“We don’t go into companies with the thought of effecting a lot of changes. That doesn’t work any better in investments than it does in marriages”.
– Warren Buffett
Monthly Archives: January 2008
Bud Hebeler’s analyzenow.com
It doesn’t sound like much, but analyzenow.com is the brainchild of Henry K. “Bud” Hebeler. We’re featuring Hebeler’s website today for two reasons. First, Henry Hebeler is one of those self made guys that everyone wants to be like. Bud is the former president of the Boeing Aerospace company, has multiple degrees from MIT and has published in the field of retirement planning. His biography, here, coveys an impressive level of civic involvement in corporate and retirement activities.
The second reason we’re promoting Hebeler’s website is because its full of great stuff. Analyzenow.com features articles on saving, spending and retirement planning – all of which are relevant, well written and highly informative. Also, analyzenow.com offers a number of beefed up excel tools to assist with investment, pre-retirement savings and post-retirement budgeting. The main thing is: most of the Hebeler’s stuff is free.
Check it out: analyzenow.com.
Toxic Mold Scandal Strikes!!!
Hi All,
Check out this news story from ABC, evidently an unsuspecting homeowner in South Carolina unwittingly purchased a home containing toxic mold. The thing is, the mold is dangerous – like makes kids sick dangerous – but the bank went ahead and sold the place without disclosing the problem. Click here for the ABC story.
The writers of the note ended up declaring bankruptcy since they couldn’t prove that the previous owners knew about the mold. After foreclosing they were concerned about that the bank was selling it in the condition it was in and left a note in a secret room that warned of the black mold.
Here’s another kicker, a cousin of a good friend of the DINKs was involved. The kids are doing better now but who knows how many families might face similar circumstances. Very sad.
Stay safe,
James&Miel
Rent, Interests and Profits
Following this weeks theme of economics 101, today’s posting addresses three topics of interest to most readers of personal finance blogs. These topics are rent, interest and profits.
Rent: – No I’m not talking about the musical – I’m talking about defining rent as the price for the use of land or natural resources that are given and fixed in total supply. Rent is determined by the intersection between supply and demand. Since most land is in fixed supply – they aren’t making any more of it – rent values is often largely determined by demand.
Why does it make sense to think about rents? Well, if you are like us DINKs you might have a piece of investment property that you are renting out. Conversely, if you are a renter, it makes sense to know what’s impacting your payments. So, factors impacting rents, at least around the Washington DC area, are: interest rates, employment trends, neighborhood location and housing stock quality.
Interest: What is interest? Its batted around a lot in the media, but its often poorly defined. Interest is the price paid for the use of money or loanable funds. So, if the interest rate is 2.5% a year, for a $100 borrowed today, $102.5 will have to be repaid tomorrow.
A couple of interesting things about interest rates. First, they are impacted by supply and demand. Demand for loanable funds rises when people and firms need to borrow for housing, or to invest in inventory, etc. Supply, however is heavily determined by monetary policy – in the US by the Federal Reserve bureaucracy. The great thing about interest rates is they provide a market mechanism for money to be allocated to the most productive uses. Firms or individuals will usually only borrow if the return on investment exceeds the rate of interest of borrowed funds.
Profits: Profits are the excess of total revenues over total costs. In this case, costs are everything that goes into generating the profit, staffing time, labor, insurance, as well as environmental externalities, etc.
Where does profit come from? Sources of profit include the introduction of successful innovation, rewards for risk taking, monopoly power or undue collusion with government (think Halliburton no bid contracts). Generally speaking profit serves as incentive for innovation and shifts resources to commodities that society wants most.
Just to end this posting, supply and demand for rent, interest and profits don’t often operate as economists theorize. The real world is messy and involves layers of politics, psychology and sociology that can greatly impacts on market trends. This aside, a basic knowledge of these core concepts can help you better understand how markets – and accordingly how your personal situation is effected.
Best,
James
Wisdom from Warren Buffet
“In the search for companies to acquire, we adopt the same attitude one might find appropriate in looking for a spouse: It pays to be active, interested, and open-minded. But, it does not pay to be in a hurry”.
– Warren Buffet.
Credit Counseling Pitfalls
Hi All,
Today’s posting is a quick video on credit counseling from consumeraffairs.com. I would say more, but today’s schedule is hectic so we’ll return with our regular high quality posts later!
What is Money?
Today’s posting is on one basic financial concepts that everyone should know about. This is the idea of money. That’s right, I’m taking about greenbacks, bucks, geld, shekels, the long green, wampum – money. Everyone’s got some and most people think they know how it works and what its role is our economy.
However, according to economists money serves three major functions in our economy. These are:
1) A medium of exchange
2) A measure of value
3) A store of value
A medium of exchange: So basically, when money is used a medium of change, its a standardized way of used to pay for labor and goods. In most countries, money is in the form of paper and metallic currency or electronic check writing accounts. The key idea here is that money is a medium that’s used as change – not for any intrinsic value of coins or currency itself – its just something that you use to swap services and goods that are inherently different.
A measure of value: This essentially means that money is a standard common measuring rod by which prices, costs, revenue, etc. For example, bananas cost 25 cents, but a corporation may earn revenues of $50 million a year. Because money is standardized measure of value it lets you assign an unambiguous value to prices, costs, revenue, etc, and to determine the degree of difference between various choices.
A store of value: Money functions as a store of value in that money you received today can be saved and held for later expenditures. Right, so you get paid or earn interest and you can save it (preferable in an interest bearing account – not under the mattress) and use it for later purposes.
As a final point, I’ve often thought about how arbitrary the value of money really is. Everybody accepts dollars not because the dollar itself is valuable, dollars are simply valuable because of social and economic processes. To illustrate how arbitrary money really can be, I wanted to leave you with a few of examples of money where the social processes governing its value have gone haywire:
A 500,000,000,000 (500 billion) Yugoslav dinar banknote circa 1993.
The 100 quintillion Hungarian Pengo circa 1942.
In both these cases, hyperinflation destroyed the value of money. This suggests the final takeaway here is that money is a standardized medium of exchange and store of values that is fundamentally governed by social and economic processes – we shouldn’t take it for granted.
Best,
James
Feed your 401 (k) instead of taxes!
Most people know that it’s a good idea to be saving away while you are young for when you are old and gray. Many people look at their budgets with discouragement that they don’t have enough extra at the end of the month to put more (any) money into their retirement account.
Well, I’ve got news for you!
What if you could contribute more to your retirement without taking a big hit in your monthly budget?
Sound too good to be true?
In the past I’ve understood the magic of putting more into your retirement and not feeling the impact as much as you’d think. In my last paycheck I was given a big reminder of this that I wanted to share with our readers.
At the end of 2007 I was contributing $3,513.64 to my retirement and $1,864.68 to taxes on a monthly basis to make sure I maxed out my retirement.
At the start of 2008 I bumped back down my retirement to evenly max out my retirement for the year; paying $1,192.30 per month. However, this pumped up my taxes to $2,659.52 per month.
This means that I’m now paying an extra $794.84 per month in taxes by not contributing to my retirement as heavily. So instead of having an extra $2,321 per month, it is now only $1,600.
Considering that retirement accounts are compound over time, it makes much more sense for me to take that extra $700 that I’m paying towards taxes now and put that towards my retirement instead. Given then I’m already maxing out this will mean that I’ll paying larger taxes later in the year, but the feds might as well wait their turn until my retirement is paid up.
Lessons learned:
- If you aren’t contributing as much as you’d like to retirement, consider that by hiking up your monthly contributions your pay check may not be as affected as you’d think!
- If you have the wiggle room in your monthly budget it may be better to pay your retirement first and the feds second.
Food for thought!
Happy savings!
Miel
Your Friend the Federal Reserve
Hello All,
Today’s posting is bit of a departure from our usual topics. Today I wanted to say a little bit about the structure of the American banking system. Specifically we talking about America’s national bank: the Federal Reserve.
The Federal Reserve was created by an act of Congress in 1913 in response to a series of banking panics in 1907. After an exhaustive study of European banking systems congress passed the 1913 Federal Reserve Act. The Federal Reserve System now comprises 12 regional federal reserve banks, a board of governors and a federal open market committee (FOMC) – lot of bureaucracy all collectively known as the “Fed”. So, when the news talks about the Fed this bureaucracy is what they’re talking about.
Now, how does the Fed work? Well, first off, it’s quasi-private. That is, the banks involved are for profit entities, but the board of governor’s and the chairman are nominated by the president and confirmed by the senate. – In the case of the board of governors the term of service is 14 years – long enough not to care about politics. However, the core activities of the fed are to supervise and regulate transactions between local banks and manage the nation’s money. The last point is the most interesting. The fed manages the money by doing several things. 1) setting reserve requirements for banks, 2) changing interest rates and 3) buying government securities.
The reserve requirements are less clear, so I’ll say a bit about them. If you are bank, you are required by law to maintain a given percentage of your deposits in reserve. Lets say a bank receives a $100 deposit and has a reserve requirement of 10%. The bank can then lend out $90. That $90 is deposited in another bank, freeing up an additional $81 dollars to be lent. – All of a sudden the initial $100 is turned into $271 in circulation (100+90+81). The amount in circulation changes depending on the reserve requirement. The only problem with changing reserve requirements is that its sometimes a blunt policy tool, but the Fed can also change interest rates or buy government securities, so I’ll just say a bit about those options.
Setting interest rates is pretty simple (clicky), but how buying government bonds impacts the money supply uses a more complicated mechanism so I’ll explain it. Lets say the Fed’s statistics indicate there is a problem with inflation. So, the fed bosses call up their traders in New York and tell them to start buying government bonds. The bonds are purchased and payment is credited to the relevant bank accounts, thus increasing available deposits and allowing the banks to change the amount of money in circulation (more here).
The truth is that the Fed is a complicated decentralized bureaucracy. It also deals in concepts that are non-intuitive. – Most people don’t even think of money in terms of supply and demand. Because of this, its attracted conspiracy theorists, as well as some legitimate criticisms by the likes of Jim Cramer, who argue it lacks transparency and conservative politicians like Ron Paul who are in favor of commodity backed money.
It’s your money, so it makes sense to understand how the government is managing it.
This is a dry posting, I’ll just end it by encouraging you to enjoy a little Federal Reserve humor. (Funny video!)
Best,
James
Marriage & Wealth
I’ve been mulling over the post that James did a couple of days ago on Why Married People are Richer, and the comments that the post generated. I see some truths in the theories that exist around marriage and wealth, and just as much reason not to buy into it.
Certainly from our experience in building wealth as a couple we have enjoyed prosperity along with our relationship. For the most part I would say that the commitment is more important that the actual marriage itself. While emotionally I’m an advocate for marriage, the numbers don’t lie in that our biggest plummet in wealth was due to spending $25k on our wedding and honeymoon. Having socked that money away in an investment would have certainly paid off. But, to me, marriage isn’t about an investment. We paid for our own wedding to relieve the burden from our families and friends. We also didn’t elope because we live across the country from our families and wanted to have their support and coming together of two families as part of our marriage.
Given the divorce rate in the US, there is plenty of reason to not get married as a means to preserve wealth. If marriage is an indicator of wealth, then divorce is an even better indicator of a decline in that wealth.
As for being a loser or not a loser, I don’t buy this bit either. Hard to say how the cards might have fallen another way, but who knows if James or I would be married if it weren’t to each other. I could just as well see myself in the category that one comment mentioned about being stuck with a limited supply of available mates after pursuing ones’ career. I also know as many losers who are married then are not.
I guess that in the end I see that financial management has so many factors that are separate from marriage; marriage simply adds on to the dynamics of financial management. Once you are in a relationship you could just as well support one another as you could instigate poor financial practices. I know that I’ve certainly dated folks in the past that caused me to spend more money than I would have if I had remained single. I would say that it has more to do with personal accountability than whether or not you are married.
Just food for thought.
Best,
Miel