequently ignored in this discussion is a precise definition of “the rich”. Many income levels have been bandied about ranging anywhere from $150K/yr Married Filing Jointly (MFJ) to $250K/yr (MFJ) and all points in between. There are two problems with this -- the first is that these figures completely ignore the differences in the cost of living. Where $150K might be a decent living for a family in the Midwest, it may be barely a livable wage for someone on the East or West Coasts. The second issue is that this figure doesn’t take into account inflation. Many adults over 40 can remember that back in the day, simply making $100K/yr was an extremely good living regardless of where in this great country you lived. This means that even if we settle on what income level is regarded as “the rich”, according to the politicians that figure will remain static regardless of how much the cost of living increases. Don’t believe me? Do a little research on the scam called the Alternative Minimum Tax.
Now, let’s take one final look at Robin Hood. Why were the poor of Nottingham in the condition they were in? Because, due to living in a feudal system, they had all been reduced to serfdom by the government of their day! They were actually the ones doing all the work and providing the means of production, but the feudal lords (aka the government) were reaping all the benefits.
So… really when you think about it, Robin Hood was actually an advocate of tax cuts, taking money from the “government” and returning it to the people (aka the producers). I submit to you that if the true meaning of this story were to be applied to today’s political climate, Robin Hood would be leading Tea Parties right now. What say you?
1. The thing that people fail to realize about the Robin Hood story is that the true meaning of the story has been perverted. Think about the story – Robin Hood’s arch nemesis was the Sheriff of Nottingham, a government official. The story takes place where the form of government was not a representative republic based on capitalism, but on feudalism which, by definition, means that the “rich” were actually the government of that day.
2. Karl Marx, the author of The Communist Manifesto and generally regarded as the father of communism is credited with the quote: “From each according to his need, to each according to his ability.” This is the premise for wealth redistribution which is a foundational concept of communism. Communism has been proven time after time to be an epic failure. In stark contrast, over the past couple of centuries, capitalism has made the United States the greatest country in the world in just about any measurable way.
3. Regardless of how one feels about “the rich”, it is both illegal and immoral to compel disproportionate payment from those who earn/have more. A study conducted by the IRS in 2004 indicates that the top 25% of earners in this country pay fully 85% of the taxes whereas the bottom 50% of earners only pay 3% of the taxes! Even more amazing is that these figures are for a period after the dreaded Bush “tax cuts for the rich”.
4. Another thing that is frequently ignored in this discussion is a precise definition of “the rich”. Many income levels have been bandied about ranging anywhere from $150K/yr Married Filing Jointly (MFJ) to $250K/yr (MFJ) and all points in between. There are two problems with this -- the first is that these figures completely ignore the differences in the cost of living. Where $150K might be a decent living for a family in the Midwest, it may be barely a livable wage for someone on the East or West Coasts. The second issue is that this figure doesn’t take into account inflation. Many adults over 40 can remember that back in the day, simply making $100K/yr was an extremely good living regardless of where in this great country you lived. This means that even if we settle on what income level is regarded as “the rich”, according to the politicians that figure will remain static regardless of how much the cost of living increases. Don’t believe me? Do a little research on the scam called the Alternative Minimum Tax.
Now, let’s take one final look at Robin Hood. Why were the poor of Nottingham in the condition they were in? Because, due to living in a feudal system, they had all been reduced to serfdom by the government of their day! They were actually the ones doing all the work and providing the means of production, but the feudal lords (aka the government) were reaping all the benefits.
So… really when you think about it, Robin Hood was actually an advocate of tax cuts, taking money from the “government” and returning it to the people (aka the producers). I submit to you that if the true meaning of this story were to be applied to today’s political climate, Robin Hood would be leading Tea Parties right now. What say you?
Monday, November 23, 2009
Wealth Building 204 – Mutual Funds
Previously we discussed stocks, bonds, and cash as investment vehicles. I mentioned that, unless you have specialized knowledge in the financial industry and want to spend significant time conducting research on individual stocks and bonds, mutual funds are probably your best way to invest.
Mutual funds give you professional money management and allow for diversification even if you only have a little bit of money to start investing with. Most people who have company sponsored retirement plans like 401Ks, 403bs, etc. are invested in mutual funds and are somewhat familiar with them, but some may not be so I will discuss the different types of funds available.
In very simply terms, a mutual fund is simply a pool of money that is invested in a portfolio of securities (aka stocks, bonds, cash, or other investments). The mutual fund has a portfolio manager (or sometimes several) who are investment professionals and they make decisions on which securities will be purchased by the fund based on the particular fund’s objectives.
There are literally thousands of mutual funds out there to choose from and sometimes it can be a little overwhelming when trying to determine which ones to choose. I will spend quite a bit of time in following segments discussing that, but generally funds are categorized and there are many categories and even sub categories. For example a stock fund may specialize in large cap growth stocks or it may specialize in high yield bonds, etc. We will get into these categories deeper in later segments. Some even get as specific as investing only in certain segments of industry.
One key thing to think about when looking at mutual funds is fees. There are two basic types of fees involved in a mutual fund from a consumer standpoint. The first is commonly called a “load”. This is a sales charge from which the person or company who sold you the fund is paid a commission and the rest usually goes to marketing, etc... When that sales charge is assessed is usually determined by which class of shares you purchase.
There are several types of shares, but the most common are A, B, and C class shares. The sales charge on A shares is known as a “front end” load, meaning that you pay the sales charge up front. It’s usually a percentage of your purchase that can sometimes be as high as 5%. Charges for B class shares are known as “back end” loads. If you pull the shares out within a specified period of time you get hit with a deferred sales charge which is often prorated depending on how long you leave them in. Some companies offer C class shares which have an annual fee based on a small percentage (e.g. 1%) of the assets.
There are also “No Load” funds which do not charge these sales charges per se, but that doesn’t mean that you get a free lunch. With these you will pay management fees in some form or another.
The fees that a mutual fund can charge are regulated by the Securities and Exchange Commission and are covered in the fund’s prospectus, usually somewhere in the first few pages. You can hit the SEC’s website to get the most current information on these fees.
A quick word about the prospectus -- it is required by law that your broker or the company you buy the funds from provides you with a prospectus when purchasing any mutual fund. In addition to outlining fees and sales charges, the prospectus is a wealth of information regarding the fund’s objectives, their investment guidelines, performance information, etc. It’s often very dry reading, but I highly recommend that you review it before making a purchase. If you are using a financial planner or a broker part of the services they should provide is to go over some of the more important parts of what’s in the prospectus. If they are not willing to do that in a way that you can understand I’d recommend that you look for another broker!
Mutual funds give you professional money management and allow for diversification even if you only have a little bit of money to start investing with. Most people who have company sponsored retirement plans like 401Ks, 403bs, etc. are invested in mutual funds and are somewhat familiar with them, but some may not be so I will discuss the different types of funds available.
In very simply terms, a mutual fund is simply a pool of money that is invested in a portfolio of securities (aka stocks, bonds, cash, or other investments). The mutual fund has a portfolio manager (or sometimes several) who are investment professionals and they make decisions on which securities will be purchased by the fund based on the particular fund’s objectives.
There are literally thousands of mutual funds out there to choose from and sometimes it can be a little overwhelming when trying to determine which ones to choose. I will spend quite a bit of time in following segments discussing that, but generally funds are categorized and there are many categories and even sub categories. For example a stock fund may specialize in large cap growth stocks or it may specialize in high yield bonds, etc. We will get into these categories deeper in later segments. Some even get as specific as investing only in certain segments of industry.
One key thing to think about when looking at mutual funds is fees. There are two basic types of fees involved in a mutual fund from a consumer standpoint. The first is commonly called a “load”. This is a sales charge from which the person or company who sold you the fund is paid a commission and the rest usually goes to marketing, etc... When that sales charge is assessed is usually determined by which class of shares you purchase.
There are several types of shares, but the most common are A, B, and C class shares. The sales charge on A shares is known as a “front end” load, meaning that you pay the sales charge up front. It’s usually a percentage of your purchase that can sometimes be as high as 5%. Charges for B class shares are known as “back end” loads. If you pull the shares out within a specified period of time you get hit with a deferred sales charge which is often prorated depending on how long you leave them in. Some companies offer C class shares which have an annual fee based on a small percentage (e.g. 1%) of the assets.
There are also “No Load” funds which do not charge these sales charges per se, but that doesn’t mean that you get a free lunch. With these you will pay management fees in some form or another.
The fees that a mutual fund can charge are regulated by the Securities and Exchange Commission and are covered in the fund’s prospectus, usually somewhere in the first few pages. You can hit the SEC’s website to get the most current information on these fees.
A quick word about the prospectus -- it is required by law that your broker or the company you buy the funds from provides you with a prospectus when purchasing any mutual fund. In addition to outlining fees and sales charges, the prospectus is a wealth of information regarding the fund’s objectives, their investment guidelines, performance information, etc. It’s often very dry reading, but I highly recommend that you review it before making a purchase. If you are using a financial planner or a broker part of the services they should provide is to go over some of the more important parts of what’s in the prospectus. If they are not willing to do that in a way that you can understand I’d recommend that you look for another broker!
Friday, November 13, 2009
Wealth Building 203 – Investment Vehicles
Last segment we discussed in very general terms considerations for building an investment strategy. In this segment we will build on that by being a bit more specific in how you can apply those building blocks given an infinite number of investment choices.
Because we want to stay relatively simple here we will skip all the exotic investments and focus on three major types: Stocks, Bonds, and Cash.
Stocks
When you own stock in a corporation you literally own a part of that company. It may only be a few shares and therefore a very small part, but it’s part ownership nonetheless. That doesn’t mean that you can go into the headquarters and start telling the CEO what to do or carry out a computer since you technically own part of the company, it simply means that you have a share in the present and future earnings.
In very broad terms, if the corporation has positive net income then the shareholders may be paid a dividend, which is a portion of the net income of the company on a per share basis. There are different types of stock, but the type we are most interested in is common stock. Common stock not only has the potential to earn dividends, but common shareholders may also vote on certain things within the company. You may also hear stocks called “equities” because owning stock implies that you have equity in the company.
There are all sorts of methods for valuing stocks to determine if they’re over valued or undervalued, however those are beyond the scope of this discussion. There are many different classes (e.g. small cap, mid cap, large cap, growth, income, etc.) of common stock that have different levels of risk associated with them. We will discuss these classes more when we talk about diversification and risk management.
Bonds
Also called “debt instruments”, bonds are basically how companies and all levels of government borrow money. Essentially when you buy a bond you are loaning money and in return you will theoretically receive interest payments plus your original principal (the amount you “loaned”) back when the bond matures. In practice bonds are rarely purchased and held to maturity, they are generally bought and sold on the secondary market many times over throughout the life of the bond, which means that even the face value of the bond can fluctuate in value. This is a profound oversimplification of how bonds work and as with stocks there are valuation methods for determining whether a particular bond is a good purchase or not, but at least you have a basic understanding of the difference between stocks and bonds which is all you need for our purposes.
Cash
In the context of personal finance when someone says they have a certain percentage of cash in their portfolio it doesn’t mean that they have it stuffed in their mattress, it simply means that they are invested in a “cash” type investment. These are usually characterized by the fact that the principal (the amount you invested) does not fluctuate in value. People generally consider money markets (although technically the value of money market shares can decrease in value, in practice they are almost always stable), CDs, and plain vanilla savings accounts as cash investments.
So, now you know all you need to invest right? Well, not exactly. This was just a very superficial survey of some of the more common vehicles. When advising clients my general rule of thumb was that unless they had specific financial knowledge or had a very high net worth and were willing to take on stock analysis as a hobby they should probably stick with mutual funds. We will cover those in the next segment.
Because we want to stay relatively simple here we will skip all the exotic investments and focus on three major types: Stocks, Bonds, and Cash.
Stocks
When you own stock in a corporation you literally own a part of that company. It may only be a few shares and therefore a very small part, but it’s part ownership nonetheless. That doesn’t mean that you can go into the headquarters and start telling the CEO what to do or carry out a computer since you technically own part of the company, it simply means that you have a share in the present and future earnings.
In very broad terms, if the corporation has positive net income then the shareholders may be paid a dividend, which is a portion of the net income of the company on a per share basis. There are different types of stock, but the type we are most interested in is common stock. Common stock not only has the potential to earn dividends, but common shareholders may also vote on certain things within the company. You may also hear stocks called “equities” because owning stock implies that you have equity in the company.
There are all sorts of methods for valuing stocks to determine if they’re over valued or undervalued, however those are beyond the scope of this discussion. There are many different classes (e.g. small cap, mid cap, large cap, growth, income, etc.) of common stock that have different levels of risk associated with them. We will discuss these classes more when we talk about diversification and risk management.
Bonds
Also called “debt instruments”, bonds are basically how companies and all levels of government borrow money. Essentially when you buy a bond you are loaning money and in return you will theoretically receive interest payments plus your original principal (the amount you “loaned”) back when the bond matures. In practice bonds are rarely purchased and held to maturity, they are generally bought and sold on the secondary market many times over throughout the life of the bond, which means that even the face value of the bond can fluctuate in value. This is a profound oversimplification of how bonds work and as with stocks there are valuation methods for determining whether a particular bond is a good purchase or not, but at least you have a basic understanding of the difference between stocks and bonds which is all you need for our purposes.
Cash
In the context of personal finance when someone says they have a certain percentage of cash in their portfolio it doesn’t mean that they have it stuffed in their mattress, it simply means that they are invested in a “cash” type investment. These are usually characterized by the fact that the principal (the amount you invested) does not fluctuate in value. People generally consider money markets (although technically the value of money market shares can decrease in value, in practice they are almost always stable), CDs, and plain vanilla savings accounts as cash investments.
So, now you know all you need to invest right? Well, not exactly. This was just a very superficial survey of some of the more common vehicles. When advising clients my general rule of thumb was that unless they had specific financial knowledge or had a very high net worth and were willing to take on stock analysis as a hobby they should probably stick with mutual funds. We will cover those in the next segment.
Thursday, November 12, 2009
Wealth Building 202 – Investment Strategy Building Blocks
Now we will begin to build some foundational knowledge that will help you to understand (or better understand) how investing works. At this point I am assuming that you have your budget under control and that you are saving for emergency spending, short term expenses, and long term goals. If not, you can still continue reading and store this information for the (hopefully near) future when you will be able to use it. Even if you’re not ready to invest yet, it’s never too early to start learning about it!
All the technical financial stuff aside, in my opinion the key building blocks for developing a successful in investing strategy are: Goals, Time Horizon, and Risk Tolerance. I discuss each of these in detail below:
Goals
Having high net worth sounds good, but when you think about it, for most people it’s really not very motivating to deprive themselves of immediate gratification for a number on a balance sheet. What makes it really motivating is to have goals that you are investing for. These are the things that, as you pass up that extra vacation, you can say “this is for (___________)." The more specific you can be the better. For example, I had a client come to me one time who had a significant sum of money saved up and wanted to retire young. As I looked at his portfolio I asked him what he wanted his standard of living to be. At the end of the discussion it turned out that, given his desired standard of living, he needed to continue working for a bit more before he could retire. So, as you can see it really helps to put a very fine point on exactly what you are investing for.
Time Horizon
This is a significant piece of information required to determine what an appropriate investment strategy would be. For example, I manage a portfolio for someone who had a 10 year time horizon very differently from someone who had, say, a 30 year time horizon. What might be very appropriate for one might be extremely inappropriate for another simply based on the time that they can leave their money in the investment.
Risk
The financial community is obsessive about the concept of risk and it can get very technical, but for the purposes of our discussion I will speak in very general terms here. The saying goes that the more risk you take on the more potential you have for reward. I would hasten to add that “potential” is the operative term here. The potential reward of winning the lottery given the amount of investment beats pretty much any investment out there, BUT the comparative risk is also astronomical to the point of absurdity. When discussing potential investments with my clients they would often focus on investments with very high returns. However, after further discussion what I sometimes found was that their tolerance for risk would not allow them to be at peace with the investment(s) that they were looking at. We ultimately decided on something a little more conservative. I would say that the rule of thumb with respect to risk is to put it to the “Will I be able to sleep at night?” test. That said, there are many ways of reducing risk and while still working towards superior returns. I will cover those in a later segment.
The key is to have these things well defined in your mind. This will serve you well in creating an investment strategy that you can work with and that works for you.
Assignment: Thing about these three building blocks. Make a list of your financial goals, determine what your time horizon is for each of those objectives, and think about what your risk tolerance is. Perhaps a good way to think about your risk tolerance is to make a scale from 1 to 10 with 1 being that you would never want to see any less in your portfolio than at least what you put in and 10 being that you think a good retirement plan is to buy a lottery ticket ever day. Most reasonable people fall somewhere between 3 and 8!
All the technical financial stuff aside, in my opinion the key building blocks for developing a successful in investing strategy are: Goals, Time Horizon, and Risk Tolerance. I discuss each of these in detail below:
Goals
Having high net worth sounds good, but when you think about it, for most people it’s really not very motivating to deprive themselves of immediate gratification for a number on a balance sheet. What makes it really motivating is to have goals that you are investing for. These are the things that, as you pass up that extra vacation, you can say “this is for (___________)." The more specific you can be the better. For example, I had a client come to me one time who had a significant sum of money saved up and wanted to retire young. As I looked at his portfolio I asked him what he wanted his standard of living to be. At the end of the discussion it turned out that, given his desired standard of living, he needed to continue working for a bit more before he could retire. So, as you can see it really helps to put a very fine point on exactly what you are investing for.
Time Horizon
This is a significant piece of information required to determine what an appropriate investment strategy would be. For example, I manage a portfolio for someone who had a 10 year time horizon very differently from someone who had, say, a 30 year time horizon. What might be very appropriate for one might be extremely inappropriate for another simply based on the time that they can leave their money in the investment.
Risk
The financial community is obsessive about the concept of risk and it can get very technical, but for the purposes of our discussion I will speak in very general terms here. The saying goes that the more risk you take on the more potential you have for reward. I would hasten to add that “potential” is the operative term here. The potential reward of winning the lottery given the amount of investment beats pretty much any investment out there, BUT the comparative risk is also astronomical to the point of absurdity. When discussing potential investments with my clients they would often focus on investments with very high returns. However, after further discussion what I sometimes found was that their tolerance for risk would not allow them to be at peace with the investment(s) that they were looking at. We ultimately decided on something a little more conservative. I would say that the rule of thumb with respect to risk is to put it to the “Will I be able to sleep at night?” test. That said, there are many ways of reducing risk and while still working towards superior returns. I will cover those in a later segment.
The key is to have these things well defined in your mind. This will serve you well in creating an investment strategy that you can work with and that works for you.
Assignment: Thing about these three building blocks. Make a list of your financial goals, determine what your time horizon is for each of those objectives, and think about what your risk tolerance is. Perhaps a good way to think about your risk tolerance is to make a scale from 1 to 10 with 1 being that you would never want to see any less in your portfolio than at least what you put in and 10 being that you think a good retirement plan is to buy a lottery ticket ever day. Most reasonable people fall somewhere between 3 and 8!
Wednesday, November 11, 2009
Honoring Our Veterans
On this particular day, I wanted to take a moment to thank my brothers and sisters in uniform past and present. The sacrifices these folks make to keep our country free and safe are indescribable. Their selfless service is appreciated.
I also want to acknowledge those who left behind to keep the home fires burning as their loved ones bravely serve our country overseas. I thank you for making this sacrifice as well.
I also want to acknowledge those who left behind to keep the home fires burning as their loved ones bravely serve our country overseas. I thank you for making this sacrifice as well.
Wealth Building 201 – Saving
Now that we’ve discussed getting a handle on your finances we’re going to switch gears and talk about a more positive facet of wealth building – accumulating wealth. The first step to that is saving.
One could argue you should be all caught up on your budget before you start saving and they would be technically correct. However, there is an old saying in the personal finance business: Pay yourself before you pay your bills. This is where the rubber meets the road in building wealth. I would argue that regardless of your financial situation, it’s important to start saving immediately. The amount you save doesn’t really matter so much, at least not in the beginning --- it’s all about building the discipline. It’s important that you recognize the importance of putting money back and having the discipline to not dip into it when times get tight.
Many folks break saving into three types: Emergency, Short Term, and Long Term. You may find some variation on that makes better sense to you, but nonetheless in order to be successful at wealth building you need to recognize the importance of all three and build them into your financial plan.
With respect to emergency savings I recommend that you define up front what an “emergency” would be for you so that you’ll know when it’s OK to use it without feeling guilty. In my opinion it should be pretty dire circumstances that would lead to even deeper financial problems if not dealt with, for example car repairs -- if you lose your car you can’t get to work!
Short term savings would be for things that you know will come up eventually and want to be prepared for it. It really helps to have a specific thing in mind (e.g. vacation, new tires for the car, a new car, etc.)
Long term savings would be something along the lines of retirement, college for the kids, or other things that might have a time horizon greater than 5 or 10 years. This type of saving is appropriate for investing which I will cover in future segments. Emergency and short term saving is more appropriately done in cash, money markets, or in some instances certificates of deposit (CDs).
I suggest that even if your financial situation isn’t where it should be you can start small and you should start the habit of earmarking (perhaps even open up separate accounts) your savings for all three types outlined above. One thing that helped me in the beginning (many, many years ago) when I was trying to get started was to open a savings account that I knew would be inconvenient to get money out of. Then I took a look at what I was willing to put back each paycheck and set up automatic withdrawals from my checking account to fund it. It may sting a bit when you first get started, but as long as you’re realistic about what you’re going to save, the pain will soon go away and you’ll forget that the money’s going there.
In addition to building a discipline, another good thing about starting small is that having only small amounts going to savings might keep you from being too tempted to dip into at first.
Assignment: Think about the three types of savings discussed above. Put together a savings plan that will work for you and commit to it. Even if you have to put the cash in mason jars at first till you get enough to open an account, the discipline you build by doing that will serve you well in the future!
For the next few segments we will be discussing investing. To me, this is the most exciting and rewarding part of wealth building. I hope you'll join me for that.
One could argue you should be all caught up on your budget before you start saving and they would be technically correct. However, there is an old saying in the personal finance business: Pay yourself before you pay your bills. This is where the rubber meets the road in building wealth. I would argue that regardless of your financial situation, it’s important to start saving immediately. The amount you save doesn’t really matter so much, at least not in the beginning --- it’s all about building the discipline. It’s important that you recognize the importance of putting money back and having the discipline to not dip into it when times get tight.
Many folks break saving into three types: Emergency, Short Term, and Long Term. You may find some variation on that makes better sense to you, but nonetheless in order to be successful at wealth building you need to recognize the importance of all three and build them into your financial plan.
With respect to emergency savings I recommend that you define up front what an “emergency” would be for you so that you’ll know when it’s OK to use it without feeling guilty. In my opinion it should be pretty dire circumstances that would lead to even deeper financial problems if not dealt with, for example car repairs -- if you lose your car you can’t get to work!
Short term savings would be for things that you know will come up eventually and want to be prepared for it. It really helps to have a specific thing in mind (e.g. vacation, new tires for the car, a new car, etc.)
Long term savings would be something along the lines of retirement, college for the kids, or other things that might have a time horizon greater than 5 or 10 years. This type of saving is appropriate for investing which I will cover in future segments. Emergency and short term saving is more appropriately done in cash, money markets, or in some instances certificates of deposit (CDs).
I suggest that even if your financial situation isn’t where it should be you can start small and you should start the habit of earmarking (perhaps even open up separate accounts) your savings for all three types outlined above. One thing that helped me in the beginning (many, many years ago) when I was trying to get started was to open a savings account that I knew would be inconvenient to get money out of. Then I took a look at what I was willing to put back each paycheck and set up automatic withdrawals from my checking account to fund it. It may sting a bit when you first get started, but as long as you’re realistic about what you’re going to save, the pain will soon go away and you’ll forget that the money’s going there.
In addition to building a discipline, another good thing about starting small is that having only small amounts going to savings might keep you from being too tempted to dip into at first.
Assignment: Think about the three types of savings discussed above. Put together a savings plan that will work for you and commit to it. Even if you have to put the cash in mason jars at first till you get enough to open an account, the discipline you build by doing that will serve you well in the future!
For the next few segments we will be discussing investing. To me, this is the most exciting and rewarding part of wealth building. I hope you'll join me for that.
Tuesday, November 10, 2009
Wealth Building 101 – Retiring Debt
So far we’ve discussed assessment of our finances, budgeting, debt, and credit traps. Is this segment we will tie it all together by coming up with a plan to get our budget under control and begin building real wealth.
At the beginning of this series I likened budgeting to a balloon with a pinhole. You put a pinhole in a balloon and try to blow it up, but as air fills the balloon the hole gets bigger and you continually have to blow harder to keep the balloon inflated. Think of the balloon as your wealth and the pinhole as your spending. The key to keep the pinhole at a manageable level and allow the balloon to inflate you absolutely have to get a handle on spending -- a lesson our government would do well to learn!
In the budgeting exercise I suggested that you come up with three categories of spending: Necessary, Important, and Discretionary. We defined the Necessary category as things you are already committed to or the bare necessities of running a household like rent/mortgage, car payment (if you owe on a vehicle), groceries, utilities, etc. For many folks, debt makes up a significant amount of their necessary spending. If this is your situation then we need to start by looking at retiring as much of that as possible and/or restructuring it. The priority would be the debt upon which you are paying the highest interest rate (especially if any of that falls in the category of the credit traps that I discussed last segment). Identify those items and focus on them. How can you get those paid off as quickly as possible?
First, you may want to look at selling off some assets. Do you really need that boat? How often do you use it vs. how much are the payments are cutting into your budget? Would you possibly be able to get enough money from it to pay the note off and perhaps some left over to pay off other debts?
Then look at your Discretionary and Important spending. Would it be possible to cut back some of that and perhaps put a few extra dollars a month into getting rid of that credit card debt? How “important” are the things on your Important list? Would it be too much of a hit to your standard of living to eliminate or scale back on some of those things temporarily to get rid of high interest credit card bills?
Finally, you may look at the possibility of debt consolidation. For example, could you possibly take out a home equity loan at a lower rate of interest (which, depending on your tax situation, may also be tax deductible) to pay off higher interest rate credit cards or loans? CAVEAT: You have to be very careful in using this method of retiring debt. Some people will take out a home equity loan to pay off credit cards. This gives them a little relief and they start using their credit cards again. Now they have not only a home equity loan to pay on, but they’re right back where they started with the credit cards again. You MUST be committed to not going back to old practices for this to work.
When looking at debt consolidation, always be very careful of using those “credit repair” or “debt consolidation” companies. Many of those are scams that will only make things worse. Also, use caution when transferring balances from one credit card to another just because it has a lower interest rate. Often the “low” interest rate is just an introductory rate and there is usually transfer fee. You’ll want to make sure that you’ve read all the fine print and been through all the numbers when you restructure your debt.
Assignment: Think about the things we’ve discussed today and see if there is any way you can begin paying some of your debt off early. One way to look at it is to consider what you could be doing with that money if you weren’t paying all that interest! Once you pay one debt off you can roll the money you were paying on that into paying off the next one.
Next segment we’ll being to look at the part where wealth building really begins to pay off – saving.
At the beginning of this series I likened budgeting to a balloon with a pinhole. You put a pinhole in a balloon and try to blow it up, but as air fills the balloon the hole gets bigger and you continually have to blow harder to keep the balloon inflated. Think of the balloon as your wealth and the pinhole as your spending. The key to keep the pinhole at a manageable level and allow the balloon to inflate you absolutely have to get a handle on spending -- a lesson our government would do well to learn!
In the budgeting exercise I suggested that you come up with three categories of spending: Necessary, Important, and Discretionary. We defined the Necessary category as things you are already committed to or the bare necessities of running a household like rent/mortgage, car payment (if you owe on a vehicle), groceries, utilities, etc. For many folks, debt makes up a significant amount of their necessary spending. If this is your situation then we need to start by looking at retiring as much of that as possible and/or restructuring it. The priority would be the debt upon which you are paying the highest interest rate (especially if any of that falls in the category of the credit traps that I discussed last segment). Identify those items and focus on them. How can you get those paid off as quickly as possible?
First, you may want to look at selling off some assets. Do you really need that boat? How often do you use it vs. how much are the payments are cutting into your budget? Would you possibly be able to get enough money from it to pay the note off and perhaps some left over to pay off other debts?
Then look at your Discretionary and Important spending. Would it be possible to cut back some of that and perhaps put a few extra dollars a month into getting rid of that credit card debt? How “important” are the things on your Important list? Would it be too much of a hit to your standard of living to eliminate or scale back on some of those things temporarily to get rid of high interest credit card bills?
Finally, you may look at the possibility of debt consolidation. For example, could you possibly take out a home equity loan at a lower rate of interest (which, depending on your tax situation, may also be tax deductible) to pay off higher interest rate credit cards or loans? CAVEAT: You have to be very careful in using this method of retiring debt. Some people will take out a home equity loan to pay off credit cards. This gives them a little relief and they start using their credit cards again. Now they have not only a home equity loan to pay on, but they’re right back where they started with the credit cards again. You MUST be committed to not going back to old practices for this to work.
When looking at debt consolidation, always be very careful of using those “credit repair” or “debt consolidation” companies. Many of those are scams that will only make things worse. Also, use caution when transferring balances from one credit card to another just because it has a lower interest rate. Often the “low” interest rate is just an introductory rate and there is usually transfer fee. You’ll want to make sure that you’ve read all the fine print and been through all the numbers when you restructure your debt.
Assignment: Think about the things we’ve discussed today and see if there is any way you can begin paying some of your debt off early. One way to look at it is to consider what you could be doing with that money if you weren’t paying all that interest! Once you pay one debt off you can roll the money you were paying on that into paying off the next one.
Next segment we’ll being to look at the part where wealth building really begins to pay off – saving.
Monday, November 9, 2009
Wealth Building 101 – Credit Traps
Now that we have a basic understanding of debt and how it works, this segment will focus on credit traps.
My philosophy on debt is that there is really no such thing as “good” debt, just “acceptable” debt. However, there is indeed very bad debt, debt that can get you in real trouble. Today we will be discussing the worst kinds of debt that you should avoid at all costs.
Rent-to-own is probably the worst debt of all time. Basically, rent-to-own companies are playing the odds and preying on people who either have a profound misunderstanding of how finances work or have a questionable credit history, or (usually) both. It’s the worst kind of trap. These companies will allow you to “rent” their furniture, electronics, etc. at what seems like a low weekly rate. The way it works is that you go and select a TV or something that has a price tag of $500. The company breaks the “payments” into low weekly payments, like $20. At the end of one year you will own the TV, assuming you continue making the payments, but if you do the math, you’ve really paid for that TV twice over the course of the year! If, at any time, you get behind on the payments they send a couple of guys to your house to pick the TV up and you get nothing for the payments you’ve made. Then they can turn around and rent the TV to some other poor soul and the cycle continues. Because people who use rent-to-own companies are by definition living beyond their means, this is the most likely scenario. The companies are playing the odds and continue to churn this inventory for as long as they can and then ultimately liquidate it after it’s been paid for many times over. What a racket!
Another more common debt trap is credit cards. We discussed credit cards in the last segment so I won’t go into great detail, but suffice it to say that if you are carrying a balance on your credit card on a regular basis it is a yellow, if not red flag, that your finances will be in trouble soon. Credit cards are a good tool when managed properly, but very few people have the discipline to do this and often get into trouble with them. The thing about credit cards is that, not only do you pay interest (which is like throwing money off a bridge); you also get stuck with late payment penalties if you don’t pay on time. The credit card companies are very helpful with this – they’re happy to take the pain away by just tacking that late payment onto your existing balance. Now, you’re paying interest on something you got no value from in the first place. These can stack up very quickly and before you know it, you’re a slave to your credit cards!
Consumer debt would be the next in line of least acceptable debt. This is where you buy something by financing it at the store. A lot of stores have specials where you can buy something and either don’t make payments or don’t pay interest for a certain period of time (90 days interest free!) or both. An interest free loan sounds like a pretty good deal on the surface, but if for any reason you don’t pay the loan in full at the end of that period they go back and retroactively charge you for all the interest accrued during that period and continue to charge you interest until the item is completely paid off. Depending on your state usury laws, this interest can sometimes be as high as 25%!
There are other similar types of bad debt like buying cars from certain used car lots (generally, buying used cars at a regular car dealership doesn’t fall into this category), using store credit cards, etc. The best way to deal with these is not to use them at all. Sometimes this means making some sacrifices in your standard of living, but the alternative is much worse.
Assignment: If you do not have any of the debt I described today congratulations -- you get a free day today! If you do have this sort of debt I recommend that you make a (hopefully very short) list of these accounts and try to figure out what can be done about eliminating this debt as quickly as possible. In a future segment I will be discussing ways you can reduce your debt, but until then it helps to get a handle on just how much you pay for this sort of debt each month and how that relates to your income. Once you realize that you are becoming a slave to your debt, it can be extremely motivating to get out from underneath it.
My philosophy on debt is that there is really no such thing as “good” debt, just “acceptable” debt. However, there is indeed very bad debt, debt that can get you in real trouble. Today we will be discussing the worst kinds of debt that you should avoid at all costs.
Rent-to-own is probably the worst debt of all time. Basically, rent-to-own companies are playing the odds and preying on people who either have a profound misunderstanding of how finances work or have a questionable credit history, or (usually) both. It’s the worst kind of trap. These companies will allow you to “rent” their furniture, electronics, etc. at what seems like a low weekly rate. The way it works is that you go and select a TV or something that has a price tag of $500. The company breaks the “payments” into low weekly payments, like $20. At the end of one year you will own the TV, assuming you continue making the payments, but if you do the math, you’ve really paid for that TV twice over the course of the year! If, at any time, you get behind on the payments they send a couple of guys to your house to pick the TV up and you get nothing for the payments you’ve made. Then they can turn around and rent the TV to some other poor soul and the cycle continues. Because people who use rent-to-own companies are by definition living beyond their means, this is the most likely scenario. The companies are playing the odds and continue to churn this inventory for as long as they can and then ultimately liquidate it after it’s been paid for many times over. What a racket!
Another more common debt trap is credit cards. We discussed credit cards in the last segment so I won’t go into great detail, but suffice it to say that if you are carrying a balance on your credit card on a regular basis it is a yellow, if not red flag, that your finances will be in trouble soon. Credit cards are a good tool when managed properly, but very few people have the discipline to do this and often get into trouble with them. The thing about credit cards is that, not only do you pay interest (which is like throwing money off a bridge); you also get stuck with late payment penalties if you don’t pay on time. The credit card companies are very helpful with this – they’re happy to take the pain away by just tacking that late payment onto your existing balance. Now, you’re paying interest on something you got no value from in the first place. These can stack up very quickly and before you know it, you’re a slave to your credit cards!
Consumer debt would be the next in line of least acceptable debt. This is where you buy something by financing it at the store. A lot of stores have specials where you can buy something and either don’t make payments or don’t pay interest for a certain period of time (90 days interest free!) or both. An interest free loan sounds like a pretty good deal on the surface, but if for any reason you don’t pay the loan in full at the end of that period they go back and retroactively charge you for all the interest accrued during that period and continue to charge you interest until the item is completely paid off. Depending on your state usury laws, this interest can sometimes be as high as 25%!
There are other similar types of bad debt like buying cars from certain used car lots (generally, buying used cars at a regular car dealership doesn’t fall into this category), using store credit cards, etc. The best way to deal with these is not to use them at all. Sometimes this means making some sacrifices in your standard of living, but the alternative is much worse.
Assignment: If you do not have any of the debt I described today congratulations -- you get a free day today! If you do have this sort of debt I recommend that you make a (hopefully very short) list of these accounts and try to figure out what can be done about eliminating this debt as quickly as possible. In a future segment I will be discussing ways you can reduce your debt, but until then it helps to get a handle on just how much you pay for this sort of debt each month and how that relates to your income. Once you realize that you are becoming a slave to your debt, it can be extremely motivating to get out from underneath it.
Saturday, November 7, 2009
Wealth Building 101 – Debt (Part 2)
Credit cards are the root of all evil in personal finance, right? Well, that depends. There are differing views on use of credit cards, but my personal view is that it depends on how you use the credit card and how disciplined you are with your finances. Credit cards can be a useful convenience that can help you manage your cash flow better and even give you a little cash back, or they can be your worst nightmare and your vehicle to financial disaster. It all depends on you.
A couple of rules of thumb for using credit cards properly: First, never buy something on a credit card that you don’t already have the available cash to pay for. Second, never, ever maintain a balance on a credit card (which is easy if you apply the first rule at the time of purchase).
Also, remember that not all credit cards are created equal. You want to shop around for the best possible deal when looking for a credit card. If you use the two rules I mention above, the interest rate is not a major consideration although I wouldn’t ignore it altogether just in case you get in a bind on month and find yourself having to carry a balance, but if you can stick to the two rules it doesn’t have to be the primary consideration.
What I personally look for in a credit card is one that has no annual fee and has some sort of perks program. The one I use has a cash back rewards program where I get a certain percentage of my purchases back in cash at the end of the year. It’s tiered based on the cumulative amount of purchases over a year, but usually averages out to slightly over 1% overall. When I was traveling for my job I put everything on my credit card that I didn’t absolutely have to put on the corporate credit card and I was religious about getting my expense reports in right after a trip. At any given time I could have as much as a couple of thousand dollars sitting in the bank from reimbursements that I didn’t have to pay on my credit card for 30 days or so. That cash was earning interest while it was waiting to pay the bill – again, taking care of the pennies! I also received the cash back at the end of the year and sometimes got as much as $1,000 just around Christmas time. That said, I want to reinforce that this practice takes a tremendous amount of organization and discipline. If you don’t have that, I recommend against credit cards and suggest that you use debit cards instead. I also want to reiterate the theme of using them as a tool, not an extension of your income.
Sometimes the question comes up as to how credit cards can give cash back on purchases. This is due to two things. First, most credit cards charge a service charge for your purchase to the merchants who accept them. Perks programs are usually funded out of a portion of that service charge. Second, (surprise!) not everyone pays off their balance every month and the hope of the credit card company is that eventually you will get in over your head and wind up being one of those people. Live to prove them wrong!
Interestingly enough, the credit industry looks at people who pay their balances off in full every month as “mooches”. Well, I wear that title as a badge of honor. After all, it’s my hard earned money we’re talking about. One caveat here: recent legislation passed has made it harder for the credit industry to “prey” upon irresponsible people who don’t pay their bills. This has a cascading effect on those of us who use credit wisely. Credit card companies and financial institutions that offer consumer loans are now starting to charge annual fees even for those with pristine credit. Be sure to review the conditions of your credit card and read the update (required by law) that your credit card company sends to you on those conditions.
Assignment: Take a look at your credit cards. Are you paying them off monthly? Do you have multiple credit cards? If so, and if you are carrying balances on them does one have a higher interest rate than the other? If so, think about whether it might make sense to consolidate. Caution: check the conditions of a balance transfer carefully before you think about transferring balances though – many companies charge a transfer fee!
A couple of rules of thumb for using credit cards properly: First, never buy something on a credit card that you don’t already have the available cash to pay for. Second, never, ever maintain a balance on a credit card (which is easy if you apply the first rule at the time of purchase).
Also, remember that not all credit cards are created equal. You want to shop around for the best possible deal when looking for a credit card. If you use the two rules I mention above, the interest rate is not a major consideration although I wouldn’t ignore it altogether just in case you get in a bind on month and find yourself having to carry a balance, but if you can stick to the two rules it doesn’t have to be the primary consideration.
What I personally look for in a credit card is one that has no annual fee and has some sort of perks program. The one I use has a cash back rewards program where I get a certain percentage of my purchases back in cash at the end of the year. It’s tiered based on the cumulative amount of purchases over a year, but usually averages out to slightly over 1% overall. When I was traveling for my job I put everything on my credit card that I didn’t absolutely have to put on the corporate credit card and I was religious about getting my expense reports in right after a trip. At any given time I could have as much as a couple of thousand dollars sitting in the bank from reimbursements that I didn’t have to pay on my credit card for 30 days or so. That cash was earning interest while it was waiting to pay the bill – again, taking care of the pennies! I also received the cash back at the end of the year and sometimes got as much as $1,000 just around Christmas time. That said, I want to reinforce that this practice takes a tremendous amount of organization and discipline. If you don’t have that, I recommend against credit cards and suggest that you use debit cards instead. I also want to reiterate the theme of using them as a tool, not an extension of your income.
Sometimes the question comes up as to how credit cards can give cash back on purchases. This is due to two things. First, most credit cards charge a service charge for your purchase to the merchants who accept them. Perks programs are usually funded out of a portion of that service charge. Second, (surprise!) not everyone pays off their balance every month and the hope of the credit card company is that eventually you will get in over your head and wind up being one of those people. Live to prove them wrong!
Interestingly enough, the credit industry looks at people who pay their balances off in full every month as “mooches”. Well, I wear that title as a badge of honor. After all, it’s my hard earned money we’re talking about. One caveat here: recent legislation passed has made it harder for the credit industry to “prey” upon irresponsible people who don’t pay their bills. This has a cascading effect on those of us who use credit wisely. Credit card companies and financial institutions that offer consumer loans are now starting to charge annual fees even for those with pristine credit. Be sure to review the conditions of your credit card and read the update (required by law) that your credit card company sends to you on those conditions.
Assignment: Take a look at your credit cards. Are you paying them off monthly? Do you have multiple credit cards? If so, and if you are carrying balances on them does one have a higher interest rate than the other? If so, think about whether it might make sense to consolidate. Caution: check the conditions of a balance transfer carefully before you think about transferring balances though – many companies charge a transfer fee!
Friday, November 6, 2009
Wealth Building 101 - Debt (Part 1)
I’d like to drop anchor here and spend some time talking about what I consider to be the number one killer of personal wealth today -- debt. It’s so important in fact, that I had to break this into multiple segments. Just to be clear, I’m not one of those who believes debt should never be used, it’s used all the time in businesses and it’s impractical to expect someone to live completely debt free all the time, especially when they’re young and just starting out. However, I do believe it should be used very sparingly and wisely.
The key difference in thinking of those who are successful in using debt well and those who aren’t is that the ones who handle debt properly use it as a tool, while the people who allow it to get out of control use it simply as an extension of their income to live beyond their means.
Obviously, one of the key things to consider when dealing with debt is the interest rate you commit to. Let’s say for example that you take out a car loan for $20,000 @ 8% interest. Just using rough numbers to keep this simple you are going to wind up paying somewhere slightly below $1,600 for interest in the first year of the loan. This means that, in addition to the small amount you are applying to the principal (the actual money you borrowed), you are going to be shelling out somewhere in the neighborhood of (staying with round numbers here) $130 a month just for interest alone -- this is after tax money. Now that’s a chunk out of some people’s budget, but it gets worse. Assuming that your tax rate (including FICA, Federal, and State) is somewhere in the neighborhood of 35% (and this is being pretty conservative) that means that your actual pretax income to service the interest on this debt is going to be somewhere around $200 a month. So, if you make $48,000/year you’re basically using around 5% of your gross income just to pay interest on this one loan! How’s that for a pay cut?
Another thing to take into account is whether the interest is tax deductible. Mortgages and home equity loans/lines of credit are generally deductible for most people who itemize on their taxes. Interest on student loans are tax deductible for folks who are under a certain income level whether they itemize or not. There may be a few others that qualify, but these are the most common. You should talk to your tax advisor to see which interest qualifies as tax deductible for you.
Going back to the example used earlier, if that loan were a tax deductible home equity loan you wouldn’t have to factor in some of the taxes (sorry folks, FICA’s not on the table when it comes to tax deductions. After all, we have to feed the monsters we call Social Security and Medicare.) So, you could cut the actual amount of pre-tax income you have to produce to service the interest by somewhere between 25 – 30% just by choosing the source of your loan carefully and shopping for the best interest rate.
One last thing to consider – try very hard to never commit long term to a variable interest rate. Uncertainty is never your friend when dealing with finances and variable interest rates are the epitome of uncertainty. This is one of the things that got a lot of people in trouble during the real estate meltdown!
In the next segment, our discussion will be centered around the (evil?) practice of credit card use. I hope you’ll join me for that!
Assignment: Make a list of all your debt. Analyze each one to see what the interest rate is. Determine which ones are highest taking into account which ones have tax deductible status. Rank them in order from the highest interest rate to the lowest. Hang on to this list – we’ll be using it later when we talk about debt reduction and tweaking our budget.
The key difference in thinking of those who are successful in using debt well and those who aren’t is that the ones who handle debt properly use it as a tool, while the people who allow it to get out of control use it simply as an extension of their income to live beyond their means.
Obviously, one of the key things to consider when dealing with debt is the interest rate you commit to. Let’s say for example that you take out a car loan for $20,000 @ 8% interest. Just using rough numbers to keep this simple you are going to wind up paying somewhere slightly below $1,600 for interest in the first year of the loan. This means that, in addition to the small amount you are applying to the principal (the actual money you borrowed), you are going to be shelling out somewhere in the neighborhood of (staying with round numbers here) $130 a month just for interest alone -- this is after tax money. Now that’s a chunk out of some people’s budget, but it gets worse. Assuming that your tax rate (including FICA, Federal, and State) is somewhere in the neighborhood of 35% (and this is being pretty conservative) that means that your actual pretax income to service the interest on this debt is going to be somewhere around $200 a month. So, if you make $48,000/year you’re basically using around 5% of your gross income just to pay interest on this one loan! How’s that for a pay cut?
Another thing to take into account is whether the interest is tax deductible. Mortgages and home equity loans/lines of credit are generally deductible for most people who itemize on their taxes. Interest on student loans are tax deductible for folks who are under a certain income level whether they itemize or not. There may be a few others that qualify, but these are the most common. You should talk to your tax advisor to see which interest qualifies as tax deductible for you.
Going back to the example used earlier, if that loan were a tax deductible home equity loan you wouldn’t have to factor in some of the taxes (sorry folks, FICA’s not on the table when it comes to tax deductions. After all, we have to feed the monsters we call Social Security and Medicare.) So, you could cut the actual amount of pre-tax income you have to produce to service the interest by somewhere between 25 – 30% just by choosing the source of your loan carefully and shopping for the best interest rate.
One last thing to consider – try very hard to never commit long term to a variable interest rate. Uncertainty is never your friend when dealing with finances and variable interest rates are the epitome of uncertainty. This is one of the things that got a lot of people in trouble during the real estate meltdown!
In the next segment, our discussion will be centered around the (evil?) practice of credit card use. I hope you’ll join me for that!
Assignment: Make a list of all your debt. Analyze each one to see what the interest rate is. Determine which ones are highest taking into account which ones have tax deductible status. Rank them in order from the highest interest rate to the lowest. Hang on to this list – we’ll be using it later when we talk about debt reduction and tweaking our budget.
Thursday, November 5, 2009
Wealth Building 101 - Budgeting
A wise man told me once, “If you take care of the pennies, the dollars will take care of themselves”. This advice has served me extremely well over the years and is the essence of wealth building. I look at budgeting kind of like a balloon with a pin hole. If you take a balloon and poke a little hole in it and try to blow it up, you may have some success at getting it to expand a bit for a while, but you’ll notice that as the balloon gets bigger the hole gets bigger as well. More air releases from the hole and you have to work harder and harder to keep the balloon inflated. This is how budgeting works as well! So… we have to make sure that we keep those dreaded “pinholes” out of our budget.
The point is that you must have a good plan on how your money is being spent each day/week/month etc. Most folks have a vague idea of what they pay in rent/mortgage, car payments, etc. but the ones who are truly successful are those who plan this stuff in advance and note variances for future planning.
Managing a budget in theory is simple in that all you have to do is spend less than you make, but in practice it’s difficult because, let’s face it, life happens! So, really if you think about it, it’s all a matter of choices. Whether you have a budget or not you are making decisions every day about how you spend your money, but the profound difference that budgeting makes is that you make a conscious decision on where your money goes and you weigh that decision against your short, intermediate, and long term financial goals. This is a simple habit that for some is hard to get started, but makes all the difference in the world!
When planning a budget, one of the major pitfalls is not being realistic in your planning. For example, we all know that there will be unexpected expenses from time to time: new tires for the car, unexpected medical bills -- the list goes on. So, when creating a budget you plan to set aside a little something each pay period for those pesky little surprises. If you don’t plan for these things, when they inevitably come up, you can easily get discouraged and abandon your budget. Often this causes people to live off of credit. This is a fatal mistake in wealth building and a topic that I will cover in a separate article.
Another thing to consider in your planning is what you are going to allow for discretionary spending. This is another landmine that chips away at wealth if left unchecked. It’s extremely easy to spend money on lunch, coffee, and all those little expenses that don’t seem to be that much, but can add up to a huge chunk of your net income if you don’t plan them well. I recommend setting a weekly “allowance” for yourself and factoring that into your budget. There may be weeks that you exceed that allowance, but at least you make a conscious decision to do so and it triggers something in your mind that you’re spending more than planned this week. That may make the difference between whether you get a large latte or a small. These things may seem miniscule, but over time they can make a staggering difference!
A great benefit to having a well defined budget is that you can manage your cash flow better. When you plan your spending, you factor into it when bills come due vs. when you get income throughout the month. This will help to ensure that you can meet your short term obligations without having to rack up late payment penalties for being only two or three days late on your car payment.
One thing that really helps me in budgeting is to divide my expenses into prioritization categories. You may come up with your own, but to get you started, these are the categories that I use:
There is no doubt that having a well defined budget will be critical to your success in wealth building, but it has to be a budget that you’re comfortable with and are willing to stick to, otherwise it just won’t work. Again, the key is that you are making conscious decisions here rather than simply frittering your hard earned money away by default because you don’t have a plan in place.
Assignment: Make a list of your expenses (weekly, monthly, and annual). Create some prioritized categories that make sense for you and put those expenses under each of the categories. Then take your monthly income and determine if you’re going to have negative or positive cash flow for each month. You may have to take significant annual expenses like Christmas or property taxes and divide them into a monthly figure so that you are “saving” a little for them each month. Then determine if your average monthly income exceeds your average monthly expenses or vice versa. If it’s the latter then you have to make some hard choices. You may have to analyze whether some of the “important” expenses need to be temporarily moved down into the “discretionary” category until you get on track.
The point is that you must have a good plan on how your money is being spent each day/week/month etc. Most folks have a vague idea of what they pay in rent/mortgage, car payments, etc. but the ones who are truly successful are those who plan this stuff in advance and note variances for future planning.
Managing a budget in theory is simple in that all you have to do is spend less than you make, but in practice it’s difficult because, let’s face it, life happens! So, really if you think about it, it’s all a matter of choices. Whether you have a budget or not you are making decisions every day about how you spend your money, but the profound difference that budgeting makes is that you make a conscious decision on where your money goes and you weigh that decision against your short, intermediate, and long term financial goals. This is a simple habit that for some is hard to get started, but makes all the difference in the world!
When planning a budget, one of the major pitfalls is not being realistic in your planning. For example, we all know that there will be unexpected expenses from time to time: new tires for the car, unexpected medical bills -- the list goes on. So, when creating a budget you plan to set aside a little something each pay period for those pesky little surprises. If you don’t plan for these things, when they inevitably come up, you can easily get discouraged and abandon your budget. Often this causes people to live off of credit. This is a fatal mistake in wealth building and a topic that I will cover in a separate article.
Another thing to consider in your planning is what you are going to allow for discretionary spending. This is another landmine that chips away at wealth if left unchecked. It’s extremely easy to spend money on lunch, coffee, and all those little expenses that don’t seem to be that much, but can add up to a huge chunk of your net income if you don’t plan them well. I recommend setting a weekly “allowance” for yourself and factoring that into your budget. There may be weeks that you exceed that allowance, but at least you make a conscious decision to do so and it triggers something in your mind that you’re spending more than planned this week. That may make the difference between whether you get a large latte or a small. These things may seem miniscule, but over time they can make a staggering difference!
A great benefit to having a well defined budget is that you can manage your cash flow better. When you plan your spending, you factor into it when bills come due vs. when you get income throughout the month. This will help to ensure that you can meet your short term obligations without having to rack up late payment penalties for being only two or three days late on your car payment.
One thing that really helps me in budgeting is to divide my expenses into prioritization categories. You may come up with your own, but to get you started, these are the categories that I use:
- Necessary: Things you are already committed to or the bare necessities of running a household like rent/mortgage, car payment (if you owe on a vehicle), groceries, utilities, etc.
- Important: Things that, although you could do without, contribute to your standard of living that you’re not willing to give up unless it becomes absolutely necessary like vacations, cable TV, gifts for friends/family, hobbies and the like.
- Discretionary: Things that you like to do when times are good, but if times get tight you’re willing to tweak back on a bit or make some changes like eating lunch out rather than bringing your lunch to work, dining out, going to baseball games (OK, some may make this a necessity, but it’s all about choices right?) :)
There is no doubt that having a well defined budget will be critical to your success in wealth building, but it has to be a budget that you’re comfortable with and are willing to stick to, otherwise it just won’t work. Again, the key is that you are making conscious decisions here rather than simply frittering your hard earned money away by default because you don’t have a plan in place.
Assignment: Make a list of your expenses (weekly, monthly, and annual). Create some prioritized categories that make sense for you and put those expenses under each of the categories. Then take your monthly income and determine if you’re going to have negative or positive cash flow for each month. You may have to take significant annual expenses like Christmas or property taxes and divide them into a monthly figure so that you are “saving” a little for them each month. Then determine if your average monthly income exceeds your average monthly expenses or vice versa. If it’s the latter then you have to make some hard choices. You may have to analyze whether some of the “important” expenses need to be temporarily moved down into the “discretionary” category until you get on track.
Wednesday, November 4, 2009
Wealth Building 101 - Financial Assessment
Businesses use many measurements to determine their financial health, but the three main things that they look at the most are their Balance Sheet, their Income Statement, and their Statement of Cash Flows.
A balance sheet in the personal finance world is often called “net worth”. It looks at an individual’s financial position at a given point in time. Think of it as a financial snapshot for a given date. Businesses typically look at their balance sheet on a quarterly and annual basis, but in personal finance it’s probably more practical to stick with annual. The formula for determining net worth is very simple: Assets – Liabilities = Net Worth. Assets are things that you own of value that, in theory, could be liquidated (sold) to produce cash to pay off your liabilities. Liabilities are things that you owe money on such as cars, homes, credit cards, etc. When you calculate your net worth, if you would theoretically be able to liquidate your assets and with the proceeds pay off all your liabilities, then any money left would be your net worth. Amazingly, many folks actually have a negative net worth.
An income statement is something that is measured over a period of time (vs. a discrete point in time as with the balance sheet) and it measures how profitable your business is. It helps to look at the income statement on a monthly basis. The formula for that is just as simple: Income – Expenses = Net Income. If your net income is consistently positive then you are in good shape. If it’s consistently negative, then you have some hard decisions to make!
The Statement of Cash Flows is a bit more complicated and, frankly, is where many people fail with their finances. This basically measures income and expenditures on an ongoing basis. It tells you how well you will be able to meet your financial obligations. If you are not watching your cash flow carefully you could still get into financial trouble even if you technically have a positive net income for the month! For example, if your mortgage is due the first of the month and you don’t have cash in your bank account to pay for it because you don’t get paid till the 15th of the month, then you have a cash flow problem. Many people fall into the trap of not managing their cash flow and pay for it dearly in the form of late payment penalties and additional interest. Left unchecked, these things will eventually impact your income statement and ultimately cause your net worth to go down the tubes.
The true secret to building wealth is to be obsessive about keeping an eye on these three measurements. I will deal with these more later in the series. One thing that is extremely helpful is to purchase (and use!) one of the many personal finance software applications on the market today. I’m not advocating any particular one – you need to decide which on is better for you. I believe Quicken (produced by Intuit) and Money (produced by Microsoft) are the leaders in the industry, but there are many others out there that may be better and cheaper.
Assignment: Review the three measurements we’ve discussed in this post and see if you can put together a Balance Sheet and Income Statement for your own personal situation (we'll discuss more on the Statement of Cash Flows later during budgeting). See where you stand. Are either of them showing negative numbers? If so, then we have some work to do!
A balance sheet in the personal finance world is often called “net worth”. It looks at an individual’s financial position at a given point in time. Think of it as a financial snapshot for a given date. Businesses typically look at their balance sheet on a quarterly and annual basis, but in personal finance it’s probably more practical to stick with annual. The formula for determining net worth is very simple: Assets – Liabilities = Net Worth. Assets are things that you own of value that, in theory, could be liquidated (sold) to produce cash to pay off your liabilities. Liabilities are things that you owe money on such as cars, homes, credit cards, etc. When you calculate your net worth, if you would theoretically be able to liquidate your assets and with the proceeds pay off all your liabilities, then any money left would be your net worth. Amazingly, many folks actually have a negative net worth.
An income statement is something that is measured over a period of time (vs. a discrete point in time as with the balance sheet) and it measures how profitable your business is. It helps to look at the income statement on a monthly basis. The formula for that is just as simple: Income – Expenses = Net Income. If your net income is consistently positive then you are in good shape. If it’s consistently negative, then you have some hard decisions to make!
The Statement of Cash Flows is a bit more complicated and, frankly, is where many people fail with their finances. This basically measures income and expenditures on an ongoing basis. It tells you how well you will be able to meet your financial obligations. If you are not watching your cash flow carefully you could still get into financial trouble even if you technically have a positive net income for the month! For example, if your mortgage is due the first of the month and you don’t have cash in your bank account to pay for it because you don’t get paid till the 15th of the month, then you have a cash flow problem. Many people fall into the trap of not managing their cash flow and pay for it dearly in the form of late payment penalties and additional interest. Left unchecked, these things will eventually impact your income statement and ultimately cause your net worth to go down the tubes.
The true secret to building wealth is to be obsessive about keeping an eye on these three measurements. I will deal with these more later in the series. One thing that is extremely helpful is to purchase (and use!) one of the many personal finance software applications on the market today. I’m not advocating any particular one – you need to decide which on is better for you. I believe Quicken (produced by Intuit) and Money (produced by Microsoft) are the leaders in the industry, but there are many others out there that may be better and cheaper.
Assignment: Review the three measurements we’ve discussed in this post and see if you can put together a Balance Sheet and Income Statement for your own personal situation (we'll discuss more on the Statement of Cash Flows later during budgeting). See where you stand. Are either of them showing negative numbers? If so, then we have some work to do!
Tuesday, November 3, 2009
Wealth Building 101 – Introduction to the Series
I thought I’d switch gears today and talk about another subject that I am very interested in and have been studying and actively engaged in for the past 18 years – wealth building.
This is an introduction to a multi-part series in the subject. I have nothing to sell here and this information is probably worth exactly what you’re paying for it, but nonetheless at the very least I hope it will be interesting for you and perhaps even provide some ideas that may help you in your own life.
This series is intended to be interactive, so not only will I provide the basic information, but I will also suggest some assignments that will help you to apply this information to your life and your situation. Since I don’t claim to know everything there is about this subject, I welcome comments, questions, and suggestions. You may either comment directly on the blog or if you prefer to have a private discussion please feel free to e-mail me at johnnydangerously64@gmail.com .
Please note that all this information will be very general in nature – I will not provide any specific investment information. I do not hold myself out to be a financial advisor; my licenses for this sort of thing have long since expired. I am coming to you simply as someone who has some experience in this subject that I would like to share with others. I welcome you to this dialog!
Some things that I will be covering in this series are:
It may seem odd to say this, but the first step to building wealth is to reconcile with yourself that it’s OK to be wealthy. With all the rhetoric out there today about the “evil rich” one would think that being wealthy and being a good, responsible member of society cannot coexist. I submit to you that this notion is patently false! As I’ve mentioned in a previous comment on this very blog, being wealthy is all about the attitude and how you use that wealth.
Another key step to take in beginning this journey is to determine exactly what it means to you to be wealthy and what your motivations are. If hoarding money and gaining material possessions are your only goals here then may I suggest that you pick up another hobby, because people who view wealth in this way are never happy. This is because they simply never have enough.
To start this process, I recommend that you sit down and decide why wealth building is important to you. Are you working to improve your quality of life? Do you want to be able to be generous to friends, family, or people in need? Do you want to be able to send your kids to college? Do you want financial security in your golden years? How would you define wealth within the context your own life? What are your specific financial goals in life and is it worth what it will take to achieve those objectives? This is certainly not an exhaustive list of questions that you should ask yourself, but you get the idea.
This is an introduction to a multi-part series in the subject. I have nothing to sell here and this information is probably worth exactly what you’re paying for it, but nonetheless at the very least I hope it will be interesting for you and perhaps even provide some ideas that may help you in your own life.
This series is intended to be interactive, so not only will I provide the basic information, but I will also suggest some assignments that will help you to apply this information to your life and your situation. Since I don’t claim to know everything there is about this subject, I welcome comments, questions, and suggestions. You may either comment directly on the blog or if you prefer to have a private discussion please feel free to e-mail me at johnnydangerously64@gmail.com .
Please note that all this information will be very general in nature – I will not provide any specific investment information. I do not hold myself out to be a financial advisor; my licenses for this sort of thing have long since expired. I am coming to you simply as someone who has some experience in this subject that I would like to share with others. I welcome you to this dialog!
Some things that I will be covering in this series are:
- Financial Assessment – how to objectively determine what your current financial situation is.
- Budgeting – ideas on budgeting and common mistakes people make.
- Planning – techniques for deciding what actions to take.
- Actions – how to execute your plan.
- Financial knowledge base – basic things you need to understand about how finance works and how to make your finances work for you.
- Assignment 1: Take about 5 – 10 minutes to brainstorm and make a list of these questions. Once you have that list, take another 20 minutes or so to answer these questions.
Monday, November 2, 2009
What's Wrong With the GOP - A Humble Observation
I think America is beginning to realize that they bought a lemon in president Obama. I think it’s also fair to say that this infestation of the Democratic Party is more invasive and repulsive than a houseful of cockroaches. Most polls show that the American electorate is slightly right of center on the political spectrum, so it begs the question – why are we allowing these uber-liberal politicians to take over our political system and what can be done about it?
There has been plenty of Bush bashing from the left, so I won’t dwell on this too long, but I believe it started with the Bush administration. I truly think, all things considered, George W. Bush was a good president and that he had the interests of the American people at heart, especially with respect to national security. However, there are a few things regarding spending and domestic policy that Republicans need to take ownership of and correct.
1. They had majority control of both chambers of congress and the White House for two full sessions of congress. To their credit they got the Bush tax cuts passed, but why in the world did they vote them in as temporary? Without legislative action these tax cuts will expire after 2010. President Obama and his henchmen in congress will undoubtedly allow them to expire. The Republicans should have worked to make them permanent when they had the chance.
2. President Bush in a genuine attempt to reach across the aisle partnered with the late Senator Kennedy to create the “No Child Left Behind Act” expanding not only the cost to the taxpayers, but more importantly, the federal government’s role in education. He was joined in this effort by Rep. John Boehner (R-OH) and Sen. Judd Gregg (R-NH).
3. After a solid victory in 2004 and still holding a majority in both chambers, President Bush made a haphazard attempt to reform Social Security – a broken program on life support that will either go broke or cause significant tax increases in the future to keep alive. Although this is a very tough and complicated issue, there were many great ideas floating around out there on how to fix it through, if not complete, at least partial privatization of the program. I believe something could have been done about it, but due to the Republican’s inability to come up with a solid message for this, the initiative fizzled and was abandoned.
4. So… as a follow up to this, President Bush also signed into law the “Medicare Prescription Drug, Improvement, and Modernization Act” (aka Medicare Part D) which took effect on 1/1/2006 - this to expand a broken program which based on current obligation, if continued indefinitely, would run an $85.6 TRILLION deficit! I call this throwing good money after bad.
5. In the 2008 presidential election the Republicans took a devastating loss to the Democrats due to the fact that they could not come up with a decent presidential candidate. In my opinion, John McCain’s lackluster performance was due to two things – his inability to articulate a clear and consistent message during the campaign, and his tragic error of trying to get the electorate to buy into his populist message pandering to the so-called “moderates” (aka liberal lite). In my mind, there is no other explanation as to why America would elect a neophyte with zero executive experience and a paper thin resume.
There are many other examples of these sorts of errors in political judgment by the Republicans, but my time is limited, so I will stop here.
So what of the future of the GOP? Well, it’s unclear right now, but all indications point to the fact that with the leadership of Michael Steele, they are continuing to try to move to the center to rebrand the Republican Party and pick up the “moderate” vote. I believe this is a losing strategy. The town hall meetings and the tea parties that occurred this summer are an indication of this. In an environment where the liberals are making great strides in infiltrating our political system, the GOP (or perhaps a third party) needs to step in with a clear message that this is a government by and for the people and that we won’t stand for any more entitlement programs or wasteful government spending.
There has been plenty of Bush bashing from the left, so I won’t dwell on this too long, but I believe it started with the Bush administration. I truly think, all things considered, George W. Bush was a good president and that he had the interests of the American people at heart, especially with respect to national security. However, there are a few things regarding spending and domestic policy that Republicans need to take ownership of and correct.
1. They had majority control of both chambers of congress and the White House for two full sessions of congress. To their credit they got the Bush tax cuts passed, but why in the world did they vote them in as temporary? Without legislative action these tax cuts will expire after 2010. President Obama and his henchmen in congress will undoubtedly allow them to expire. The Republicans should have worked to make them permanent when they had the chance.
2. President Bush in a genuine attempt to reach across the aisle partnered with the late Senator Kennedy to create the “No Child Left Behind Act” expanding not only the cost to the taxpayers, but more importantly, the federal government’s role in education. He was joined in this effort by Rep. John Boehner (R-OH) and Sen. Judd Gregg (R-NH).
3. After a solid victory in 2004 and still holding a majority in both chambers, President Bush made a haphazard attempt to reform Social Security – a broken program on life support that will either go broke or cause significant tax increases in the future to keep alive. Although this is a very tough and complicated issue, there were many great ideas floating around out there on how to fix it through, if not complete, at least partial privatization of the program. I believe something could have been done about it, but due to the Republican’s inability to come up with a solid message for this, the initiative fizzled and was abandoned.
4. So… as a follow up to this, President Bush also signed into law the “Medicare Prescription Drug, Improvement, and Modernization Act” (aka Medicare Part D) which took effect on 1/1/2006 - this to expand a broken program which based on current obligation, if continued indefinitely, would run an $85.6 TRILLION deficit! I call this throwing good money after bad.
5. In the 2008 presidential election the Republicans took a devastating loss to the Democrats due to the fact that they could not come up with a decent presidential candidate. In my opinion, John McCain’s lackluster performance was due to two things – his inability to articulate a clear and consistent message during the campaign, and his tragic error of trying to get the electorate to buy into his populist message pandering to the so-called “moderates” (aka liberal lite). In my mind, there is no other explanation as to why America would elect a neophyte with zero executive experience and a paper thin resume.
There are many other examples of these sorts of errors in political judgment by the Republicans, but my time is limited, so I will stop here.
So what of the future of the GOP? Well, it’s unclear right now, but all indications point to the fact that with the leadership of Michael Steele, they are continuing to try to move to the center to rebrand the Republican Party and pick up the “moderate” vote. I believe this is a losing strategy. The town hall meetings and the tea parties that occurred this summer are an indication of this. In an environment where the liberals are making great strides in infiltrating our political system, the GOP (or perhaps a third party) needs to step in with a clear message that this is a government by and for the people and that we won’t stand for any more entitlement programs or wasteful government spending.
Sunday, November 1, 2009
ADMINISTRATIVE NOTE
UPDATE as of 11/2/09: Thanks to a good friend who was patient enough to help me work through this issue I think it has been resolved. Thanks C, for your patience and your help! :-)
If you encounter any other issues with the site, please feel free to e-mail me at johnnydangerously64@gmail.com.
*************************************************************
I want my blog to be as interactive as possible. Comments are very important.
That said, I have had some folks tell me that they have attempted to leave comments and were not successful in getting their comments posted. I'm not sure what the issue is, but I'm looking into it.
In the meantime, if you wish to leave a comment, try using the "anonymous" feature (you can put your screen name in your comment). I think that method will allow you to post a comment.
Thanks for your patience while I work on getting this fixed.
~ Johnny D.
If you encounter any other issues with the site, please feel free to e-mail me at johnnydangerously64@gmail.com.
*************************************************************
I want my blog to be as interactive as possible. Comments are very important.
That said, I have had some folks tell me that they have attempted to leave comments and were not successful in getting their comments posted. I'm not sure what the issue is, but I'm looking into it.
In the meantime, if you wish to leave a comment, try using the "anonymous" feature (you can put your screen name in your comment). I think that method will allow you to post a comment.
Thanks for your patience while I work on getting this fixed.
~ Johnny D.
Was Jesus a Socialist?
This was a question that I debated with a friend of mine a while back. She was an atheist and has since passed away. I believe this discussion was one of many she initiated because she was searching for something she could not find as an atheist. Today I post this in her memory and sincerely hope that before her passing she was able to find what she was looking for and make her peace with God.
The case she presented for why Christ was a socialist are in italics below. I answer each of those points, but first a quick review on the actual definition of socialism:
Socialism - A theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.
Before moving on, it’s important to understand that the concept of socialism doesn’t work unless there is an entity present to arbitrate this distribution. This is almost always some form of government.
He did not hold a job.
First and foremost, there is nowhere in the definition of socialism that indicates socialists don’t have jobs. After all, who would be earning money to pay taxes and support the bureaucracy that administers socialism? Secondly, Christ’s ministry did not start till around age 30. It’s commonly accepted that before that we was a carpenter and worked in his earthly stepfather’s business. When his ministry got underway he was a teacher/evangelist of his day. I think many carpenters, teachers, and evangelists would be quick to agree that these are indeed jobs!
He did not have an income. He lived off his friends.
If he didn't have an income then why did he need Judas Iscariot to manage the treasury of his ministry? Christ, like modern day evangelists, received income from his benefactors – people who supported him in his ministry. He provided a service (spiritual gratification & education) and was justly compensated for it. There are no accounts in the Bible or anywhere else for that matter that Jesus had to beg. Also, he did not live off his friends because most of his closest friends were part of his ministry and were supported through the same means as him. In fact, it could be argued that his friends lived off of him, but I digress.
He put people before anything else.
Surprisingly he did not. He put God before anything else. He certainly had mankind’s interest at heart – it was the entire point of his mission on earth, but he was submissive to God and God alone. I think it’s also worthy of note that putting people’s interest before anything else is not a trait of socialism, this is a personal trait. Socialism is an economic philosophy that in practice actually oppresses the people and winds up putting government before anything else.
He was a man of peace.
This begs the question - how is peace related to socialism? History is littered with stories of socialist leaders who were definitely not men of peace. Also, I believe that Jesus recognized the fact that there was a time to make a stand when necessary and was not shy about making his point. This is exemplified in the story of when he drove the vendors out of the temple. If you read the story carefully you will notice that he wasn't exactly asking them politely when he did that. As I recall he made a whip out of cords to assist him in that effort and was pretty forceful in removing the vendors.
He fed the people for free.
Actually he provided for their needs at a time when they could not, just like many others do today when they contribute to homeless shelters. The most famous instances of this were when he was preaching far away from anywhere that food could be bought. However, you’ll notice that he FIRST required an investment - he collected fish and loaves, THEN he gave the people a return on that investment. If I were to put a label on this, I'd call that closer to capitalism that socialism. :-)
He healed people for free. That means social programs food and health care.
He healed people to reveal the glory of God, not as a matter of charity. It’s interesting to note that he didn't provide comprehensive healthcare. He only healed a select few. Another point worthy of consideration is that often the people he healed made great efforts to get to where he was so that they could be healed, he didn't go to their homes or open "free" clinics in places convenient for them to get to.
He was against the religion of the day.
Indeed, in fact he was against "religion" in general. Not because of what it represented, but because of what the religious leaders of that day had made it into. It had become a ritualistic, legalistic bureaucracy that did not serve the people it claimed to help (sound familiar?).
He was against the government.
Christ was not against the government. In fact, he advocated civil obedience when it did not conflict with the higher principles of God. When questioned regarding the payment of taxes he said: "Render into Caesar what is Caesar's and God what is God's". He paid his taxes, unlike some “leaders” we've heard about in the news lately.
He was a revolutionary. He stood for freedom for the people.
Our founding fathers were revolutionaries as well. I think one would be hard pressed to characterize them as socialist. They were working to free the people from an oppressive government. Christ was here to free the people from a legalistic and oppressive religion.
He did not judge those who were looked down on by society. He partied with them.
This was one of the more amusing points. Yes, he dined with them and engaged in fellowship. I just want to make sure we both have the same definition of "partying". I don’t recall any recounts of late night trips to the 7-11 to get Cheetos and beer. Again, still not seeing how this trait makes him a socialist.
He was against capital punishment. He saved the woman that was to be stoned.
Just because he saved her doesn't prove he was against capital punishment. In context, this story was about the Pharisees trying to trap him with the conundrum of being either a heartless individual or one who stood by his core values. He simply revealed their duplicity by pointing out their hypocrisy. You'll notice there was nowhere in that story where he denounced capital punishment. You'll also notice that he told her to "go and sin no more", meaning that she had a responsibility to live within the laws of her day.
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In summary, I look at this list and see an individual who was apolitical, who had a sense of personal liberty, a love for humanity, a sense of personal responsibility for individuals, and respect for (but not necessarily agreement with) the government of his day.
Finally the acid test - all of Christ's actions were intended to show that God is the answer. All of socialism's actions are intended to show that government is the answer. These two are not even remotely related (unless of course the government is your god).
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To my friend - thanks for so many enlightening and spirited discussions. May you rest in the peace of our Lord and Savior Jesus Christ.
The case she presented for why Christ was a socialist are in italics below. I answer each of those points, but first a quick review on the actual definition of socialism:
Socialism - A theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.
Before moving on, it’s important to understand that the concept of socialism doesn’t work unless there is an entity present to arbitrate this distribution. This is almost always some form of government.
He did not hold a job.
First and foremost, there is nowhere in the definition of socialism that indicates socialists don’t have jobs. After all, who would be earning money to pay taxes and support the bureaucracy that administers socialism? Secondly, Christ’s ministry did not start till around age 30. It’s commonly accepted that before that we was a carpenter and worked in his earthly stepfather’s business. When his ministry got underway he was a teacher/evangelist of his day. I think many carpenters, teachers, and evangelists would be quick to agree that these are indeed jobs!
He did not have an income. He lived off his friends.
If he didn't have an income then why did he need Judas Iscariot to manage the treasury of his ministry? Christ, like modern day evangelists, received income from his benefactors – people who supported him in his ministry. He provided a service (spiritual gratification & education) and was justly compensated for it. There are no accounts in the Bible or anywhere else for that matter that Jesus had to beg. Also, he did not live off his friends because most of his closest friends were part of his ministry and were supported through the same means as him. In fact, it could be argued that his friends lived off of him, but I digress.
He put people before anything else.
Surprisingly he did not. He put God before anything else. He certainly had mankind’s interest at heart – it was the entire point of his mission on earth, but he was submissive to God and God alone. I think it’s also worthy of note that putting people’s interest before anything else is not a trait of socialism, this is a personal trait. Socialism is an economic philosophy that in practice actually oppresses the people and winds up putting government before anything else.
He was a man of peace.
This begs the question - how is peace related to socialism? History is littered with stories of socialist leaders who were definitely not men of peace. Also, I believe that Jesus recognized the fact that there was a time to make a stand when necessary and was not shy about making his point. This is exemplified in the story of when he drove the vendors out of the temple. If you read the story carefully you will notice that he wasn't exactly asking them politely when he did that. As I recall he made a whip out of cords to assist him in that effort and was pretty forceful in removing the vendors.
He fed the people for free.
Actually he provided for their needs at a time when they could not, just like many others do today when they contribute to homeless shelters. The most famous instances of this were when he was preaching far away from anywhere that food could be bought. However, you’ll notice that he FIRST required an investment - he collected fish and loaves, THEN he gave the people a return on that investment. If I were to put a label on this, I'd call that closer to capitalism that socialism. :-)
He healed people for free. That means social programs food and health care.
He healed people to reveal the glory of God, not as a matter of charity. It’s interesting to note that he didn't provide comprehensive healthcare. He only healed a select few. Another point worthy of consideration is that often the people he healed made great efforts to get to where he was so that they could be healed, he didn't go to their homes or open "free" clinics in places convenient for them to get to.
He was against the religion of the day.
Indeed, in fact he was against "religion" in general. Not because of what it represented, but because of what the religious leaders of that day had made it into. It had become a ritualistic, legalistic bureaucracy that did not serve the people it claimed to help (sound familiar?).
He was against the government.
Christ was not against the government. In fact, he advocated civil obedience when it did not conflict with the higher principles of God. When questioned regarding the payment of taxes he said: "Render into Caesar what is Caesar's and God what is God's". He paid his taxes, unlike some “leaders” we've heard about in the news lately.
He was a revolutionary. He stood for freedom for the people.
Our founding fathers were revolutionaries as well. I think one would be hard pressed to characterize them as socialist. They were working to free the people from an oppressive government. Christ was here to free the people from a legalistic and oppressive religion.
He did not judge those who were looked down on by society. He partied with them.
This was one of the more amusing points. Yes, he dined with them and engaged in fellowship. I just want to make sure we both have the same definition of "partying". I don’t recall any recounts of late night trips to the 7-11 to get Cheetos and beer. Again, still not seeing how this trait makes him a socialist.
He was against capital punishment. He saved the woman that was to be stoned.
Just because he saved her doesn't prove he was against capital punishment. In context, this story was about the Pharisees trying to trap him with the conundrum of being either a heartless individual or one who stood by his core values. He simply revealed their duplicity by pointing out their hypocrisy. You'll notice there was nowhere in that story where he denounced capital punishment. You'll also notice that he told her to "go and sin no more", meaning that she had a responsibility to live within the laws of her day.
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In summary, I look at this list and see an individual who was apolitical, who had a sense of personal liberty, a love for humanity, a sense of personal responsibility for individuals, and respect for (but not necessarily agreement with) the government of his day.
Finally the acid test - all of Christ's actions were intended to show that God is the answer. All of socialism's actions are intended to show that government is the answer. These two are not even remotely related (unless of course the government is your god).
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To my friend - thanks for so many enlightening and spirited discussions. May you rest in the peace of our Lord and Savior Jesus Christ.
Saturday, October 31, 2009
The Stimulus Package - Trick or Treat?
This particular day makes me think of Peanuts. Not the kind you eat, but the popular cartoon created through the genius of Charles Schultz. Linus, with his annual vigil in the pumpkin patch waiting for The Great Pumpkin, and Charlie Brown going trick or treating but getting rocks in his sack rather than candy.
It’s all great fun in fiction, but there was a distinct feeling of deja vue yesterday as I watched the Obama administration boasting when the economic numbers came out about how the recession is now over and touting how many jobs the “stimulus” package has created. Indeed, the GDP grew by 3.5% (annualized) in the 3rd quarter.
This is good news no doubt, given the numbers that we have seen for the past couple of years, but in their haste to take credit for this bump, the administration conveniently left out the fact that it actually decreased in the 2nd quarter by .7%. Economic recovery is generally regarded by economists as growth in two quarters back to back. Well, we haven’t seen that yet, so perhaps this “irrational exuberance” is a bit premature.
Now normally I’m a glass half full kind of guy, but here’s the deal: When looking at numbers like this you have to take into account what has actually caused this growth. A large portion of it, roughly 45% was due to motor vehicle sales. This was largely due to the popular “Cash for Clunkers” program that provided $4,500 government (funded by taxpayers) rebates to people who traded in vehicles that met certain criteria.
The question follows – what impact might this have on future car sales? It doesn’t really take a lot of deep analysis to realize that these people who purchased cars under this program will probably not turn around and buy cars again in the next quarter and, in fact, may be driving the same car 2 or 3 years down the road. So, what have we done here? We’ve actually accelerated the car buying cycle, thus leaving a void for future car sales - all at the taxpayers’ expense!
Another thing that contributed to these numbers is government spending. Anytime money is injected into the marketplace with government spending there is going to be a spike in growth, but the dirty little secret here is that many of the “jobs” created are government jobs which has done two things:
So, while we the people are sitting in the pumpkin patch waiting on The Great Pumpkin (aka the government) to come and save the day, our economy is rocks in its bag with artificial and temporary growth. Charlie Brown – I feel your pain!
- Created additional government bureaucracy that creates future commitments to support these jobs.
- Taken people out of the marketplace who, if you subscribe to the American view of capitalism, would normally be entrepreneurs or otherwise be adding to private sector productivity and placed them on the government payroll or working on pork barrel projects that will only be around temporarily.
Friday, October 30, 2009
Healthcare "Reform"?
The House version of the healthcare bill was unveiled yesterday. At 1,990 pages it’s a testament to what government bureaucracy can do! The cost of the bill according to CBO estimates is over $1 Trillion dollars. This doesn’t even include the cost of the so-called “doctor fix” for Medicare which is estimated at $245B.
So… this bill is supposed to “reform” healthcare and make it “more affordable”? Interesting technique. Exactly who is this going to make it more affordable for?
What’s even more interesting is that they think they can do this in the face of the epic failure of Medicare and Social Security, both of which are tragically in the red.
As the saying goes - those who fail to learn from history are doomed to repeat it. Hopefully the voters will hold these politicians accountable for their failure to learn...
So… this bill is supposed to “reform” healthcare and make it “more affordable”? Interesting technique. Exactly who is this going to make it more affordable for?
What’s even more interesting is that they think they can do this in the face of the epic failure of Medicare and Social Security, both of which are tragically in the red.
As the saying goes - those who fail to learn from history are doomed to repeat it. Hopefully the voters will hold these politicians accountable for their failure to learn...
Thursday, October 29, 2009
Welcome to the Grand Opening!
Welcome to the grand opening of Johnny Dangerously's blog. Please take a moment to read through the articles and comment as you see fit.
Here's my site mascot - Stormy:
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