Occam’s Razor

Real Life 101, Lesson 2: Personal Finance Basics

This is the second in an indeterminate series of entries that provides my “real world” lessons to young adults. It is my conviction that these lessons are rarely taught either at home or in the schools. For those who did not get them growing up you can get them from me for free. This is part of my way of giving back to the universe on the occasion of my 50th birthday. It is my hope that at least some of you reading this will benefit from my experience and save yourself a lot of unnecessary anguish.

When I was growing up managing money was straightforward. If you were just starting out it was almost impossible to get a credit card. Consequently, you lived within your means, no matter how modest they were.

Now managing money is much more complicated. Unfortunately, it is a good bet that you graduated high school without a money management class. Credit card companies spend millions trolling for financial fools willing to get themselves deeply in debt. They especially target young people, and try to make your indebtedness to them a lifelong habit. It appears that many Americans and young people in particular now see money as wholly abstract. As long as your ATM card works or your credit card is not over its spending limit, you assume your head is above water. Personal debt has become as abstract as the National Debt.

If this is what you think, you are sadly mistaken. Debt matters and the kind of debt you carry matters even more. Carrying debt costs you dearly and limits what you can do with our own money. Your goal should be not to be one of the millions of Americans with a negative net worth. Your goal should be to get out of debt entirely and start accumulating both a reserve of cash and a supply of assets that exceeds your debts. What you will get are financial resiliency and peace of mind. You want to be one of the financial winners in life, not one of the many losers out there always struggling under a crushing load of debt. If a real financial crisis hits, like a banking crisis or the need for an expensive operation not covered by insurance, these people will end up as financial road kill. You should not aspire to be one of the unfortunate.

Having no debt is ideal, but impractical. Credit card debt, like any debt that is unsecured is bad debt. Any debt that does not help you work yourself up the food chain is also bad debt. Consequently, student loans are probably good debt, providing you use the money to study earnestly in a program that will provide you with a good and steady income in future years.

All your expenses can be placed into three categories based on decreasing priority: things you need, things that will enhance your long-term financial solvency, and things you want. You need food, housing and a way to get to and from work. You may aspire to be a college graduate or a truck driver. Money spent here is your second priority because it enhances your long-term solvency. The latest Xbox game station may be something you think you need for your happiness. Do not delude yourself. It is something you want. You can live without it. If after satisfying the first two priorities there is money left over, go and buy something off your want list, providing you can pay for it without going into further debt.

You might say, “But I need high speed internet so I can respond to emails for job searches.” Sorry. It is convenient to you to have high-speed internet, but it is not a need. You can go to most public libraries and use their internet service for free. Similarly, you do not need a car. You can walk, bike, join a carpool or take public transportation. You might even be able to work from home. If you live in the middle of nowhere you can move to some place closer in. People survive without cars all the time and so can you. I used public transportation for years until I could afford a car. Similarly, you may think you need your own apartment. However, you could also find a roommate, take a room in a group house or even live in your parents’ spare bedroom if they will let you.

Granted this sort of life will not necessarily be fun. However painful what you are doing is in the short term, always keep in mind that it is a sound long-term strategy that has been proven effective over millennium. It means that you are living within your means. It means that you are positioning yourself for your long-term prosperity.

After seeing where your money goes, the next step is to make sure money goes where it needs to go first. This involves the prosaic but vital exercise of making and sticking to a budget. If you have more expenses than income, you either need to cut expenses, increase income or do both. Creating a budget is not rocket science. If need be you can do it with a pen and paper, as most generations until now have done it. Any spreadsheet can be used to create a budget. If you cannot afford Microsoft Excel, download the free OpenOffice suite, or use Google’s free spreadsheet tool.

For years, I would end up going “ouch” whenever that big bill arrived. I did not necessarily have all the cash on hand when, for example, the auto insurance bill arrived. Eventually I figured out that if I escrowed equal parts of the money I needed every month I would have all the money on hand when I needed it and I would not be so anxious. You can use the same strategy. My criteria is that any bill paid less often than monthly and which will be for more than $250 when it arrives I will escrow for in advance. I divided up one of my bank accounts into a number of imaginary accounts, one for each of these major expenses. For example, I pay $765.18 a year for homeowner’s insurance. That is $63.77 a month. Therefore, every month I put $63.77 into that account. I expect the bill in 4 months, so I have paid 8 months into the account so far and have accumulated $510.16 in it. When the bill comes due, I have the money to pay it in full. In addition to known bills, I also escrow for anticipated major expenses. For example, I put $250 a month into a car savings account. It is there to act as a down payment for future car purchases, as well as to pay for any major car repair bills that come up. I have a similar account for major repairs. This generally means that I do not need to touch savings when I have to install a new roof or put in a new air conditioner.

To use an escrow system you first need a pile of cash that you can subdivide this way. If you have no pile of cash because you are making payments on your credit card instead, work to get its balance down to a zero balance as fast as possible. You can use a debt calculator to figure out how much money to pay every month to get rid of a credit card balance. For example if you have $8000 in credit card debt and are being charged 15% interest and want to pay it off in 2 years, you can use an online debt calculator like this one. Pay $383.10 a month over two years and you will pay off the debt.

I suspect you will find that when you pay off a debt that you will feel like a weight has been lifted off your shoulders. While you are paying off the debt, you will have the satisfaction of seeing your finance charges and outstanding balance drop lower every month. When finally paid off, there will be no more finance charges ever. You can use the money on other priorities. $383.10 a month can buy a lot of Xboxes.

I plan to offer more financial guidance for you to ponder will be coming up in future entries.

February 25th, 2007 at 12:43pm Posted by Mark | Advice | 2 comments

Adventures in Financial Planning

If you have been wondering why I have not been blogging this week it is because real life has been keeping me busy. Some weeks there simply is not time to blog. This was one of those weeks.

Many things have distracted me. There is my job, of course, which more than fills the daylight hours. There was my wonderful daughter’s seventeenth birthday, part one of which we celebrated last night. In addition, a sister was in town this week. We got together for dinner in Tyson’s Corner, discussed family news and politics. You cannot put two of my siblings in the same room without politics coming up.

We both shared the same shameful and sick feelings. We were grasping how to articulate them. What comes out are not so much words as an inchoate primal scream. We cannot believe that our Congress has given President Bush permission to torture people and limit the rights of enemy combatants. Congress approved a law so broad that it appears that the president could declare me an enemy combatant and indefinitely detain me. We can only hope these unconstitutional laws are quickly overturned by the courts. It boggles my mind that our Congress could discard the tradition of Habeas Corpus that goes back to the Magna Carta. As if these outrages were not enough, the House of Representatives approved a bill that lets President Bush conduct widespread government eavesdropping. The Senate will likely follow along, after the recess. The congress believes that these actions will show they are tough on terrorists and consequently will help them retain control of Congress. What is does to those of us who are politically awake is make us wet our pants. One diarist on DailyKos put it accurately when he wrote an obituary for our country. I hope after all the wreckage from the last five years that America has finally woken up. We will know in about a month after the midterm elections. In any event, I cannot fully articulate my feelings about these events right now; just express my abject horror, and my disgust at our president and our Congress. I cannot even absolve my own party, which should have filibustered this bill in the Senate, but did not.

While the bizarre and surreal actions in Washington have occupied my forebrain, ordinary life still goes on. I have also been planning for my father’s 80th birthday, which we celebrate next week. My family is still getting to know our cat Arthur Dent better. We spent part of each day is spent coaxing him out of hiding, petting him and giving him tummy rubs. Then there have been the illnesses. Our daughter brought home some nasty cold from school, promptly gave it to me, and I passed it on to my wife. My wife is the only one who still has cold symptoms. Her voice sounds like gravel and she spends much of her waking hours coughing and chugging expectorant. In addition, my side business of installing modifications to phpBB has gotten more active. I have been working with a very assertive client who has been uncovering many hitherto undiscovered bugs in my Digest and Smartfeed modifications and naturally wants me to fix them.

Finally, and perhaps most importantly, there is the slow Chinese water torture of implementing our financial plan. I am discovering why I have procrastinated on our family’s financial planning all these years. To put it mildly, it is a pain in the tuckus to implement our financial plan. I can see why many choose to outsource the whole business to a trusted broker. Jerry, my financial planner, says I am in the worst of it right now. He has made things as simple as possible, by doing things like providing many of the forms I need and having one of his employees fill them out. Once this load of work is behind us, he assures us that we are in for a long period of smooth sailing. The hard part is changing course. We may trim our sails once a year during our annual review. I cannot wait to get to that stage because right now I am up to my armpits in forms and phone calls. I am discovering that it will take months to make this course correction.

My wife has two 401-Ks that have sat dormant for the last few years. It should be routine to roll them over into someone else’s plan. Alas, it is anything but. Instead, there is a plethora of confusing and poorly documented hoops to jump through. Each company that manages 401-K or IRAs has its own bizarre procedures for rolling money in and out. Prudential Retirement, for example, holds one of my wife’s 401Ks. They require a spousal notification form. That is fine if only a signature were needed but no, it has to be notarized, which means I have to find a notary and arrange a time when we are both available to have the form notarized. One plan simply requires that I give authorization on the receiving institution’s forms. Another insists on sending us their special forms. They must be returned before they will accept a transfer request from the receiving institution. Setting up receiving accounts is not necessarily straightforward either. Vanguard, for example, requires a minimum investment in each kind of fund (usually $3000). One fund, their Energy Fund, requires a minimum of $25,000. In addition, you must set up a money market account with at least $2500 in it in order to move funds around.

Working through just one of these rollover issues is enough to trigger a migraine. I have discovered that financial institutions are not necessarily anxious to part with your money. They seem to put up lots of hoops just to see if you have the patience to jump through them. The details on how to do these things are not necessarily on their web sites. Therefore, you have to call them on the phone, decipher their financial speak, then call back the receiving institutions, and ask more questions. The whole process feels medieval and is both frustrating and aggravating.

My wife used to work for USAA Insurance. The only way to get a rollover of her 401K going is to access their employee only web site. That requires an ID and PIN. Maybe she knew once upon a time but long ago forgot. So now, we are waiting for snail mail to arrive with a new PIN to get that process going.

Then there are the non-retirement assets to shuffle. Closing two funds with USAA was actually straightforward. I just logged on and pressed a few buttons. Money instantly shuffled into my money market account. Great. I opened my money market checkbook to write a check to the new institution only to discover I had just used the last check. I now have to wait 4-6 business days to get new checks.

Altogether, I have to move five funds in four institutions and place them into eight funds maintained by five institutions. Three of them are retirement accounts, which have to go through a rollover process to avoid withdrawal penalties. Other existing funds, which I was told to keep, required some minor tweaking. Changing contribution and reallocations for my Thrift Savings Plan took only a few minutes and were done conveniently online.

My wife made all this more challenging. She hates anything to do with money management. It required coaxing her to do things she really, really hates, like speak to retirement fund specialists. This is just one of the reasons why I keep the books. She can be challenged just holding to her receipts. Fortunately, she has a process for that now: she stuffs them into her wallet. I typically sort through them once a week or so. So getting her on the phone with those holding her 401Ks and talking through issues like IRA rollovers was challenging. Often I had to initiate the call, conference her in, get her permission to let me talk to them, and then get the answers I needed.

Once our money is shuffled around, other issues loom. Life insurance is one of them. Next year when I turn 50, my term life insurance costs will nearly double to about $800 a year. Jerry says that I need to keep the life insurance through age 60. He has sources that offer much better deals but work only through financial planners. One gave him a quote for about $500 a year for ten years. That is great, because it means I will save at least $3000. Of course, to save the money I have to go through an obtrusive physical examination and then wait 60 days or so. That process needs to start now, because I turn 50 in February.

I am keeping a notebook of things I need to do. The list keeps expanding. It took about three weeks, but we finally returned the papers for our home equity loan to the credit union. Second trustee endorsement statements first had to be added to our homeowner’s insurance. Much, much notarizing was needed. We made one appointment with a notary, but missed one place where we needed a notary’s signature. This required finding another notary while working it around my wife’s illness.

The recommended umbrella insurance policy arrived, but the bill has not, at least not yet. I have not even begun to think about updating our will. Jerry has some lawyers he can recommend. Setting up a special IRA for my wife was straightforward, but required a $2000 initial investment. That money had to come from somewhere. Fortunately, last month was a three-paycheck month.

I figure it will be several more weeks of aggravating phone calls and filling out dense legal forms before we succeed in transferring all our assets. Dotting all the I’s and crossing the T’s with items like life insurance policies and wills will take longer. Once these assets are in place, then I need to set up regular contributions for many funds. I am hoping somewhere around the start of 2007 all this will be behind us and all we need to do is trim those sails once a year. For it will take many margaritas under some palm tree in the Caribbean to make up for this aggravation.

September 29th, 2006 at 12:23pm Posted by Mark | Life 2006 | one comment

The Plan

“Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”

Fred Schwed Jr.

“Where are the Customer’s Yachts?”, 1940

From the preface to our financial plan

Back in February, after attending a retirement seminar I became uncomfortably financially awake. As a result, my wife and I decided to spend some money making sure that we were not going to be eating dog food in our retirement. The result finally arrived yesterday: a detailed financial plan for the second half of our lives. I thought I would share some of the insights in our financial plan. While the strategies recommended were tuned for our particular situation, many of them might apply in your particular case. In the process of putting together a financial plan, I learned to become specific about my hazy goals for the future. I also learned a lot from the planner on what to do and what not to do when planning for the future. You may find this valuable also.

Please understand that I am not the typical case. I am a career federal civil servant, grade GS-14, which is one stop below the top rung in the general schedule. I also have more than twenty years of federal employment. I am blessed with steady employment, plus pension and health benefits that many in the private sector no longer have. I start out with a good financial base.

Let me say a bit about our financial planner. Jerry lives locally and makes his living from a combination of financial planning and financial planning evangelism. (I met him at a retirement seminar.) He is a member of the National Association of Personal Financial Advisors. While not every NAPFA member is necessarily competent, I do feel better for hiring a NAPFA affiliate. First, since he is a member I know he is not trying to sell me securities for which he has a personal interest. NAPFA members are fee-only advisors. Nor does he buy or trade securities for me. In short, he has no incentive to work against my interests. This, plus the financial acumen that I lack, were my two essential qualifications for a personal financial adviser. While I can balance my checkbook, my eyes glaze over when I try to competently select from the thousands of stocks, bonds and securities out there. I cannot begin to make an informed judgment on whether one security is better than another is. I have neither the aptitude nor the interest to become financially savvy like Warren Buffet.

The good news is that our financial strategy to date has been good. It has not been great, but at least it has been good. Our net worth is approaching a million dollars. With many families, the bulk of their net worth is in their house. If the market goes down much of their net worth disappears. With over $400K in investment and retirement assets, our financial base is somewhat insulated from housing price fluctuations. In addition, since our only major liability is our mortgage (down to about $120K) we have an excellent net worth. I was fortunate to learn prudent money management basics from my father. Having practiced it for more than twenty years, this strategy alone has proven very valuable. If you can live within your means, not carry a credit card balance and escrow to pay for most major expenses and bills, you will naturally move you toward the top tier of financially stable families. You win simply because the vast majority of Americans cannot discipline their financial lives. Many of these families are awash in debt.

After we told Jerry our risk tolerance (moderate), he looked for appropriate securities. His strategy was to put us into funds that were less likely to be turbulent but had consistently beaten the market. Since I am a federal employee, he told me to continue to invest in their version of a 401-K, the Thrift Savings Plan. However, he recommended that I shift 50% of my assets and allocations into the “G” (government bond) fund. This would ensure the bulk of my retirement assets would grow but would be insulated from market shocks. He also recommended putting 25% into the “F” (fixed non-governmental bonds) fund and 25% into the “S” (Small Cap) fund. I was a bit surprised by this advice, since it meant getting out of the “C” (Commercial) fund, the blue chips, in other words. He does not see adequate future growth coming from blue chip funds.

My wife has two 401Ks from previous employers. For her funds, he recommended rolling over the money into a Vanguard Fund Group IRA. For one fund he recommended 40% be placed in their energy fund, 20% in the commercial real estate fund, and 40% in their global equity fund. Jerry believes that the United States, due to deficit spending, has overextended its credit and it is likely to show up soon as a financial shock or at the very least, in the form of higher taxes in the form of capital gains.

He also had this interesting and very sober statement:

“It is difficult to predict how much Social Security will provide you when you retire given the questionable long-term status of this program. Consequently, we advise you to keep your own retirement savings contributions at the maximum level throughout the remainder of your professional work careers.”

Since Jerry believes the bulk of growth in the future will come from overseas where governments know how to live within their means, he believes we should invest strongly in quality overseas mutual funds. For her other 401K, he suggested my wife place $30,000 in Vanguard’s health care fund, and the rest in the global equity fund. He is convinced that with the retirement of the baby boomers the demand for health care services will only increase. Putting her money into a company like Vanguard also offers a lot of flexibility to move funds around in the future, since they manage hundreds of funds.

I have a small IRA left over from days when I thought I needed one. His recommendation was to move it from my Wells Fargo Discovery Fund into a CGM Focus Fund. Since my wife is currently in a part time job with no benefits, he recommended that we set up an IRA for her and put the maximum of $4000 a year into it. He recommends the Bridgeway Small Cap Value Fund IRA.

He says to “hold” a number of our existing accounts and funds. He says to keep the savings bonds and spend them first when our daughter goes to college. He also said to hold the USAA Income and Money Market Funds and to keep contributing to them. As for my USAA Growth Fund, he said USAA does much better with their bond funds than their stock funds. He recommended moving this money into a Mairs & Powers Growth Fund instead. He said my USAA S&P 500 Fund needed to go too. He does not like index funds and the S&P 500 in particular has been underperforming the market. He suggests putting it in the T. Rowe Price Real Estate Fund instead.

Our financial plan came in a thick binder full of charts and statistics. He used Morningstar Research to select funds and showed us all the ratings and rankings and the rationale that he used. He even ran Monte Carlo simulations on our plan. He priced everything in today’s dollars, so I could quantify the information. He erred on the side of caution, assumed a 4.5% inflation factor and 8%-9% in annual earnings.

He also looked at other aspects of our financial life. He recommended I maintain a $500K term life insurance policy until I reach age 60. That way in case I died, my wife could pay off the mortgage. He also strongly pushed me to get an umbrella insurance liability policy. It would cover expenses in the event that I or some member of my family was sued. He said skip the long-term care insurance until I was 64 and a half years old. My federal disability insurance is adequate and he saw no need for my wife to buy separate insurance, since at the moment her income is not crucial. He directed us to check our homeowner’s insurance to make sure we had sufficient replacement coverage. Moreover, should we need to pay for major expenses he strongly suggested we open a Home Equity Line of Credit. With the HELOC, should unforeseen expenses arise, we would not have to sell any of our investment assets. In addition, interest on a HELOC is tax deductible. Meanwhile, he recommended that we keep paying off the additional principle on our mortgage every month, but try to pay an extra $200 a month, rather than the $50 - $75 extra I had been paying. The goal is that when both my wife and I truly retire (for I plan to work part time after I retire from the federal government) we should be mortgage free. In addition, we need to update our will, maintain durable power of attorney statements and create advanced life support directives.

If we follow his plan then when I retire from the federal government at age 57 he believes we will have $115,000 in annual retirement income. This assumes I take a part time job paying $32,000 a year through age 63. When we “retire-retire” (no more part time employment) assuming a solvent social security system then there is a 100% probability of having $134,000 a year in after tax dollars per year, a 75% chance of having $146,000 a year and a “most likely” (average of the two) of $140,000 in retirement income.

All this is conditional, of course, on following the financial plan, a solvent social security system and his reasonable assumptions on inflation and fund growths.

Included in this scenario is $60,000 to pay for a round the world cruise that I asked for.

Barring nuclear war, I guess we will not be eating dog food.

September 3rd, 2006 at 11:35am Posted by Mark | Life 2006 | 2 comments

Raising our retirement sails

Oh, how I wish I could stop thinking about tomorrow. Ignorance may be foolhardy, but while you are in it, life is truly blissful. However, since my retirement seminar about a month ago, I have been feeling a bit spooked. All along, I had this image of my ideal retirement. I would “retire” at 55 on my government pension. There would be no financial worries. However, I would work or consult a little for my own amusement and set my own hours. Maybe I would take up teaching full time at a community college or maybe not. I would leave plenty of gaps during the year for vacations and extended cruises. Then, perhaps around age 60, I would truly retire. The rest of my life would be on the house and stress free. I would indulge my many hobbies and whims. My life’s cup would runneth over. I would climb many mountains and ride my bike on many a trail. I would avoid all medical problems, stay in optimal health, and always look like Hugh Downs. I would die gently in my sleep sometime my extremely late 90s or, perhaps in the arms of an illicit and voluptuous lover half my age. Hey, it worked for Nelson Rockefeller. What a way to go!

The vision is fading. Now, after two days of learning the ins and outs of retirement, I feel like someone has thrown a bucket of cold water on me. The Eight Ball is now saying “Outlook hazy, try again”. So unfortunately, I now find myself painfully and uncomfortably financially awake. I now realize that if my wife and I want a good retirement we need both a stroke of luck and must get our financial house in order post haste.

How silly of me. I thought my government pension, our modest 401-Ks, and our small IRA would see us robustly through retirement. I had faith that my retirement income would cover expenses. Alas, it ain’t necessarily so. The sad reality out there is that not many of us can afford to spend our retirement hitting the golf course every day. As a government worker I am more fortunate than most. Yet it would not take too much for my financial house of cards to collapse either. There is nothing certain in life, not even a government job or a government pension.

In fact, retirement is turning into a scary experience for many Americans. The good news is that we are living longer. Instead of dropping dead of a heart attack in our sixties, many of us will reach our eighties or beyond. That is pretty much the extent of the good news.

The bad news is that because we are living longer we need to save even more money to carry us through those extra years. Medical expenses and home prices are likely to continue to exceed inflation during our retirements. Many of us have to work longer because social security insists we must wait longer before it will pay out benefits.

Yet there is no guarantee that we will remain gainfully employed until a proper retirement age. It seems that we budding senior citizens are expensive employees. We too have jobs that could be amenable to outsourcing. If our employer is watching the bottom line, and whose employer isn’t, someone half our age and willing to work for half our salary can likely replace us. Consequently, long before we turn 67 and a half there is a decent chance that we will be shoved out the door. If it is done gracefully, we will retire on a reduced pension. However, pensions are largely obsolete. So for most of us, a graceful forced retirement means perhaps a few tens of thousands of dollars to not come to work anymore. So there we are, maybe age 50 or 55, forced to buy our own health insurance at exorbitant rates (if we can get it at all), our mortgage payments still due every month, and working perhaps 2 or 3 mediocre jobs for less than half what we made before. We can see a second career as a Wal-Mart greeter in our future. Naturally, we will be too young for Medicare or Social Security benefits. In addition, we dare not touch our 401-Ks for our living expenses, since we will have to pay stiff penalties. Meanwhile, Junior is miffed because we are having a hard time turning up even spare change under the cushions to send him to a community college.

I hope that most of you reading this will not suffer this fate. Unfortunately, there is ample evidence that millions of Americans have already gone through one of these peculiar levels of hell. Nevertheless, even if we are fortunate and retire with a decent pension and bulging 401-K, there are other potential financial landmines just below the surface. Perhaps we have aging parents with special needs. Perhaps our spouse will develop a chronic condition that will require years in a nursing home. If you thought owning a house and raising children was complicated, welcome to modern retirement living. It is a new landscape, where many doctors will refuse to see you because of they will not accept the government’s niggardly Medicare reimbursement rates. Cash only please.

Darn that Jerry. Jerry is the financial planner at the retirement seminar I attended who sobered me up. Yeah, I think I knew about all these landmines in my future, but I was much more comfortable not thinking about them. I have more immediate health problems inside my family to navigate and a daughter who will be attending college soon. Now I also have to think five, ten, twenty, and potentially forty years ahead to make sure I have all my bases covered.

I have decided I cannot do this alone. Yes, I am good at tracking my net worth in Quicken. I balance my accounts to the penny every month. I even put away money for my daughter’s college education, although we have saved only about half what it will cost. The sad reality is that managing a successful retirement is beyond all but a tiny percent of us. It is too complex. There are too many variables. The rules keep changing. Therefore, my wife and I are hiring a financial planner.

Even this is risky. Most financial planners are more interested in their bottom line than yours. Moreover, their bottom line will look a lot better if they sell you the stocks and funds for the banks or brokerage firms they represent. So where do you go? You may want to do what I am doing and hire a fee only financial planner. Yet even that is no guarantee that you will get your money’s worth. It is easy to squander your money at $150 an hour too.

We decided to hire Jerry, the financial planner who woke me up. I know he has many clients, and I was surprised to find he was taking on new ones. He seems to spend about half his time engaged in financial evangelism by going out and talking to people like me. Yes, he is affiliated with the National Association of Personal Financial Advisors, a fee-only group of financial planners with reasonably rigorous standards and ethics. Still, NAPFA affiliation is no guarantee of quality advice. However, having met Jerry in class I feel confident that although his fees are not cheap, I will get my money’s worth.

Getting there from here will be another chore. Aside from the initial planning fee, (I am glad we are getting a substantial tax refund this year so we can afford to do this) and the yearly retainer there is much work that we have to do first. The bundle of papers from Jerry arrived in the mail the other day. This is as intimidating as filing a complex tax return. There are about thirty pages of forms to go through asking for excruciating details about our financial life and goals. Many of the questions are hard to answer. How long do you expect to live? Well, forever naturally, but they want a number. I answered 90 for my wife and me, although I would be surprised if either of us live that long. Where do we want to retire? I haven’t a clue. When do we want to retire? We do not know precisely. Sometime between 55 and 60 maybe, if we can afford it?

Perhaps it does not matter much, but putting our thoughts down on paper does have merit. For in doing so every year we have an opportunity to reassess our goals. Then, with Jerry’s sound help, we will steer closer toward meeting those goals every year. As he put in his newsletter, “We cannot direct the wind, but we can adjust the sails.”

This is good advice. We need to start by putting up our sails.

(Stay tuned for more chapters in the months and years ahead.)

March 10th, 2006 at 11:03pm Posted by Mark | Life 2006 | no comments

Squeezed

For me the last day of the year is a day to take stock of my financial universe. If I wasn’t feeling the pain of most middle income Americans before, after I got through looking at the details of my family’s personal situation I do now. Our upper middle class family is being squeezed too. I feel fortunate that so far, while we have coped rather well. Yet we are being squeezed nonetheless. So are you. Now I have all the proof I need: my income vs. expenses reports churned out by my Quicken financial software.

2005 is the first year since the 1980s that my family has had less income than the previous year. This is due entirely to my wife losing her IT Help Desk job a year ago. She did not find another job in her field until a couple months ago. Where she used to work full time, she is now working part time. She now makes a fraction of her former wages and at least one third less per hour than her old job. In her last job, she had a 401-K and access to health insurance. In her new job, being a part timer, she has neither.

The good news is that she is really enjoying the job. The bad news is that with substantially less income than we had in 2004, we are not living quite as we used to. Granted, we are not eating dog food, but the fact that this is happening at all to my family when we have known nearly twenty years of steady income growth is disquieting.

In 2004 when we were flush, we spent over $6K so my wife could get elective surgery. In 2005, this is totally out of the question. In addition to elective surgery, we have cut back on other medical expenses. We are not getting the level of mental health care we got in 2004. Our insurance is reasonably generous with mental health benefits, and allows up to 26 sessions per year with co-pay. In 2005, these benefits were exhausted by July. We could have paid $150 a visit out of pocket for the rest of the year, but that is $3900. Ouch. In 2006, we will hope that our mental health benefits stay the same. Unless my wife makes a lot more money, although members may need weekly visits it will mean biweekly visits.

I bet that most of you are going through similar experiences. The Bush Administration talks about how wonderful the economy is. Consumer confidence, having tanked earlier in the year, is now rising again. I do not give too much credence to those numbers. I know that in the real America of 2005 things are different. If your family’s fortunes increased during 2005, consider yourself lucky: you are bucking a general trend. I hope your luck continues. My experience and the experience of many others of us suggest you are likely living on borrowed time. Most of the rest of us downsizing our lives. In my case, the downsizing is so far relatively modest, but it is still a bit scary. If my family’s downsizing continues for a few more years, our choices will get increasingly troubling.

Here is the reality for this upper middle class household. Things cost much more than are stated in the inflation numbers. Even though I am fortunate enough to have an existing locked in mortgage, my property taxes are rising. Ours are up about $500 from last year. This means that my monthly mortgage payments are also going up. Other big-ticket items going up: health insurance is up $400 compared to 2004. Copays for medicines: up $300. These three items alone add up to $1200 more money I had to pay in 2005, and with markedly less income. I do not track gasoline as a separate expense, but if I did, I am sure it would amount to at least a couple hundred dollars more a year.

Then there are the nickel and dime things that when totaled amount to real money: cable TV, auto insurance, homeowner’s insurance, association fees and electricity. Except for the cable TV, none of these are services that we can really do without. To compensate we have cut cash expenditures, charitable giving, dining out, entertainment, food (we are eating plainer), and gifts (nearly in half).

When we can, we are also deferring big expenses. We are less likely to engage in project like replacing the roof. Fortunately, before my wife lost her job we had finished all the costly home repair projects. My priorities are to keep a roof over our heads, put as much money as I possibly can into retirement accounts and keep contributing to my daughter’s college education fund. On the latter by May with virtually no income coming in from my wife, we cut our contributions to our daughter’s college fund from $400 to $200 a month. You can only pinch a nickel so far when you are living on one income.

Speaking of investments, I am really disappointed by how mine are doing. I bet you are too. Mine are nothing fancy: mutual funds that tend to track indexes. My USAA Income fund, which I purchased for low risk and started buying in 2002, has had essentially flat performance. Now it is worth about $120 less than what I paid for it. I am losing money on it, although the amount is small compared to the total investment. My USAA S&P 500 fund, which went gangbusters when Clinton was in office and the tech boom was hot, followed the very flat stock market since Bush took office. My total gain is 9.2% or about 1% a year, much of it realized before Bush took office!

These funds are set aside for our daughter’s education. I followed what I thought was sound financial advice at the time. Over seven years I expected some return on my investment that exceeded inflation. However, our non-indexed fund did much worse. Our USAA Growth Fund has lost 26% of its value since we began purchasing shares in 1996.

What a fool I was. I was taking mainstream actions, just like you I bet, and we still got screwed. I feel that we have been taken to the cleaners by the Bush Administration. No wonder Bush’s attempts to privatize Social Security fell flat with the public. Americans simply had to look at their portfolios and realize, “We sure don’t need more of this!” Bush may be good for his big business cronies, but he is not good for the average investor who will need the money they are so diligently and painfully saving. Business taxes and capital gains may have been cut, but it has not resulting in any more wealth for me because I am not realizing any gains! The only good thing about selling a fund is that since I am losing money on it, I can take it as a deduction on my tax returns.

So just how is Bush really good for business? The reality is that stock prices have been flat. If a company has profits, they are more likely to use it to buy back their own stock instead of passing the profits on to shareholders. As The Washington Post reported this week, it is not translating into increased share prices, as it has in the past. It does however give the company more clout over its own future, and shareholders less.

I am no longer fooled. Don’t you be fooled any longer either. The Bush Administration and our Republican Congress have proven over five years that they are bad for your bottom line. Just run your family’s financial numbers as I did. I bet you see a similar trend. Bush and his Republican cohorts in Congress are systematically and very deliberately stealing wealth from all but the richest of us. If they continue with their reckless foolishness, we will be back to a society of rich and poor, with no one in the middle. As long as this crew remains in charge, you can expect the trend to exacerbate.

With the New Year comes mid term elections in November. If you are planning to vote your economic interests, you would do well to send as many of Republicans as possible in Congress packing.

December 31st, 2005 at 06:28pm Posted by Mark | Politics 2005 | no comments